Growth policy? Really?
Dar is one up; growth notched down. The finance ministry has not only increased the FBR’s revenue growth to 18 percent in the first half (24% in second quarter) but also fetched hefty surpluses from provinces to curtail the fiscal deficit to Rs515 billion or 1.7 percent of GDP. The deficit in the second quarter at Rs187 billion is Rs93 billion less from the IMF’s estimates of Rs280 billion.
Wow, Dar surely is the blue eyed boy of the fund and is negating all the speculative negative noise coming from international media. But what about growth; who cares! The development expenditure has been slashed both by provinces and federal government to meet the revenue targets, though cut in development expenditure by the federal government was more than that of provinces.
On the revenue front, FBR is the star performer as its revenue grew by 18 percent year-on-year in 1HFY16 and more importantly by 24 percent in the 2QFY16. There is praise all over on the performance of refreshed FBR team in the back drop of imposition of mini budget in October.
Let’s try to evaluate the marvellous performance of second quarter in pieces. Oops, there is not much to jubilate on direct taxes as despite the imposition of super tax, the growth was limited to 12 percent in the second quarter as against 26 percent in the first quarter. This implies that either the economy has significantly slowed down in the second quarter or there was a case of collecting advance taxes in the first quarter to save the skin.
Most likely, latter is the case. Mind you, the FBR’s performance in the first quarter was way below the target and IMF didn’t take it lightly and Dar had to reshuffle the top management of FBR and introduced an array of new indirect taxes.
Hence the indirect taxes grew substantially in the second quarter; FBR probably refrained from collecting advance taxes from banks and other corporate. The growth in indirect taxes was mere 4 percent in the first quarter which increased to 18 percent in the first half - whopping 32 percent in the second quarter.
How did this unprecedented growth happen? Sales tax collection was shrunk by 2 percent in the first quarter, jumped by 33 percent in the second quarter to make the half year growth at 15 percent. Higher sales tax on petroleum products, cascading impact of imposition of regulatory duties on an array of items in the mini budget resulted in higher collection.
No surprises in 41 percent growth in the customs duties during the second quarter as now virtually every item is taxed higher at imported stage - there is now minimum duty of 3 percent on almost 60 percent of imports which was either zero or one percent earlier. Then there is 17 percent sales tax on newly imposed customs duties and this explains how these indirect taxes cascade in higher sales tax collection.
Well, Dar achieved his targets with flying colours but unfortunately the burden is skewed towards the poor. Already the indirect taxation was proportionately higher than the regional economies and it has increased further after the imposition of mini budget in October 15 - indirect taxes in total FBR revenue increased from 56 percent in 1HFY15 to 61 percent in 1HFY16.
That was the story of revenues, in case of expenditure the equation is simple - cut the development expenditure to curtail fiscal deficit. The current expenditure which grew by 3 percent in the first quarter increased to 6 percent in the first half implying 9 percent growth in the second quarter. Domestic debt servicing cost despite falling interest rates grew by 10 percent in 1HFY16 and 22 percent in the second quarter. Defence expenditure was slashed by 8 percent in the first half to partially offset the impact of higher debt servicing.
The catch is in the development expenditure where the consolidated expenditure in first half is even less than what is committed to the IMF - a rare phenomenon. Dar finally convinced provinces to show some surpluses as the accountant created debt in the name of provincial cash surplus - he offered provinces t-bills’ rates for generating surplus cash and latter forgone development to earn interest.
Punjab generated Rs43 billion in first half (deficit of Rs28bn in first quarter), but Sindh provided the lion’s share by exhibiting a fiscal surplus of Rs77 billion - overall surplus by four provinces was Rs154.5 billion or 0.5 percent of GDP.
Despite higher surpluses, the development spending of provinces exceeded the IMF’s estimates (Rs222bn versus fund estimates of Rs175bn); but federal government compromised its spending to fill the gap (Rs156bn versus IMF’s target of Rs182)
Did the finance minister in the budget speech not say that FY16 would be focusing on growth? How on this green earth growth oriented fiscal policy has higher sales tax, super tax on income and low development?
