An Analysis of Budget Deficit of Pakistan since 1988

By: Mehreen Idrees Khan

Deficits primarily are of three types- budget deficit, trade deficit and current account deficit. Deficits have stabilized their position in economy as rapidly as they entered into it, so that uprooting them is too formidable a task, and even controlling them is much difficult too. Thus, our economy is now completely tied with deficits particularly budget deficit, which have increased progressively with the years. Budget deficit exerts some adverse effects on the economy in general and on consumers in particular. However, the effects are much related with modes by which it is financed. Obviously, the causes of fiscal deficit lay either on revenue or expenditure side. The paper compares Pakistan’s fiscal deficit with other selected countries deficit/surplus. It also attempts to find cause of deficit in revenue side. Let us examine only budget deficit. It emerges out of the gap between revenue and expenditure. The revenues structure of our economy indicates that revenues mainly comprise tax and non-tax heads. Tax revenue is the single biggest source, heavily contributing to consolidated revenue collection, while non-tax revenue is rather a poor source with its contribution to revenue income being meager. During 1988-89, total revenue collection was 18 percent of GDP in which tax revenue accounted for 14.3 while the non-tax revenue was 3.7 percent. This trend was prevailed since 1984-85. A comparison of our revenue situation with the newly-industrialized countries in general and the other Asian countries in particular reveals that in the consolidation of revenues Pakistan has not been too far behind. Rather, it has remained pretty close to the countries of the region, with Singapore and Malaysia being the two exceptional Asian countries, have rich revenue resources than ours. The reasons for this lie not so much in the revenue sphere as they do on the expenditure side. A glance at expenditure scenario indicates that public expenditure does exceed revenues enormously, eventually dragging the economy into a situation where it would have to survive on the crutches of borrowing from international agencies by putting country as mortgage. The government revenue receipts during 1984-85 have been 16.4 percent of GDP while expenditure stood at 24.7 percent, thereby depicting a variation of 8.3 percent. This massive variance in revenue and expenditure receipts indicates how serious the situation is. Pakistan’s annual growth rate has generally progressed well and recorded from 5 to 6 percent growth whereas the gap between revenues and expenditures has been recorded around percent. While the revenue collection revels that Pakistan has an edge over some countries of the region, it has remained too close to even Asian tigers concerning revenue generation. On the other hand, as far as governments spending sector is concerned, Pakistan’s expenditure has been extremely aggravating. Surprisingly though, its expenditures exceed even those of china and India. During 1992, Pakistan’s expenditure soared so dramatically, that it was twice as much as India’s. Dispersion of revenue and expenditure never surpassed the range 2 to 3% in all those countries who ever suffered with a deficit crisis except India. Examining the budget surplus of deficit situation of different countries it is clear that none of the listed countries has been in such a difficult budgetary situation as Pakistan. Since long, Taiwan has been enjoying a surplus, it is only in the 1990s that it went into a deficit, but still controllable. This situation in Indonesia and Malaysia has remained serious during the 1980s, but now it has been put under manageable limits. Among the countries surveyed, India and Pakistan are the only ones to be loaded with a difficult budgetary position. Among the countries, Pakistan is the only one where the revenue net has remained at a reasonable level. Despite this, the deficit shot up sharply. Thus, the remedy for the deficit perhaps lies in cutting down expenditure which has been soaring at a high speed. The question, then, is; where to begin from. During 1991-92, interest payment made by Pakistan was 6% of the GDP. Pakistan budget deficit was close to Rs.2 trillion at the end of the year 2012-13. The budget goes beyond 8.5% of the GDP during the year. The government projected budget deficit would be 4.7% of the GDP at the eve of budget 2012-13. The government budget balance is the difference between government revenues and expenses. The budget is balanced when outlays equal to receipts, the country reports budget surplus when revenues are higher than expenses and deficit when expenses exceed the revenues. Pakistan’s