On a micro level, it appears that the urban middle class is likely to get hit by the budget. The rising inflation and higher taxes will squeeze both nominal and real income of all tiers of the middle class. The massive depreciation (worst form of taxation) has already eroded the value of fixed and liquid assets, depriving middle class people of whatever little comfort they drew from the worth of their holdings.
The government has also announced that it will not borrow from SBP from 1st July 2019 onwards. If it intends to rely on borrowings from commercial banks, then it may be beneficial for the banks but private sector will be crowded out. Excessive government borrowings may deteriorate banks’ advances to deposit ratio as banks will indulge in parking bulk of their deposits in government debt securities instead of lending to the private sector which will lead to financial disintermediation.
The most immediate and visible consequence of this budget is the erosion of the purchasing power of the common man. On a more macro level, with the global rise in fuel prices and given our current exporting industries, the cost of production will increase, making our goods less competitive in the global market. There are three adverse consequences of this budget which we need to look at over the coming year:
The impact of increased taxation on people’s spending capacity — for example, a person making Rs. 50,000 a month will have to pay income tax, along with exposure to the broader impact of inflation due to the devaluation of the rupee and increase in sales taxes. The dramatic decrease in higher education spending (via the PSDP) is going to have a significant impact on the quality of universities and research. The budget is also going to allow non-tax filers to purchase property worth Rs5 million or more. This is going to push people to move capital towards the non-tradable sector — an incredibly bad incentive for people to move capital away from productive sectors.
The weakness of this budget is the high revenue target, which is set at Rs. 5,555 billion. Missing revenue targets will also mean increased reliance on borrowing to meet fiscal gaps, leading to increased inflationary and interest rate pressures on the economy. If the government is unable to meet its own revenue targets, then we can expect the government to unveil additional tax measures through mini-budgets.
The next 12-24 months are not about reviving economic growth. They are going to be focused on stabilizing the economy and getting the fiscal and current account deficits under control, while shoring up reserves.Expanding the tax base will be the real test of the government. They have set an ambitious target for themselves. In the short term, the only way to raise revenues is to squeeze the existing tax base. In the medium term, the proposed tax reforms may or may not bear fruit. The coming years are not going to be easy, not only for the government to achieve their targets but also for the people, who will have to put up with a slowing economy, more taxes (a bulk of which are going to be used to pay off debt) and rising inflation.
[box type=”note” align=”” class=”” width=””]The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan[/box]