Federal Budget 2008-09: an analysis

By Mehmood-Ul-Hassan Khan

The Finance Minister, Naveed Qamar presented PPP-led government’s first budget for the fiscal year 2008-09. As usual, it was deficit budget. The total size of the budget is Rs2010 billion. It is 29.7 per cent higher than the size of budget estimates 2007-08.

The Government and its allied parties termed it pro-poor, relief-oriented. The most of the stakeholders of agriculture judged it pro-agri. The majority of the business organisations recognised it pro-business budget. On the contrary, the opposition parties labeled it as anti-common man budget. The finance minister said it is aimed at restoring economic stability and investor confidence, protecting the vulnerable groups by increasing their income and increasing social sector allocations.

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Sectoral allocation

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Sector          Allocation

General public services           929.5 billion

Defence           296.1 billion

Economic affairs 201.2 billion

PSDP   550.0 billion

Education          24.6 billion

Public safety           26.8 billion

Source: Federal Budget (2008-09)

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Policy objectives

The federal budget has been stated to be industrial friendly and give incentives for growth and expansion. It will discourage imports of non-essential and luxury items in order to reduce widening trade and current account deficits. It will minimise the cost of doing business in order to promote local and as well foreign investment. More incentives and exemption will be granted to help the industrial sector.

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Salient features

Incomes          Rs2010 billion

Expenditure           Rs1836 billion

Gap     Rs174 billion

Source: Federal Budget (2008-09)

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(a) GDP growth: The Government has predicted 5.5 per cent GDP growth for next fiscal year (5.8 per cent in 2007-08) that would be contributed by 3.5 per cent growth in agriculture, 6.1 per cent manufacturing and 6.1 per cent growth in services, (b) Exports & imports: Exports are projected to grow by 16 per cent to $22.9 billion while imports are projected to increase by 6.5 per cent to $37.2 billion due to higher volume of import of food items and petroleum products, (c) Total investment: Rs2638.8 billion would be required to achieve the projected growth target, which 17 per cent higher to investment in 2007-08. As a ratio to GDP, total investment is expected to stay around outgoing year's level of 21.5 per cent of the GDP. For financing the required investment, national saving as a ratio to GDP is projected to increase to 14.3 per cent in 2008-09, (d) Inflation: The CPI for next fiscal year is projected at 12 per cent. However, the inflation scenario would remain sensitive to international price movement.

(i) Fiscal deficit: It will be contained to 4.7 per cent; current account deficit will be reduced to 6 per cent of GDP while foreign exchange reserve will be increased to $12 billion.

(ii) Trade account: The trade account is projected to be in deficit of $14.3 billion in 2008-09 while remittances have been projected at $7.7 billion. The current account deficit is projected to be $12.7 billion or 7.2 per cent of the GDP. The main objective of fiscal policy would be to keep the deficit within a sustainable limit by furthering reforms in the tax system, broadening the tax base/net, improving good and corporate governance and allocating adequate resources for development activities.

(iii) Net tax revenue: According to the budget 2008-09; the Government targeted to generate net-tax revenues of 1.25 trillion rupees through Federal Board of Revenue (FBR), showing an increase of 23.1 per cent over this fiscal year. The share of indirect taxes has been projected at Rs755 billion that shows Rs138 billion increases compared to the previous year's figures of Rs617 billion. The original target of indirect taxes was Rs622 billion during outgoing fiscal year, which was scaled down to Rs617 billion.

(a) Integrated taxation & custom duties: Withdrawal of 35 income tax exemptions to broaden tax base, standard rate of general sales tax increased to 16 per cent from 15 per cent, customs duty on import of 300 non-essential and luxury items will increase up to 35 per cent, the customs duty on the luxury vehicles of 1800 cc engine capacity and above increased to 100 per cent from 90 per cent, rate of federal excise duty on telecommunication services increased to 21 per cent from 15 per cent, the federal excise duty on banking, insurance and franchise services increased to 10 per cent from 5 per cent have announced in the budget 2008-09. Moreover, CNG buses have been exempted from duty. 18 drugs for cancer/heart treatment made duty-free which may give some relief to general masses too.

