Salman Ahmed Shaikh

It is comforting to note that Pakistan economy has breached the level of $400 billion economy. Per capita income had also breached the level of $1,800. With decrease in interest rates and inflation, the economy may get breathing space. Decrease in interest rates has eased the fiscal burden which will provide space to contain fiscal deficit at 3.9% of GDP and maintain primary surplus at 2.4% of GDP.

GDP growth target is set at 4.2% which is also ambitious given the ambitious tax target without concerted effort to widen the tax base. Government has set an ambitious revenue target of Rs 14.131 trillion, which is an increase of 19% from the previous financial year. The tax burden on salaried class has been reduced a bit at absolute levels of lower income slabs, but this is very much a necessary thing to do with time because of inflation.

As per Economic Survey of Pakistan, tax to GDP ratio is still in single digits at 9.6% for FY24. Current expenditure is 17.7% of GDP for FY24. Development expenditure has moved down from 3.7% of GDP in 2009-10 to 1.9% of GDP in 2023-24.

Mark-up payments alone are 7.8% of GDP, more than four times as much as entire development expenditure. Despite keeping the interest rates at 22% in the recent past, the domestic savings rate has declined from 7.6% in 2019-20 to 7% in 2023-24. Expenditure on education and health as a % of GDP stood at less than 2% and 1% respectively in FY24.

The current budget announced for FY25-26 did not do much to reverse the trends and status quo. More money is allocated on pensions than on running civil government. Net revenue receipts are only enough to cover the payment of interest and defence expenditure. Defence expenditure is necessary given the security situation. However, pensions and tax system needs reforms.

More than 70% of the pensions are earmarked for military. Defence expenditure with military pensions comprises 23.3% of the federal tax revenue. The bigger burden is debt servicing which will eat up more than 58% of the tax revenues even when interest rates are projected to go in single digits and provided that federal tax revenues are received as budgeted with a 19% budgeted increase. Every other expense is then dependent on more borrowing and more interest payments later on. There is still no major focus on privatization, as even the planned receipts are very minimal.

To raise taxes, it is a wrong approach to tax formal sector investments by raising taxes on dividends from mutual funds and fixed income investments. The rate of tax for profit on debt is proposed at 20% of the yield/profit paid by a banking company or financial institution as against 15% previously.

No radical steps are taken to urge provinces to raise taxes in their jurisdiction, such as a tax on agricultural income. There is a 26.5% increase in petroleum development levy. Gas Infrastructure Development Cess is budgeted to increase by 140%. Petroleum levy on LPG is budgeted to increase by 58.5%.

Advance adjustable cash withdrawal on non-filers is proposed to be increased from 0.6% to 0.8%. While it is important to document the economy, but the stick approach may lead to in-formalization of the economy and financial exclusion given the lack of incentives to come in the formal and documented sector.

A carbon levy of Rs 2.5 per liter on petrol, high-speed diesel, and furnace oil has been proposed for FY 25-26, which will increase to Rs 5 per liter in FY 26-27. While such measures make sense keeping the long-term in perspective, but the government is unable to provide a cheap renewable alternate. Electricity is still produced, purchased and distributed inefficiently and expensively using the non-renewable resources.

Sales tax on Solar PV has been enhanced to 18% from zero rated, which may reduce solar adaptation going forward. A uniform sales tax rate of 18% will be imposed on small vehicles up to 850cc. The locally assembled cars below 850cc are more fuel efficient and relatively more affordable in comparison to the other cars.

In comparison to Rs 95 billion allocated for payments to IPPs (Independent Power Producers), the budget allocation on higher education commission is kept at Rs 65 billion. In PSDP (Public Sector Development Program), the allocation for higher education is slashed from Rs 61.115 billion to Rs 39.488 billion, a decrease of 35.4%.

The budget allocation for cabinet division has almost tripled in just a single year. On top of that, there is an allocation of Rs 2.5 billion for parliamentary affairs division, which was not there in the previous year. Budget allocation for other miniseries and divisions which saw an increase include national heritage & culture division (+ 65.1%), religious affairs & interfaith harmony (+ 30%) and Kashmir affairs and Gilgit Baltistan division (+ 52.0%). Even though, some allocations are not large in absolute terms, but it reflects the priorities.

On the other hand, in PSDP, budget for these ministries and divisions had been slashed:

Board of investment (- 4.5%)

Climate change division (- 47%)

Federal education and trainings division (- 10.5%)

Higher education commission (- 35.4%)

Housing and works division (- 38.3%)

Industries and production division (- 55.4%)

IT and Telecom division (- 32.2%)

National food security division (- 82.2%)

Science & Technology research division (- 28%)

Suparco (- 77.5%)

Water resources division (- 27.7%)

Narcotics control division (zero allocation)

In allocation for ministries and divisions, Pakistan Post Office Department received a budget allocation of Rs 24.454 billion as against allocation of Rs 4.9 billion for development expenditure of National Vocational & Technical Training Commission (NAVTTC) and Rs 4.793 billion development expenditure on science and technology division. For PM Ramzan package, Rs 19 billion is allocated. It will have been better to improve governance, supply chain and agricultural marketing infrastructure rather than doling out allocations which are not allocated in targeted ways.

Going forward, there is need to focus on education, health, rule of law and political stability with meaningful democracy. Delivery and performance based allocations and accountability are important rather than just feeding the bureaucracy and ministries with higher salaries and pensions.

It is time to give private sector and local governments the role to improve delivery and performance. Reducing subsidies for the common person while not containing the losses of loss making state owned enterprises is hurting the economy consistently. Structural reforms, privatization and delegation of power and funds to the local governments are important; but amidst short-sighted politics and firefighting, the needed reforms remain on the back burner.