The budget for the upcoming financial year, unveiled on Tuesday, aims to deepen fiscal consolidation to pave the way for a successful second review of the $7 billion IMF program in September. This strategic move is evident in the substantial reduction of the consolidated national fiscal deficit target to 3.9% of GDP from the initial goal of 5.9%. The provinces, often criticized for exacerbating federal fiscal challenges due to their increased share under the NFC award, are set to contribute a cash surplus of nearly Rs1.5 trillion, a 50% increase from the Rs1 trillion required contribution this year to curb the national deficit.
The government has managed to partially meet the income tax relief demands of the salaried classes, with the fiscal space for this relief primarily facilitated by savings of Rs1 trillion in debt payments owing to reduced domestic interest rates over the past year. These savings have also enabled authorities to address the demands of influential real estate groups seeking tax concessions. Despite these efforts, some find the budget disappointing as they had hoped for deeper structural reforms to sustain economic growth following the attained economic stability over the previous year and a half.
However, the budget is not devoid of positive aspects. Notably, it initiates long-overdue tariff reforms that are expected to phase out protections for certain rent-seeking industries over the next five years. Additionally, it aims to bring non-filers into the tax net by imposing restrictions on activities such as purchasing securities above a specified threshold and acquiring autos above 850cc. Moreover, the budget sets the stage for the gradual removal of sales tax exemptions for industries in ex-Fata/Pata regions to promote a level playing field nationwide.
While the finance minister acknowledged the challenges faced by compliant corporate entities, the budget speech fell short of addressing the issue of inequitable corporate tax rates, a significant barrier to investment and export expansion. Despite a marginal reduction in the controversial super tax, measures to enhance competitiveness and attract foreign investment are notably absent. Unfair tax policies, disproportionately burdening the industry – which constitutes 18% of the economy yet contributes nearly 60% to overall tax revenues – have led to a contraction in large-scale manufacturing.
The government’s ambition to elevate exports to $100 billion within five years through its Uraan program may prove challenging without a focus on enhancing industrial productivity and attracting foreign direct investment. Many observers remain doubtful about the administration’s ability to reach next year’s growth target of 4.2%, primarily due to its failure to transform the dynamics of a stagnant economy. While stability has been restored, the crucial question remains: will sustainable growth ensue?
