Analysts doubt budget’s ambitious targets and goals

It will take some time to fully grasp and analyze the budget to determine how effectively it will achieve the government’s targets outlined by Finance Minister Aurangzeb Khan in his budget speech. These targets include continuing on the path of stabilisation, controlling inflation, stimulating growth, improving the framework to make it efficient and equitable, satisfying the International Monetary Fund (IMF) to clinch the new $6-8 billion deal, and protecting vulnerable segments from the current harsh conditions.

It is also crucial to objectively evaluate the taxation measures, assess their implementation scope and analyze their impact while keeping the fairness concerns in sight.

A quick review of the budget and initial assessment of experts and private sector leaders reached for their input, does not project a promising picture. Some taxation measures announced clashed with the targets set such as curbing inflation, increasing revenue collection and making the taxation framework progressive. Other measures rely on an ineffective, corruption-prone bureaucracy.

The 33 per cent increase in the petroleum levy from Rs60 to Rs80 per liter, withdrawal of exemption and concessional rates for essentials like medicines, and a 1-2 per cent rise in the sales tax rate are to not only halt the declining inflation trend but also potentially push it higher.

It is hard to foresee higher revenue collection in a sluggish economy. Similarly, envisioning higher growth is difficult when local and foreign private investors haven’t demonstrated confidence in the country’s market potential through capital commitments. Moreover, the foundation of public investment is shaky, given that the higher Rs140 billion Public Sector Development Programme (PSDP) is to be financed by uncertain loans.

The ratio of direct to indirect taxes is set to worsen from 48:52 to 42.5: 57.5 in the year ahead. The lack of official data on the current inequality in Pakistan, as the recent economic survey remains silent on this issue, leaves room for questioning. If there is any justification for this regressive stance, the government should provide an explanation. 

Regarding negotiations with the IMF, the finance minister likely has a clearer perspective, but to outside observers, the government appears more generous with expenditures than anticipated and desired by the donor. If there are assurances of assistance from friendly nations or development partners, the government should disclose them to build public confidence. 

It appeased the IMF by following its advice to significantly increase revenue through taxation measures: eliminating exemptions, raising petroleum levy by one-third, hiking the sales tax rate, imposing higher taxes on non-filers, applying federal excise duty to all property transactions, and taxing export proceeds at the same rate as other income sources.

However, there appeared to be a lack of equivalent commitment on the expenditure side. Aside from closing down a public works department, the budget lacks measures indicating the government’s effort to right-size the federal government and conserve precious resources.  

Dr Rashid Amjad, a senior economist, found the budget to be more whimsical. “FM Khan presented the budget with hopes of securing $6-8bn Extended Fund Facility from the IMF, reviving growth and reducing inflation. However, the budget falls short of these objectives.”

“Political pressures prevented significant expenditure cuts, leading to an increased PSDP of Rs1,500 billion, reversing commitments to transfer projects to the provinces and eliminate discretionary funds. Concrete measures to stimulate growth and investment in agriculture or industry, aside from IT, are lacking. Taxation measures remain unclear, and achieving the projected 37pc increase in tax revenues is unrealistic, a 12-15 per cent increase is more likely. The focus on completing ongoing projects, with only 15-20 per cent allocations to new ones, is positive but insufficient to satisfy the ruling party and coalition partners. Highlighting a 2.4 per cent growth rate amid 2.5 per cent population increase and 24pc annual inflation, achieved by impoverishing farmers, reflects the dire economic state. Promises of falling inflation are dubious, as it is expected to rise again due to budget measures.

The increase in salaries and pensions is commendable, but the minimum wage increase to Rs37,000 is inadequate. The lack of a BISP stipend increase suggests a further rise in poverty. Overall, the budget is high on rhetoric and low on substance, unlikely to convince either the public or the IMF.

“The increases in government salaries and pensions are commendable, the minimum wages increase to Rs37,000 is inadequate, a 25 per cent instead of 10 per cent been more appropriate. The lack of a BISP stipend increase suggests a further rise in poverty. Overall, the budget is high on rhetoric and low on substance, unlikely to convince either the public or the IMF,” he concluded.

Nasim Beg, a senior investment expert shared his observations. “Indirect taxes, including new withholding taxes, will remain the cornerstone of tax collection. With a target of Rs12.9 trillion, up 40 per cent from Rs9.2 trillion, this approach is inherently inflationary. Additionally, the government’s need to borrow Rs8.5 trillion will further fuel inflation. Coupled with an estimated 10 per cent currency CPI at 12 per cent seems optimistic. The significant increase in the targeted infrastructure spending is questionable. However, the government’s move to discourage the import of luxury vehicles is a positive step”.

Abdul Aleem, Secretary General of the Overseas Chamber of Commerce and Industry (OICCI) shared his impressions, acknowledging that while the revenue and growth targets are ambitious, they reflect a positive direction. He noted the boldness of revenue measures related to real estate and the removal of sales tax exemptions.

“Increasing taxes for non-filers and on high-value vehicles are positive steps. However, the budget lacks measures to tax agricultural income and retailers and fails to incentivize manufacturing and employment. The salary increase for government employees seems excessive, with a significant impact on pension costs. The effective tax rate for the salaried class has increased, higher petroleum levy and the removal of sales tax exemptions will raise living expenses. Additionally, the budget did not remove the Super Tax, despite corporate sector demands. Overall, it is a move in the right direction in a challenging environment”.

Muhammad Sohail, CEO of Topline Securities, was brief and direct, “The budget will help in fiscal consolidation and aligns broadly with IMF guidelines. Although the tax collection target is high, with new taxation measures, Pakistan may come close to meeting the primary and fiscal deficit estimates”.

Mashood Khan, the auto sector leader was not particularly happy. “The budget overlooks the potential of the domestic truck and bus sector. There’s also no relief for the middle class, as small cars lack incentives. SMEs continue to be neglected, with no supportive policies except for export credit. Supporting these sectors would boost the automotive industry and foster broader economic growth and stability.