A new budget is here, but it fails to bring the reforms and economic revival we urgently need. Like many of our past budgets, it focuses on taxing the already burdened sectors, while sidestepping property, agriculture, and the NFC. It also aims to meet IMF conditions.
Old habits die hard, as evidenced by this PML-N budget. Total federal development spending remains at Rs1700 billion, including Rs1400 billion for PSDP, Rs100 billion via public-private partnerships, and Rs200 billion through government-owned companies. Notably, Rs75 billion has been allocated for MNA projects in the PSDP.
This increase in development spending is unsustainable, given the projected federal budget deficit of Rs8500 billion. The NEC has also approved provincial development schemes exceeding Rs2 trillion, pushing ‘development’ spending in the country to Rs3800 billion and necessitating over $3 billion in new dollar loans. It seems this budget serves the interests of governments in federal and provincial capitals, with little regard for the challenges faced by the middle class.
The projected federal deficit of Rs8500 billion will be financed through borrowing from banks (crowding out private investment), new foreign loans, provincial surpluses, and the SBP printing more money, thereby fueling inflation. Lower international oil and commodity prices are the only hope for curbing inflation; any increase will translate into higher prices domestically.
Tax revenues are projected to reach Rs12,970 billion, up 40% from the revised target of Rs9250 billion for this year. Of this, Rs1572 billion is attributed to autonomous growth (inflation rate plus GDP growth rate), while Rs2148 billion comes from new taxes or measures, amounting to 2.0% of GDP. In a low-growth environment, achieving either the tax target or the economic growth target of 3.5% seems improbable, further reducing disposable incomes for Pakistanis.
New taxes include higher tax rates on FBR-registered stores, withdrawal of exemptions increasing prices on everyday items, a hike in petroleum levy by up to Rs20 per litre, and increased taxes for salaried employees by moving down tax slabs, but without raising the highest slab from 35%, resulting in higher taxes for all employees.
While there is no new tax on retailers, the withholding tax on manufacturers has been increased for sales to non-registered retailers, akin to a 2.25% increase in sales tax, which consumers will feel in higher prices. Pensioners and salaried individuals, who depend on food and medicine, will find it harder to make ends meet.
Most of the burden of these new taxes will fall on the middle class. Once again, we have overlooked horizontal equity in taxation—individuals with similar incomes from different sources pay similar taxes—and vertical equity—the principle that wealthier individuals should pay a higher proportion of their income in taxes. Instead, we continue to protect the powerful and burden the middle class.
Taxpayers will subsidize the energy sector by over Rs1300 billion, while we continue to endure backbreaking power tariffs. This should prompt a clear call for privatizing the entire power industry—from transmission to distribution to generation—and learning from past policy mistakes of over-reliance on imported fuel and excessive borrowing.
The allocation for BISP has increased from Rs425 billion to Rs530 billion, with a new government program training children of BISP recipients in trades and introducing a school meal program in Islamabad.
According to the World Bank, 90 million Pakistanis live in poverty, with an additional 10 million expected to fall into poverty this year. The budget lacks programs to boost industrialization, increase agricultural output, or spur economic growth to create jobs and lift people out of poverty. There are no measures to encourage exports; in fact, taxes on exporters have been increased.
Having served in positions similar to those of Muhammad Aurangzeb and Secretary Finance Imdad Bosal, I understand the stress of IMF negotiations, the political pressures faced by their bosses, and the constraints of our economy. With more leeway, these individuals could have presented a better budget and seized this opportunity for reform.
