LAHORE -  Despite the rhetoric, the federal budget 2014-15 shows little consideration for the ultimate purpose of public finances which is to improve the living standard and quality of life of the people of Pakistan.
The analysis of the federal budget 2014-15, compiled by Institute for Policy Reforms (IPR) shows high risks for imbalance and limited opportunity for economic growth.
“The risks are in the shape of inflation from increase in fiscal deficit, declining credit worthiness from high debt, and government’s inability to invest in priority projects or in human development and too many resources diverted to highways. The budget also likely entails increase in power tariff and other levies with little to show for improved service to the people. Despite the rhetoric, the budget shows little consideration for the ultimate purpose of public finances which is to improve the living standard and quality of life of the people.”
The IPR report which is mainly complied by its MD and renowned economist Dr. Hafiz Pasha claimed that the budget is a combination of promise and government’s usual inclination to rely on improbable hope. More realistically, the numbers do not add up. The budget estimates are meant to satisfy donor expectations, especially the IMF. It will be really challenging for government to meet the targets set in the budget, he added in the report.
At its best, here is what IPR found: Government is right to claim some success in stabilizing the economy. The budget does address some irritants for businesses (this is the promise of the budget) though it avoids making necessary reforms in the working of the government to reduce costs of doing business. IPR has concerns about the estimates for fiscal 2014-15, as the numbers in the budget document do not square up with the story in the Finance Minister’s speech. IPR finds that the budget documents do not support the following: Government’s estimates of growth in tax collection; Increase in tax to GDP ratio and contribution of direct taxes; Control over inflation; GDP growth rate and Decline in fiscal deficit.
The report said that the Finance Minister listed a number of successes for his government and IPR endorses many of these achievements. But there are other areas where more progress is required.
Agriculture growth rate declined from 2.9% in 2012-13 to 2.1% in 2013-14. Private investment (gross fixed capital formation in the private sector) has declined by 1.6% in fiscal 2013-14 notwithstanding government’s claim of major increase in private credit.
Dr Pasha said that increase in foreign reserves and the accompanying appreciation in the value of the Pakistan Rupee come at the expense of potentially unserviceable foreign debt and unanswered questions about the purpose of voluntary grants extended by a ‘friendly’ government.
Government may feel satisfied at the 16% growth rate for tax collection, but it falls well below government’s target growth rate of 27%.
Despite the rhetoric about tax reforms, there is little change in the tax to GDP ratio and especially in the abysmally low contribution of direct taxes to total revenue.
According to report, the new budget does well to incentivize exports and private investment.
The IPR is concerned that the numbers for Budget 2014-15 do not add up. The basis of the budget is fragile at best. Inability to achieve targets will result in high fiscal deficit, high inflation, decline in GDP growth, and friction in relations with IMF.
Within the present policy framework and structure of the economy, government cannot conceivably meet the tax revenue target of 2810 billion rupees or remain within its expenditure estimates. This is not only because government has underperformed historically, (actual FBR tax collection for 2013-14 is over 200 billion rupees below the original collection estimate).
Below are three cases where the numbers do not add up. IPR estimates that collection of the Cess has been overstated by 56 billion rupees. Government estimates total collection of 145 billion rupees in fiscal 2014-15. The present rate of the levy does not justify this level of collection. This revenue target satisfies IMF’s requirement for contribution of 0.4% of GDP on this account. Government will either fall well short of its promise or increase the rate of the levy. IPR fears a combination of both.
Subsidy to the power sector mainly contributes to this line item. A reduction in subsidy of such magnitude requires an increase of 15 to 20% in power tariff. It is curious that the Finance Minister’s speech missed this important detail. It is likely also, that, in keeping with the past, expenditure on this account will breach the estimated amount putting to question government’s claim of controlling the fiscal deficit.
Government estimates that provinces will not spend all of their revenue and will generate a surplus of 289 billion rupees. IPR finds such optimism misplaced. 
Despite government’s professed objective of increase in contribution of direct taxes, the Finance Bill does not propose any major measures for its enhancement. Last year, finding resistance among some key constituents, government gave up quickly its objective to broaden the tax base.
This year, the government did not even consider it worth a mention.  Proposals for additional tax are based mostly on expansion in the withholding tax regime, increase in customs duty such as those listed earlier. IPR has serious concerns about further indebtedness of the Pakistan economy. It makes debt servicing unsustainable (already it claims 33% of total budget), reduces credit worthiness while increasing donor dependence.