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As election looms, so does a higher budget deficit

LAHORE: The time for general elections is approaching. Political parties have kickstarted their election campaigns by nominating key election organisers.

In this regard, the government is not far behind and has jumpstarted the development projects. After the completion of the IMF’s Extended Fund Facility (EFF), the government is facing a ‘soft’ budget constraint and is on the path of electioneering.

The budget document of FY2016-17 was prepared under the guidance of the IMF, therefore the government restricted its budget deficit at 3.8 % of GDP. The reason was that the government intends to show a continuous reduction of the budget deficit over the years since this would reflect a continuity of the reform process.

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The government documented a conservative estimate for expenditure and overstated the tax revenue receipts. For instance, authorities projected that the provinces would generate a net surplus of Rs340 billion and by doing so the budget deficit would reduce considerably.

This also shows that the federal government intended to impose a strict fiscal discipline on the provincial governments which would be an unlikely case close to the elections.

The development expenditure was 4.7% of the GDP in FY2015-16. The government intends to improve this ratio to 5% in FY2016-17. For this purpose, the government has allocated Rs800 billion in the federal budget.

The brick and mortar projects are worthwhile as far as the case of electioneering is concerned.

The disbursement for such projects is going on at a decent pace at around 35% of the allocated amount has been disbursed till now. This pace reflects that the government would achieve its development target since there is no external pressure to curtail the expenditure.

The current expenditure of the government is of an inertial nature. The current expenditure/total expenditure is around 85% in the first 3 months of FY2016-17 as reported by the Finance Ministry showing the dominance of these expenditures.

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Under strict fiscal discipline, the government may freeze these expenditures either by not increasing the salary and or pensions of civil servants or restricting the welfare payments through the reduction of subsidies.

Revenue issue

When there is no urgency of fiscal belt tightening these expenditures could easily go up. In the current year, the government intends to achieve current expenditure/GDP of 15% which may increase to some extent. Without meaningful taxation reforms, it is very difficult for the FBR to achieve a 17% revenue growth. This much growth can only be possible if the economy is either booming or the government is under a multilateral programme.

In the stagnating case of Pakistan, where businesses are not expanding fast and consumers are wary of expenditure, this much growth is not feasible. On top of that, relaxations granted to traders, realty sector and other taxpayers close to elections become a stumbling block to achieve the target.

On this basis, the revenue growth of the FBR in the first five and half months is below par. Soon the government would revise down the tax collection target.

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In the first three months July-September 2016, the budget deficit remained at 1.3% of the GDP which has set the pace for a full year budget deficit. The deficit normally increases in the third and fourth quarter. Keeping in view the conservative estimates of expenditure and exaggerated revenue receipts, the budget deficit would remain in the range of 5.7- 6% for the FY2016-17.

In short, the government has to tackle the off-budget items such as the stock of circular debt and refunds of exporters in future which have been temporary parked outside the usual budget through accounting tricks. The tackling of these items would keep on haunting future government in years to come.

courtesy : Express Tribune

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