Federal Budget 2022-2023
A mix of austerity and election-year spending
The budget for 2022-23 contains a mix of real stabilisation measures sugar-coated with feel-good sentiment — the revival of petroleum levy with a bang, withdrawal of incentives for construction coupled with taxation on real estate and candies for government employees, income tax payers, industries and solar energy — and additional taxes of Rs355 billion to be collected by the Federal Board of Revenue (FBR).
Here is a list of the salient features of the federal budget:
· GDP growth target at 5%
· GDP projected at Rs78.3 trillion against Rs67 trillion this year
· Inflation expected at 11.5% in FY23 against 11.7% in FY22
· Tax-to-GDP to be taken to 9.2% in FY23 against 8.6% in FY22
· The fiscal deficit is to be reduced to 4.9% in FY23 against 8.6% in
· The primary surplus is expected at 0.19% in FY23 against a primary deficit of 2.4% in FY22
· Imports projected at $70bn in FY23 vs $76 billion in FY22
· Exports projected at $3 billion in FY23 vs $31.3 billion in FY22
· Remittances estimated at $33.2 billion vs $31.1 billion in FY22
· Current account deficit projected at 2.2% of GDP in FY23 versus 4.1% of GDP in FY22
· Total interest payment of Rs3,144 billion; domestic interest payment: Rs2,770 billion and external interest payment R373 billion
· Debt ceiling at 60% of GDP
Overdue receivables of the petroleum sector are estimated at Rs284 billion, while next year’s allocation has been set at Rs71 billion
· Five-year tax holiday for film-makers, new cinemas, production houses
· Fixed income and sales tax on small retailers — to be collected with electricity bills
· 100% depreciation adjustment in the first year of operations for corporates and businesses
· Advance income tax at import stage to be made adjustable
· People having more than one immovable property worth more than Rs25 million will be assumed to have 5% rental income on market value, which will be taxed at 1% of this fair market value
15% capital gains tax on immovable property on one year holding period, reducing by 2.5% for every additional year
· Advance tax on filers to be increased to 2% from the previous 1% on purchase of property (non-filers: 5%)
· People/companies with income above Rs300 million to pay an additional 2% tax
· Increased advanced tax on autos above 1600cc
· Taxation increased on banks to 42% from the previous 39% (including super tax)
· Credit/debit card payments made outside the country to be taxed at 1% (filers) and 2% (non-filers), adjustable in full-year tax
· No sales tax on solar panels
· Annulment of sales tax on tractors, wheat, maize, sunflower, canola etc.
· Custom duty eliminated on agriculture machinery
· Custom duties rationalised on 400 items within the manufacturing sector
· Tariff rationalised on synthetic yarn (PSF)
· More than 30 pharma APIs free from customs duties
· 10% salary increase for government employees
· Pension increased to Rs530 billion
It is a sad commentary on the state of our economy that within a brief span of three years, we are faced with the same unpleasant but imperative task of putting the economy back in the stabilisation mode. Pursuant to the International Monetary Fund (IMF) programme that was signed in 2019, the federal budget for the year 2019-20 was framed to stabilise the economy. It was designed to severely contract economic activity through tough fiscal consolidatory steps to arrest the growing mismatch in our current account and an unsustainable fiscal deficit that had brought our external account under pressure. Regrettably, we seem to have reverted to that very familiar situation now. The federal budget presented in the National Assembly on June 10 is designed again to stabilise the economy by slowing demand-driven growth that has brought our external account to an unsustainable pass.
Time and again we have witnessed this vicious cycle and all our successive governments have displayed a remarkable neglect of the fault lines in our economic model, despite repeated cycles of boom and bust. Ironically, government after government remains obsessed with pushing for higher growth in the economy in utter disregard of evidence that shows that constraints in our external accounts due to lower exports make it an exercise to generate a self-inflicted crisis in the forex reserves situation of the country. The result is that the country, time and again, has to seek bailouts from the IMF.
The budget, in all, seems a mix of austerity and election-year spending. The thought process shows long-term planning in some places while in other places short-term election thinking is prevailing. The IMF’s tough measures have somehow been adjusted along with some unrealistic targets. There are some populist measures along with an end to exemptions.
Taxes such as petroleum levy are set at peak levels while assuming volumetric growth. GDP is expected to grow at 5 percent with 11 percent inflation. Both are non-realistic. Independent forecast suggests that growth would be lower and inflation higher. In short, the budget is based on compliance with the IMF conditions, and it is going to be tough on people. And it could be followed by a mini-budget by October if the revenues fall short of target.
Caught between a rock (IMF) and a hard place (popularity), the commodity super cycle and devaluation came to the government’s rescue to help bridge the tax revenue target through higher import values. This allowed the finance minister to limit the impact of additional taxes and find the space to retain some element of growth. So, on the face of it, there are no new taxes as such – existing ones have been repackaged. Minimum salary threshold is increased while higher taxes have been imposed on top slabs. Some fear that government will lose revenues as many report income close to minimum level.
This budget is not going to lead to higher growth. The 5 percent target is just set on paper. If the government doesn’t complete remaining term, it can run its election campaign on the issue. Then inflation at 11 percent is even more unrealistic. Petroleum prices at current international prices with full PL (even with zero GST) would be close to Rs300/liter. International prices are rising further and are expected to remain high in the short term. Then, electricity subsidies are budgeted to be half of this year revised values. Same is the case
for LNG. Expect both electricity and gas tariffs to increase.
Inflation would by no means be less than 15 percent (on average) in the upcoming fiscal year. The nominal GDP is expected to grow by 17 percent in FY23. This is based on assumptions of 5 percent GDP growth and 11.5 percent inflation. The actual math could be 15 percent inflation and 2 percent GDP. The nominal GDP growth would be somehow similar. And this may help in achieving IMF’s revenues targets.
However, budgeted revenues of Rs750 billion on petroleum levy would be a challenge if oil prices move towards $150/barrel. Imagine where petroleum prices in PKR for consumers might reach. Then on tax revenues, import compression could challenge targets on custom duties and sales tax which is heavily dependent on imports. If commodity prices remain high, these can be achieved. However, in that case, the subsidy element could increase.
Support measures have been announced for agriculture, IT, and other sectors. Let’s see how much this relief might help combat against growing inflation. The budget displays intention to provide energy at regionally competitive rates to exporters. However, Rs 20 billion has been allocated against the revised estimates of Rs26 billion this year. Then the promise of no-load shedding due to fluctuations on grid provisions is easier said than done.
The real challenge is on budget implementation. PSDP must be cut from the currently budgeted levels. In case of shortfall in revenues during first quarter, the IMF may ask for more. Even today, the IMF is questioning some numbers and believes that some estimates are unrealistic. It seems there would be some revision (perhaps through a mini budget) by the end of first quarter; and this quarter is going to be the toughest. It is a bumpy road ahead for the government.
The writer is a CSS aspirant.
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