Budget to increase defence budget by 31%, erase power tariff, fertiliser, sugar subsidies

Source Business Recorder
ISLAMABAD (May 22 2010): The government is expected to set federal budget outlay at Rs 2.488 trillion for 2010-11 with Rs 1.7 trillion revenue collection target,” Business Recorder has learnt. Defence budget will increase by 31 percent to Rs 448 billion compared to Rs 343 billion for the on-going financial year due to military operation in Waziristan and other parts of Fata.

The government has also decided to eliminate subsidies on power tariff, fertiliser and sugar in the coming budget. Federal government would also set aside Rs 1.412 trillion for defence, debt servicing and running of civil government and would transfer Rs 1.036 trillion to provinces which include direct transfer as well as their share under NFC Award.

It was revealed in a presentation by the Secretary Finance Salman Siddique on Budget Strategy Paper-2 to the National Assembly Standing Committee on Finance and Revenues chaired by Fauzia Wahab MNA at the Ministry of Finance. The NA body was informed that in 2010 and beyond the government will continue and consolidate the budgetary management reforms and widen public financial management system.

Central to this continued reform process will be the preparation of a Public Finance Bill to be taken to the National Assembly to provide a firmer legal basis for the budgetary management system, including the imposition of more effective controls on the issuance of supplementary funds during budget execution, the renewal of the provisions of the FRDL (Fiscal Responsibility and Debts Limitation) Act.

“Out of Rs 2.488 trillion federal outlay, Rs 1.7 trillion would be gathered through federal taxes by Federal Board of Revenue,” he said, adding that an amount of Rs 327 billion is expected from foreign aid and loans whereas the remaining amount would be collected from non-tax revenues of the federal government.

Secretary Finance said the Ministry of Defence had requested an increase of Rs 110 billion in the defence budget for 2010-11. “But federal government has approved an increase of Rs 105 billion for the next fiscal year,” he said. Federal government has decided to allocate Rs 40 billion for increase in the salary and pension of the federal government employees in the budget 2010-11 and there would be no subsidy on power tariff, sugar and fertiliser in the budget.

During the ongoing fiscal year, the federal government had allocated Rs 343 billion for defence budget, however, due to the higher expenditure on operation against militants and other security matters, some Rs 60 billion additional amount has been spent in the head of defence expenditure. Due to the additional expenditures of Rs 60 billion, total defence expenditure for the ongoing fiscal year would reach Rs 403 billion by June 30, 2010.

It was further informed to the parliamentarians that federal government is fully determined to enforce 15 percent Value Added Tax in the next fiscal year and that would help increase revenues as well as the tax base. During the ongoing fiscal year 2009-10 total expenditures of the country would reach Rs 2.927 trillion and revenues of the government remain well below at Rs 2.164 trillion resulting in budget deficit of Rs 763 billion. Out of a total PSDP worth Rs 421 billion for the ongoing fiscal year 2009-10, federal government has released Rs 260 billion and remaining Rs 235 billion have been spent on power tariff subsidies and expenditures on war against terrorism.

According to BSP-2, the federal budget will continue to be very tight for the foreseeable future. This situation demands that special attention be paid to ensuring that limited resources available for the budget are aligned with the real priorities of the government.

Two principal priorities are identified: the first is the need for public investment to correct the energy shortages which are having such a crippling affect on the productive economy; the second is the need for greatly enhanced service delivery in support of investment in people through the systems for education and health care delivery.

The Budget Strategy Paper (BSP) is developed twice during the year and presented to the Cabinet for approval. The BSP1 was approved by the Cabinet in its meeting of 10th February 2010. The BSP2 will also be reviewed by the Parliamentary Committees on Finance (including National Assembly Standing Committee on Finance and Senate Standing Committee on Finance) before receiving approval from the Cabinet.

The low level of public sector resource mobilisation poses a fundamental challenge for national development. The most acute symptoms of an inadequately dimensioned public sector are the lack of resources to fund essential public sector investment in the energy sector, and the continuing inadequacy of provision of basic education and health services to the population as a whole.

This dire situation will continue so long as Pakistan’s resource mobilisation (measured by the revenue /GDP ratio) remains at a level comparable with the least developed and post-conflict countries in the world. With a revenue/GDP ratio of 10-11 per cent it is not possible for the public sector to play the lead role required of it to put the country on a sustainable growth trajectory.

Addressing the issue of inadequate resource mobilisation will take several years and will require a greater degree of buy-in at the political level than has been achieved in the past. Specific measures will be introduced in the 2010 budget and beyond to increase the revenue yield, including the introduction of VAT and the continued reform of our tax administration system. The MTBF has introduced important changes to the budget preparation process of the Federal Government.

These include:

1) the ‘Budget Strategy Paper’ is a Cabinet paper which presents the medium-term budget strategy o the Federal Government and results in issuance of Indicative Budget Ceilings for the medium-term for both the recurrent and development budgets, 2) the ‘Output based budget’ which is a mechanism o. preparing budgets as per services delivery, and 3) strengthening of the budget review meetings (eg Priorities Committee) to review both sides of the budget and enhance focus on Service Delivery.

Fiscal stability and sustainability over the medium term is an essential precondition for accelerated economic growth. In the past two years Pakistan has managed a serious threat to fiscal sustainability. The overall budget deficit, which stood at 7.8 per cent of GOP and threatened a crisis on the balance of payments, has been brought under control.

Nevertheless the level of public sector debt remains high by international and emerging economy standards and the associated requirements for the servicing of domestic and external public debt continue to be major a drain on budgetary resources, limiting the pool of disposable budgetary funds to be applied for service delivery and national development.

In coping with the balance of payments crisis of 2008/09 the trend towards debt reduction which was maintained during the previous five years was reversed, the limits for public debt set out in the Fiscal Responsibility and Debt Limitation Act (FRDL) are close to be breached in 2010 as total public sector debt (including borrowings from the IMF) climbs above 59.3 percent of GDP.

The medium-term budget will correct this reversal and put the debt to GOP ratio on a downward path, heading in the medium term towards 53 percent and below. In addition, as mentioned below, the FRDL will need to be revised and updated as part of wider reform of the legal basis for the budget management system.

A specific challenge to fiscal prudence and sustainability is posed by the important on going reforms to the system for sharing public revenues between the federal and provincial governments and the associated assignment of responsibilities for service delivery. The recent NFC award has increased very substantially the share of consolidated fund revenues, which will flow to the provinces.

At the same time the Constitutional Review Committee (CRC) has recommended the abolition of the concurrent list, with an implied substantial reassignment of responsibilities currently undertaken at the federal level to the provinces. However, the recommendations of the CRC are not to take effect until 2011. There is, accordingly, a mismatch for the budget year 2010/11 between the distribution formula applied through the NFC and the assignment of responsibilities for service delivery.

This mismatch threatens to undermine fiscal prudence and the ability of the federal budget to maintain a level of the consolidated fiscal deficit, which is compatible with fiscal sustainability and economic stability. In recent years the federal government has embarked on a process of reform of the budgetary management system.

Central to this has been the introduction of the Medium Term Budgetary Framework, which aims to provide both a strategic system for the overall management of the budget in line with resources available, and the reform of the budget preparation process in the federal lone ministries to Orient budgetary allocations towards service delivery and the achievement of results. These reforms are now well-advanced.