Home »Budgets » 2006-07 » The Budget

Taking a break from tradition, the Budget speech rendered by the Minister of State, Omar Ayub Khan, was replete with political rhetoric as well as economic facts and figures. The Minister repeatedly challenged the opposition, without naming them as such, that the economic progress under the Musharraf-Aziz dispensation stands much higher than that of the governments' at the helm in the 1990s.

The principal thrust of the seventh budget prepared under the stewardship of Shaukat Aziz, first as Finance Minister and later as Prime Minister, was to stay the course chartered to hasten growth, undistracted by inflation. The difference this time is that stronger fiscal stimulus has been devised to maintain growth in the range of six to eight percent.

Pakistan's economy was able to withstand the twin shocks of high oil prices and the devastating earthquake of October 8, 2005, in its Northern Areas. In this backdrop, the lowering of fiscal deficit and build-up of foreign exchanges reserves to over 10 billion dollars, by the present economic team was definitely a remarkable feat.

Fortunately, the earthquake was located in the Northern Areas, away from the industrial and agricultural heartland of the country.

The Finance Bill placed, before Parliament yesterday, envisages a budgetary outlay of Rs 1.315 trillion, with a development programme of Rs 435 billion. The Federal portion of the programme has been allocated Rs 325 billion, and Provincial ADPs Rs 115 billion - a net increase of 28 percent, over the current year's scheme.

Other salient features of the Budget are: CBR tax collection is envisaged to rise from Rs 704 billion (FY06) to Rs 835 billion (FY07). With a nominal rise of GDP by about 14 percent (FY07), the taxation measures coupled with other CBR efforts, are expected to deliver an additional five percent revenue. Budgetary deficit is estimated at Rs 373.5 billion ie 4.2 percent of GDP. In FY06, too, the target was at 3.7 percent, the earthquake impact increasing it to 4.2 percent in FY07.

Defence expenditure is expected to rise by Rs 27 billion to touch the figure of Rs 250 billion - almost constant at 3 percent of the GDP. The noteworthy aspect of it is the presentation of defence expenditure to the Senate Defence Committee this year. Under the new (ad hoc) National Finance Award, the provinces will get 45 percent with a commitment of enhancement to 50 percent in the next five years.

The general election due next year, the government has made good on the pre-budget feeler regarding relief to its employees, pensioners and other low income wage earners - 15 percent dearness allowance for all government employees, 20 percent increase for pensioners who retired before 1977 and 15 percent for after 1977.

For Grade 1 to 16 government servants' conveyance allowances have been raised by 50 percent, retirees benefiting from EOBI Act, will get Rs 1300 instead of Rs 1000 per month. In addition, several other benefits were announced for workers. Minimum wage in the private sector has been raised from Rs 3000 to Rs 4000 to mitigate the inflationary pressure.

This will, however, only apply to the workers in the formal sector. Labour, involved in agriculture and the informal sector may share the benefit indirectly.

An important measure, which reverses the unwelcome steps taken in the past few years is that the return on National Saving Schemes, including prize bonds, has been increased by 0.5 to 1.5 percent. This move is likely to induce banks also to improve the return to their depositors. The age limit for senior citizens stands reduced to 60 from 65 years for tax relief at the income threshold of Rs 400,000.

In a timely response to the hue and cry about food prices, the budget makers have enlarged the subsidy net. The utility stores will now cover every Tehsil and provide relief on commonly consumed kitchen items. Besides sugar, various pulses will be made available at reduced rates at these stores.

The Government would be well advised to improve supply side at the same time, giving a push to domestic production and imports. It may be noted here, however, that administrative measures have not worked in the past to control prices. Model markets like the Sunday Bazaars and Price Magistrates, a shadow of District Magistrates of the past, will also not suffice.

The Government needs to think up more measures for effective control on prices. Measures for bridging the supply-demand gap thus far have been more effective.

To give a boost to agriculture, the government intends to maintain the subsidy on fertiliser and electricity, costing Rs 12.3 billion and Rs 55 billion respectively.

Duty free imports of tractors and a sharp policy focus to raise livestock and dairy production will indeed aid in keeping a check on food prices. For improving agricultural productivity, timely completion of water management projects worth Rs 48 billion and increasing irrigated acreage through building of dams (allocation Rs 10 billion) is a noteworthy initiative.

President Musharraf's decision to bring about a national consensus on the divisive issue of dams will hopefully provide the much-needed leadership towards food autarky.

In the sphere of employment, governments in the past also launched various populist schemes, such as yellow cabs, green tractors; small businesses, youth employment etc. The economic impact of such schemes was marginal. However, they did win over the voters.

With elections next year in sight, the self-employment scheme of this Budget is aimed to benefit 1.8 million (18 to 40 years) persons. It needs to be made commercially viable.

Providing interest subsidy would create a distortion. It will adversely impact micro-finance institutions working in the country. Even with only two to three years in operation the investment made by both private and public micro-banks will be at risk.

The Budget speech did not reveal that the government has decided to use the banks as a major tool for tax collection. But the proposed five percent excise duty on non-funded services, such as Letters of Credit, brokerage fee, credit card processing, electronic mail transfer, debit card etc, would encourage cash transactions and defeat the documentation objective.

On the other hand, taxing mutual funds on income earned through money lending will now force people to restrict their activity to investment in equities. This will bring stability and reduce volatility on the bourses. Government's decision to tax private security services employing guards - in the present law and order conditions - will add to the cost of doing business.

While increasing the excise duty on cigarettes, to reduce consumption, government should have lowered excise on cement to induce construction. Levying excise on a host of services, is intended to compensate the Federal Government for higher share provided to the provinces, under the NFC Award.

At long last, the government has decided to tax real estate business and enhance the capital value tax on the stock market. CVT mode of collection is indirect and not a substitute for capital gains. Doubling the tax on cash withdrawals from banks is ostensibly aimed to document the economy, which, in fact, it cannot.

A better alternative would have been the condition of providing National Tax Number for all transactions above Rs 25,000, for reducing the size of the black economy. Imposing CVT on real estate without a time-limit on the use of power of attorney will not curb off-the-books transactions.

The general practice of allotment letters changing hands and 'benami' transactions conducted in real estate will persist. Imposing tax at the rate of five percent of the rental income, will also not pay dividend unless the landlord is also a tax registered person.

No one can dispute government's claim of increased economic activity. Credit growth despite a tight monetary stance in FY06 is evident. In policy making, there is always some trade-off. Fiscal deficit within manageable limits is not necessarily bad.

It is the quality of growth which is more important. The government expects the rise in imports to slow down and the enhancement in production capacity to close the supply-demand gap. Without bringing inflation down substantially, we fear the pressure would shift to exchange rate adjustment. The textile sector, which accounts for 50 percent of exports, has been clamouring for subsidised credit and cheaper energy rates.

The Budget speech indicates neither. The government is confident that the cost of doing business can be reduced through improvement in infrastructure and creating the national trade corridor. It took us 12 months to reduce inflation by 1.3 percent. The target for further reduction by 1.5 percent will be a real challenge.

Copyright Business Recorder, 2006


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