In FY15, the reliance on fiscal revenues on a one-off, non-tax revenues has increased which is not only exposing the poor performance of tax collecting authorities but also questions the targets set for the new fiscal year. FBR missed its target by Rs205 billion (7%) which was fully compensated by Rs226 billion (28%) higher than targeted non-tax revenues.
Thus, the overall revenue target was met by virtue of non-tax elements. Since the provincial share in the federal divisible pool is pegged to tax revenues, the amount transferred was Rs145 billion (8%) less than the budgeted amount. The current expenditure increased by Rs18 billion (1%), which is more than the decline in federal development spending – down by Rs84 billion (10%).
Overall expenditure remains in the permissible limit (down by Rs67bn or 2%) while the revenues net of provincial share is up by Rs169 billion (7%) taking the fiscal deficit to Rs1375 billion against budgeted Rs1422 billion. However, fiscal deficit to GDP increased from budgeted 4.9 percent to five percent as the GDP at market prices is lower than what was budgeted due to lower than expected inflation in FY15.
The bottom line is good, as, for the first time in many years, the fiscal deficit was almost contained to its permissible limits; but the catch in how it has happened – are there some elements of creative accounting in it? Are the revenue streams sustainable?
The problem lies in stagnating tax revenues which implies that all the efforts envisaged in so-called broadening tax base are not reaping fruits. FBR revenues were budgeted at 9.7 percent of GDP but were limited to 9.5 percent of GDP. There are doubts on the meeting of 10.1 percent of GDP target in FY16. There is a need to release the break-up of FBR revenues to gauge the outcome of steps taken in the past two years and based on that to forecast realistic estimates of FY16.
How much has the government raised through higher withholding taxes especially on non-filers? How many people have filed returns for the first time, this year? The need is to find the right reason and its benefit of enhancing more and more on higher WHT/GST on non-filers.
Dar is keeping mum on these numbers, even as he insists that the policy is working. But the objective is not clear and critics fear that it is just a mechanism to jack up revenues. In that way, the policy can be detrimental in medium to long-term as, if the non-filers do not file returns, they rather would pass the additional tax burden to the consumers by hiking the price by a similar margin. The tax may turn out to be inflationary in nature – similar to GST.
Now despite these aggressive yet regressive measures of WHT, the FBR revenues have fallen down in terms of GDP. There is something seriously wrong somewhere. Anyway, the non-tax revenues came to the rescue to keep the fiscal deficit in check. So what made non-tax revenues outpace the target by Rs226 billion (28%)? SBP profits jacked up to Rs399 billion from Rs280 billion budgeted and that is due to the capital gains booked on selling 42 percent shares of its holding in HBL.
Shouldn’t this be listed as privatization proceeds and shown below the line as financing fiscal deficit? But here comes the creative accounting, by booking it in SBPs profit, it has become a part of revenues. Anyway, after selling HBL and UBL there is nothing much left for the government to milk from the banks.
One could contend that Dar is a smart guy for letting the banks earn during the PIBs bonanza. This helped to achieve a better valuation of HBL/UBL. Now that the government has made its exit, all forms of taxes are being levied on the sector and their stock prices are hitting lower locks. Well done, sir!
Still, the central bank’s profits in FY15 are budgeted at Rs280 billion and the final tally will likely be within its vicinity. The government raised Rs56 billion from the remaining proceedings of 3/4G license sale in FY14, and it has budgeted Rs65 billion in FY16. Although the government is eyeing the sale of additional spectrum, market pundits doubt that dream will be a reality anytime soon. Similarly, CSF money poured much more than expected in FY15 (Rs204bn from budgeted Rs140bn), the government is looking to get Rs154 billion in FY16. However, with the US exiting from the region, that claim looks too optimistic also.
In other words, the hike in non-tax revenues was due to non-recurring events. Although budgeted at Rs894 billion; the actual number may come around Rs800 billion. The onus falls on tax revenues whose targets are unrealistic.
There is not much that can be done to trim current expenditure which is budgeted almost at last years level. Low-interest rates will not let debt servicing grow sizably (from 4.6% of GDP in FY15 to 4.2% in Fy16) while low oil prices may keep subsidies in check – from a revised estimate of Rs243 billion (FY15) to Rs138 billion in FY16. The major reduction is in inter-tariff differential which means a significant hike in electricity prices is expected and Dar is betting on oil prices to remain depressed. Hence, any slippage in the revenues will ax development spending, both by federal and provincial governments as the latter will receive a lesser amount from the divisible pool to spend. Federal PSDP has increased to Rs700 billion in FY16 (up by 29% from FY15 revised estimates). The allocation has increased but priorities have changed.
The ministries/divisions are getting Rs252 billion (83 percent of what they spent in FY15) as their share of the pie has shifted to WAPDA and NHA – hike in allocation by 70 percent to Rs272 billion. Roads and highways are among the top priorities with WAPDA getting it for building dams.
Then there comes account tweaking by incorporating special development programme for TDPs and security enhancement in development budget – earmarked Rs100 billion in FY16 and spent unbudgeted Rs45 billion in the outgoing year.
Let’s hope the spending on roads, highways, small dams and power sector projects is not compromised because of FBR habitual failure to meet tax revenue targets. Otherwise, development will take the back seat and economic growth to seven percent by FY18 will remain a distant dream.
This article originally appeared in Business Recorder (BR) research on June 10,2015.
