Prime Minister Shehbaz Sharif’s new budget for the next fiscal year sets ambitious targets to meet IMF demands and strengthen Pakistan’s case for a larger, longer bailout to anchor the economic stability achieved in the past year.
The budget aims to increase government tax revenues by over 40%, raising Rs12.97 trillion from a projected Rs9.25 trillion this year through significant tax measures. Historically, the annual tax collection increase has averaged 20% over the last five years, with an estimated 30% rise this year. The budget’s additional tax measures, amounting to Rs2.2 trillion or 1.8% of GDP, aim to broaden the consumption tax scope, significantly increase the personal tax burden on both salaried and non-salaried individuals, eliminate tax exemptions for various sectors, incorporate some untaxed incomes, tighten regulations around non-filers, and raise the petroleum levy by Rs20 per litre to Rs80. The remaining Rs1.5 trillion increase in tax revenues is expected from nominal economic expansion, with a targeted inflation rate of 12% and 3.6% GDP growth.
These measures and the proposed petroleum levy hike are projected to raise the tax-to-GDP ratio to 11.5% next year from the current 9.6%. Another key goal is to achieve a primary surplus of 1% of GDP to maintain fiscal deficit sustainability at 6.8%. The deficit could be further reduced to 5.9% if provinces contribute a surplus of Rs1.2 trillion as planned.
Finance Minister Muhammad Aurangzeb’s announced measures target ‘sacred cows’ like real estate investors, stock investors, exporters, and the retail supply chain. However, these are incremental steps towards economic documentation rather than radical policy changes, reflecting potentially unfavorable political conditions for more significant reforms. Despite the ambitious tax and deficit targets, their attainment is not beyond reach.
Doubts persist about the government’s ability to enforce these measures fully and ensure compliance. While the tax collection target is raised to narrow the fiscal gap, the budget lacks substantial efforts to cut expenditure. Although the finance minister mentioned ‘right-sizing’ the government, no tangible policies were announced. Instead, current expenditure is set to increase by 21% to Rs17.2 trillion, with power and other subsidies rising to Rs1.4 trillion and defense spending by 14% to Rs2.1 trillion. Additionally, consolidated development expenditure of the center and provinces is projected to grow by over 58% to nearly Rs3.8 trillion, aiming to stimulate moderate economic growth through large infrastructure projects, given the lack of new private sector investments.
Beyond accessing IMF funds, a major objective of the budget is to maintain the stability achieved over the past year. Fiscal consolidation in the budget is likely to deepen stability, but sustainable economic recovery depends on foreign flows from multilateral and bilateral partners to bolster international reserves, ensuring they cover three months of imports.
While authorities are optimistic that a new IMF deal will unlock these flows and improve Pakistan’s credit ratings, facilitating access to commercial loans, there is little immediate indication of substantial foreign flow increases from these sources. The IMF deal could help unlock multilateral funds, but this alone may not reassure bilateral or commercial creditors or foreign investors. Unfortunately, the new budget does little to address this challenge.