(b) Total resources: Total resources available for the expenditure will be 1.84 trillion rupees against 1394 billion available in the outgoing financial year.

(c) The overall expenditure during 2008-09 has been estimated at Rs2010 billion of which the current expenditure is Rs1493 billion. Current expenditure shows a decrease of 1.5 per cent over the revised estimates of 2007-08,

(d) Budget deficit: It would be remain at 4.7 per cent of the GDP or Rs582 billion

(e) Bank borrowing: The federal government has projected Rs149 billion, bank-borrowing in 2008-09 to finance the federal budget against the budgetary estimate of Rs80.938 billion set by the previous government. The previous government borrowed Rs424 billion from banks against the target of Rs80.938 billion, excessive bank borrowing by the previous government despite repeated warning from the State Bank of Pakistan (SBP). Now, the SBP wants the government not to exceed the limit in order to counter inflation.

(f) The expenditure on general public services (inclusive of debt-servicing transfer payments and superannuation allowance) is estimated at Rs930 billion which is 62.3 per cent of the current expenditure.

(g) Public sector development programme (PSDP): The federal government has allocated Rs549 billion for the PSDP which is highest in our national history. It has been increased by 20 per cent in 2008-09 over the revised estimates of 2007-08.

(h) Pensions and pay: 20 per cent increase has been announced for the government employees. Minimum wage of unskilled workers will be increased from 4,600 rupees a month to 6,000 rupee. Minimum pension is proposed to be increased to 2000 rupees from 300 rupees. In order to encourage domestic investment and to give some relief to the common people the government has also announced 2 per cent hike in NSS rates.

(i) Education: Rs24.6 billion has been allocated for education.  In the budget 2008-09, for the on-going and new projects of Higher Education Commission (HEC) an amount of Rs18 billion has been allocated while an amount of just Rs6.2 billion has been allocated for primary and secondary education.

(j) Human resources development commission: Government announced to set-up human resources development commission, which will review the state of unemployment, regularly monitor the unemployment rate and suggest measures for its control. Furthermore, national internship programme will be continued.

(k) Social welfare: Government has decided to continue the current self-employment schemes (People's Rozgar Programme) being undertaken through National Bank for creation of self-employment opportunities. The government has committed to reduce gender discrimination. The government, through its poverty reduction strategy paper and medium term development framework, has initiated the process of gender responsive budgeting for mainstreaming gender dimension in the budgetary process at the federal level. A ten per cent quota for women across the board in all government departments has been approved by the government aiming to increase their role in the decision-making process. Furthermore, the government will support the ongoing microfinance schemes because it plays a critical role in the lives of the poor. The potential client base of microfinance sector is around 25-30 million borrowers. It is noteworthy the female clients make up 45 per cent of the total microfinance services to 3 million borrowers by 2010 including increase in rural microfinance

(l) Relief: Rs34 billion earmarked for income support programme. The programme designed to help the poorest of the poor will be expanded to 50 billion rupees. Every deserving household will be given 1000 rupees a month. One million small houses will be constructed for the government employees in 2008-09.

(m) Defence budget: Rs296.1 billion has been provided for defence needs showing an increase of 7.6 per cent. The amount has been allocated for undertaking total 57 projects which include four new schemes while rest 53 on-going plans.

(n) The provincial share in federal revenue receipts is estimated at Rs568 billion during 2008-09 which is 22 per cent higher than the budget estimates for 2007-08.

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Province           2007-08      2008-09          Increase

          (Rs in bn)     (Rs in bn)     (Rs in bn)

Punjab          228.838        292.75          64

Sindh  141          169          28

NWFP  56.69          72.21          16

Balochistan          30.07          34.44          4.33

Source: Federal Budget (2008-09)

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(o) The capital receipts (net) for 2008-09 have been estimated at Rs221 billion against the budget estimates of Rs59 billion in 2007-08.

(p) The external receipts in 2008-09 are estimated at Rs200 billion. This shows an increase of 16.1 per cent over the budget estimates for 2007-08.

Concluding remarks

Budgeting is a technical and complicated job. In case of Pakistan it has been remained mere accounting exercise nothing to do with the concerns of the poor of the poorest. Sincere efforts instead of eye-wash must be initiated to give some meaningful relief to the common people.