budget deficit has widened to a whopping Rs2.26 trillion or 6.6% of gross domestic product in the outgoing fiscal year (2017-18), the highest in the five year term of PML-N government. A similar trend was witnessed in the FY 2016-17 when the country’s deficit went up to 5.8pc against the target of 3.8pc. During these years, expenditures and revenues were also significantly off target. The summary of consolidated federal and provincial budgetary operations 2017-18 released by the ministry of finance said the major contribution to this historic fiscal deficit came from fiscal indiscipline of three provinces. Pakistan’s budget deficit was 6% in the current financial year 2018-19, compared to the previous year FY2017-18 which was 5.8%. the agency revised its projections for the budget deficit as a share of GDP to clock at 6% in FY2018-19 from 5.8% previously. The country suffers from a weak tax to GDP ratio, an issue the government has admitted and depends majorly on indirect taxes. During 1992, Pakistan’s expenditure soared so dramatically, that it was twice as much as India’s. Dispersion of revenue and expenditure never surpassed the range 2 to 3% in all those countries who ever suffered with a deficit crisis except India. The government budget balance is the difference between government revenues and expenses. The budget is balanced when outlays equal to receipts, the country reports budget surplus when revenues are higher than expenses and deficit when expenses exceed the revenues. Pakistan’s budget deficit has soared to Rs.994.7 billion or 2.3% of the GDP during the first half of the financial year 2019-2020, revealed the fiscal operation report issued by the Ministry of Finance on Friday. According to the report, the country’s expenditures were recorded at Rs.4226.6 billion or 9 % of the GDP, as compared to the revenue of Rs.3231.9 billion during the same period. The government spends Rs.529.9 billion on defense expenses out of the Rs.1.152 trillion allocated for the sector in the current fiscal year. Meanwhile, the government spent only Rs.237.5 billion on federal development projects whereas the provincial governments spent Rs.219.4 billion on the same. Of the total revenue of Rs.3231.9 billion, the government collected Rs.766.7 billion as non-tax revenue. Out of the Rs.766.7 billion, Rs.277.44 billion were collected as mark up on public sector entities, Rs.26.02 billion were collected as markup on public sector entities, Rs.26.02 billion as divided, Rs.426.5 billion as profit of the State Bank of Pakistan (SBP), Rs.112.1 billion as profit of the Pakistan Telecommunication Authority (PTA), Rs.6.5 billion from passport fee, Rs.6.5 billion from defense sources, Rs.11.4 billion from passport fee, Rs.7.2 billion as discounts on crude oil, Rs.43.8 billion as royalties on gas and oil, Rs.3.3 billion as windfall levy against crude oil and Rs.100.6 billion through other sources. The Federal Board of Revenue faced a major tax collection shortfall of Rs.274 billion in the first six months of the current financial year. The bureau collected Rs.2093 against the target of Rs.2367 billion for the first half of EY20. The shortfall continuous to increase with passing time whereas non-tax collection is expected to increase by Rs.400 billion to Rs.1.6 trillion in the current fiscal year. In the year 2020, the government proposed primary deficit target- the total revenues excluding interest payments at only 0.5% of GDP. However, its internal working showed that the primary deficit would not be less than 1.2% of the GDP. The proposed overall budget deficit target is 7% of the GDP despite the government knows that the deficit cannot be less than 8.5% of the GDP in the next fiscal year. The propose size of the new budget is Rs.101 billion or 1.4% higher than the original budget of the outgoing fiscal year. About 60% of the proposed budget will be consumed on paying interest on loans (41.2%) and defense spending (18%), leaving very little for other expenditures. Another 13.3% of the proposed budget will be consumed in running the civil government and paying pensions. The failure in achieving the proposed targets would mean reversing the first step that the government has taken towards addressing the core issue of high indebtedness. The budget deficit is projected at a record 7% of GDP. It is the second largest black hole in the federal budget after the outgoing year’s estimates of Rs.3.8 trillion or 9.1% of the GDP. The budget doesn’t immediately address the issues such as economic slowdown, growing unemployment rate and even the high budget deficit in the next year. However, the government has kept its focus on addressing the issue of debt trap by focusing on primary deficit.