ISLAMABAD – PRIME Institute, an economic think tank, launched a policy note on Federal Budget 2020-21. “Federal budget speech 2020-21 notes that the expected recession due to COVID-19 calls for an expansionary fiscal policy.
An expansionary fiscal policy aims for greater public spending, which drives up aggregate demand, generating employment opportunities and economic activity,” PRIME noted. Having mentioned the need for an expansionary fiscal policy without exposure to unsustainable deficit financing, the federal minister presenting the budget speech went on to present a budget with a stated total federal expenditure of Rs7, 137 billion as against the revised budget estimates of Rs8345.3 billion incurred in FY 2020. As for sustainable debt financing, this year’s budget entails further debt assumption, as the primary balance is still in the negative.
The government is terming the non-increase in income tax rates as a relief in itself. The budget estimates Rs2036.8 billion as collection through taxes on income. This estimate is an increase of about 25.9 per cent over revised estimates of FY 2019-20. It is not easy to fathom how the government plans to increase its income tax collection by almost 26 per cent, when the economy has been forecasted to contract by 1.5 per cent in real value terms.
PRIME Institute also notes that this fiscal year, Pakistan has faced restrained economic activity in the last quarter. Since COVID-19 is here to stay for the time being, it should come as no surprise if the country faces another three months of constrained economic activity. So if in the next fiscal year too, one quarter is to see constrained economic activity, and the tax rate remains the same, the budgeted increase of 25.9 per cent in income tax collection should be eyed with caution.
Further the policy note states that the Budget allocation for Defence Affairs and Services went up by 5 per cent, while allocation for Social Protection has been cut down by 5.8 per cent, as compared to revised budget estimates 2019-20. This comes at a time when the Economic Survey of Pakistan, released a day before the federal budget, states that Pakistan’s HDI ranking declined to 152, from the earlier 150, as reported in the UNDP Human Development Index Report, 2019. The survey further states in its ‘COVID-19 Advent and Impact Assessment’, an estimated 56.6 per cent of Pakistan’s population is socio-economically vulnerable due to COVID-19 crisis.
Among the most vulnerable, the expected loss of employment (across both the agriculture and non-agriculture sectors) is estimated to be between 12.5 million to 15.5 million in case of moderate slow-down of economic activity/partial lockdown, and between 18.7 million and 19.1 million in case of severe restrictions to economic activity/full lockdown. It is expected that wholesale and retail trade will lose maximum workers followed by manufacturing, construction and transport. One thing the Economic Survey of Pakistan misses out on is that actual unemployment would likely be greater than these estimates due to homecoming of Pakistan’s overseas workforce, now unemployed due to COVID-19 related economic recession.
To sum up, to dress up public accounts for the IMF, the federal government had presented over-ambitious revenue targets in budget 2019-20, and that (coupled with effect of COVID-19) has resulted in a magnanimous revenue shortfall towards the end of the fiscal year. In the upcoming fiscal year, let alone a 2.1 per cent growth in real terms, just holding its ground against economic contraction will be quite a challenging task.