Every year, the federal government announces a federal budget and the news media reports on it. The budget itself is a bunch of numbers that may or may not mean much to the people listening. However, these numbers have a huge impact on the lives of not only the taxpayers but every citizen of the country.
Profit explains how a common man can make sense of the Rs 18.87 trillion budget announced today in the parliament house.
Central to a country’s economic policy is the annual budget. It is in this document that a government decides whether it will increase or decrease its expenditure in a particular sector. The government also projects the revenues that it will collect through taxes and other sources in the budget and it is based on those estimates that the government allocates budgets to different sectors, ministries and provinces.
So making a budget is an accounting exercise, with underlying policy objectives. The accounting exercise is divided into 6 essential steps namely, Preparation, Authorization, Execution, Reporting and Monitoring, Review and Policy setting. This sounds a well-rounded approach to tackle the exercise however oftentimes, the miscalculation in the first two steps, renders the last 3 utterly moot. A good example of that would be the last federal budget of FY24 which was changed majorly within days after being presented in the parliament.
The annual budget statement (ABS) is the main document for the federal budget. After the preparation and authorization, the ABS makes its way to the senate and eventually to the public. In terms of expenditures, the ABS categorically differentiates between “Receipts” and “Expenditures”.
Revenues/Receipts
Receipts or revenue consists of balances of all budgetary receipts, e.g. Revenue Receipts, External Receipts, Public Account Receipts. Revenue receipts contain all the tax and non-tax revenue to be collected by the FBR and the government during that year.
Combined, these resources constitute federal gross receipts. This means that the provincial share is deducted to arrive at net federal receipts available to finance the federation’s expenditures. For the upcoming fiscal year, Pakistan’s net fiscal revenue receipts is estimated to be at 10.377 trillion. Meanwhile the total receipts is estimated at its highest ever Rs 24.38 trillion. Total revenue receipts, both tax and non-tax, add up to around Rs 17.815.
It’s important to note that the distribution of revenue between the federal government and the provinces is guided by the principles laid out in the NFC Award. The award determines the share of each province in the federal revenue pool based on factors such as population, backwardness, revenue generation capacity, and other socio-economic indicators. While this award has been highly criticised by economic experts at various levels, the provincial share in this year’s budget turned out to be Rs 7.438 trillion. It is important to note that this amount is not only more than the total income tax estimated to be collected by all filers (Rs 5.4 trillion but also at par with the total indirect taxes Pakistan is estimated to collect during this year i.e. Rs 7.45 trillion.
Additional resources in receipts may include privatisation proceeds plus credit from the banking sector to finance government expenditures. The government has estimated Rs. 30 billion as privatisation proceeds in the upcoming year, showcasing its hope for privatisation of loss making State Owned Enterprises (SOE’s).
It is important to note that most of the revenue receipts have been increased by a huge amount to account for this highest ever budget. The tall order of expenditure, which will be later explained will only be possible if the government is able to pull off some of these extraordinary changes. For example, total revenue receipts have been estimated to grow by a massive 47%. Similarly, the collection of direct taxes by the FBR, such as the income tax, have been estimated to increase by a whopping 48%. For reference, after a series of strict reforms and coercive actions promised to massively impact the tax net of the country, the FBR could only increase its direct tax collection by a little over 13% in FY24.
A lot of these expected receipts are reliant on high indirect taxes once again. The estimated growth of indirect taxes is up to 45% higher than the estimated collection target for FY24. It is important to note that the target was later revised and the government ended up collecting a higher amount in indirect taxes than it planned.
Sales Taxes, Federal excise duties and Custom duties all are estimated to increase by a massive amount, with just the Sales tax estimate increasing by more than 36% or Rs 1.3 trillion.
Expenditures
The other part of the ABS is expenditures. Expenditure is broken down into current expenditure and development expenditure and is separately shown for expenditure on Revenue Account and expenditure on Capital Account. Expenditure on Revenue Account signifies that portion of expenditure which is met from resources such as tax revenue and receipts, whereas expenditure on Capital Account refers to expenditure which is financed from loans, finances, credits, grants, and other borrowings.
The expenditure on revenue for FY25 is estimated to be Rs 17.2 trillion, almost Rs 200 million more than the optimistic revenue receipts.
The biggest current expenditures on the revenue account that Pakistan incurs are General Public Service and Defense affairs and services. The General Public Service mainly inculcates the servicing of domestic and foreign debt. Apart from that it includes administrative and research expenditures of “General Public Service”. Meanwhile defence expenditure includes the military and defence forces cost. Collectively these two expenses are budgeted at Rs 15.75 trillion which is almost 91% of the total expenditure.
As per the proposed budget, Pakistan is estimated to spend 33% more than it estimated to and 17% more than it actually spent in FY24 in debt servicing. With Rs 9.775 trillion expected to be spent in debt servicing, the debt servicing alone eats up almost all of our net revenue receipts (Total revenue receipts minus provincial share). In the past Pakistan has financed the deficits of its budget through borrowing from international and domestic sources. However, it is this very unsustainable nature of budgeting that has led Pakistan to where it is today.
Another significant expense under the GPS which has crossed the 1 trillion mark for the first time this year is pensions. A massive unfunded expense, pension is often referred to as a time bomb. The pension expense, despite the call for reforms, has gone up by more than 26% marking a Rs 213 billion increase.
Other heads under the current expenditures include Public order and Safety Affairs, Economic Affairs, Health, Education and Social protection etc. While significant, these expenses account for less than 10% of the total expenditures on the revenue account.
Another significant portion of the current expenditures is financed through the capital account. This includes foreign loan repayments and repayment of short term foreign credits.
Some salient features regarding the increase in expenditure are as follows. All federal employees between the grades of 1-16
With some opposition surrounding the Finance Bill 2024 and lack of rationale surrounding the increase in taxation, the legislative assembly is expected to have a debate over the acceptance of this budget. News regarding the government’s coalition partners i.e. Pakistan People’s Party not being satisfied with the budget has made its way to the surface. Therefore it will be important to see how this proposed budget and the debate surrounding it pans out. Even though the estimates of inflation for the next year are said to be below 12%, with the sudden increase in indirect taxes, the public is expected to feel a price shock in the upcoming weeks.
