The context of the budget for the year 2023-24 was that of a country going through a poly-crisis barely averting an external default, and squeezed by stagflation. At a time when there was a dire need to reduce the fiscal deficit and bring inflation under control, the budget has effectively been designed to attain moderate-to-low growth, largely funded by debt. However, a responsible growth strategy would have curtailed fiscal deficit through the expansion of the tax net, while incentivising private sector investment to drive growth and job creation.
With no new taxes and a marked increase in the salaries of government employees, the government claims that the budget is “not an election budget” and is focusing on the “elements of the real economy”. In reality, it seems that the budget has been announced with the intention that whoever takes power at the end of the year will deal with the fallout of the present crises.
The total outlay for the budget stands at Rs14.460 trillion, more than half of which will effectively be utilised to service debt. In essence, all taxes that the government will collect will be used to service debt, while the rest of the government’s expenses will be covered through additional debt. As the government takes on additional debt in an environment where fiscal space is already scarce, there is a potential for increasing interest rates. The revenue streams announced in the budget include an amnesty on declaring the source of certain remittances, an ad hoc ‘windfall’ tax, and creating taxes for non-filers cash withdrawals that will create economic distortions and will not fix structural problems. The government remained evasive on difficult decisions as to how to reduce tax evasion, energy theft, and public losses.
Good news
There is some good news in the budget as well. There are many encouraging initiatives, such as eliminating import duty on solar panel batteries and imported seeds, and no new tax on industry and agricultural machines. It’s good to see that freelancer and IT exports will not be taxed. IT will get small and medium-sized enterprises (SME) status and will have to pay very concessional pay. This is good news for youth and nascent entrepreneurs.
Other relief measures include an increase in Benazir Income Support Programme to Rs450 billion, jacking up the minimum wage to Rs32,000 from the current Rs25,000, a 35% ad hoc increase in the salary of government employees of grades 1-16 and 30% for grades 17-22 public officers and 17.5% increase in public servant pensions. However, the relief efforts encompass less than five percent of a population of about 241 million dealing with historically highest inflation levels. Instead of laptop schemes and an increase in the development budget for HEC, it would have been better if the funds were directed toward the education and health sectors.
The inability to close the IMF programme and the accelerating availability of foreign currency liquidity will continue to exert pressure on the country’s growth prospects and make stagflation worse. What has been proposed is essentially yet another budget fueled by debt at historically high-interest rates, with little regard given to fiscal discipline.
The inability to understand the unintended consequences of policy actions may push the country towards a potential restructuring of its external and domestic debt, or a potential hyper-inflationary episode. In both scenarios, the people of the country suffer the most while the game of political musical chairs continues.