Budget 2021-22: Where Do We Stand?

By Saddam Hussein

Federal Budget 2021-22, announced yesterday by Shaukat Tarin, our Finance Minister, is the best financial possibility, given the resource availability. During the last fiscal year, the country has been facing massive inflation, slackening growth along with low investment and exports. In this context, the government in an audacious move has taken daring steps to change the direction of the economy. Transitioning from merely balancing expenditures and revenues towards a growth oriented economy.

Total outlay of the Federal Budget 2021-22 is over PKR 8 trillion. Total expenditure for the next year stands at PKR 8.487 trillion; almost 19 percent higher than last year’s PKR 7.136 trillion. The growth benchmark for the next fiscal year is 4.8 percent; Current Account Deficit (CAD) is to be limited to 0.7 percent. Inflation to be capped at 8.2 percent. Substantial allocations for environment, water security, social safety nets and pro-poor schemes are also part of budget.

Henceforth, the government’s priorities for the next fiscal year are:

  • inclusive and sustainable economic growth,
  • pro-poor initiatives and social safety net through the Ehsaas Programme’s vertical and horizontal expansion,
  • increased development spending for more job creation,
  • PM’s initiatives including Kamyab Jawan and Kissan Programmes,
  • impact mitigation of COVID-19, and
  • continuation of the stimulus package.

The government focus is also on circular debt financing and power subsidies, revenue mobilization without new taxes, support of the housing sector and the construction industry through Naya Pakistan Housing Scheme and Small and Medium Enterprises (SME) support programs, facilitating expatriates’ remittances and savings through Roshan Digital Account and Pakistan Remittances Initiatives and other such schemes. In short, the government has offered something positive in most of the sectors of the economy.

For instance, let’s discuss the taxation policy. The business class and investors were never with no complaints about the taxation policy, high tax rate and its compliance cost. They always demanded a moderate taxation policy and called for a sort of partnership between the government and business class, rather than predatory approach by the government machinery, which suffocates the economic activity.

The current government in the budget has somehow addressed this demand. Restoration of self-assessment scheme is a significant move in this regard. Now what does this mean? The government is telling the business community that whatever they declare, the government will accept it. However, the government reserves the right to pick some of the cases–around five per cent – through a digital balloting system for audit. A third party will do the audit. So, the stifling environment will be drawn-down and replaced by a business friendly one. The government has also decided not to impose further tax burden on the middle and lower income class groups, which is a big sigh of relief for them.

Likewise, the government is planning to bring all retailers into the tax net, which is exceedingly challenging. But without this fundamental reform we can’t really move ahead with the roadmap to revamp our economic outlook. They have removed custom duties on textiles’ and other industries’ raw materials. This is a very interesting scenario, as on the one hand the government wants to bring more people into tax net and on the other hand it is also promoting an export-led growth approach. 

In another surprising move, the budget has increased the Public Sector Development Programme (PSDP) from PKR 630 billion to PKR 900 billion to counter the adverse impact of the COVID-19 pandemic. This is a massive increase of around 40 percent. This would really get the wheel of the economy going, while also spurring growth in the dozens of industries linked to proposed development projects and construction. It would create employment opportunities and alleviate poverty as well.

Similarly, there are some other drastic measures in budget which are commendable. For example, the budget allocates PKR 14 billion for the 10 Billion Trees Tsunami project, which is very significant and need of the hour, given the impact of climate change being felt across the country. The allocation reflects the commitment of the government towards mitigating environmental impact of development and tackling global warming. PKR 91 billion are being allocated for construction of water reservoirs. This is again a much needed decision against the backdrop of increasing complexity around water scarcity, within and beyond our geographical landscape.

To encourage ICT industry in the country, import of plant, machinery and raw material by a Special Technology Zone which will be exempt from sales tax. To promote a business environment, the budget introduces the concept of Common Identifier Number. As rising prices of our locally manufactured compact cars is a major concern for low earning families, there will be VAT exemption for vehicles with engine capacity of 850cc, and sales tax rate reduction from 17 percent to 12.5 percent. On the salaried individual front, there is a 10 percent increase in salaries and pensions as well.

In a crux, given the tight economic conditions and hard pill of gigantic debt servicing we need to swallow, it is a pro-growth, pro-poor and fairly balanced budget. However, the approach is same – a brick and mortar approach. The budget, if implemented in its true essence, would definitely bear fruit; but at the end of the day it is still a short to medium term approach. It is likely that after a year, we may be back to square one, or somewhere near it. What is desperately missing is a long-term approach. For that, PIDE’s Reform Agenda is a must read, as it spells out a change of development paradigm that we need. The agenda highlights investing in the software of development. The human capital, technology, education, as well as reform of key systems.

We at PIDE advocate deregulation, decreasing government’s footprint, allowing a more pro-active role of the private sector, digitization, removing sludge and so on. Without these fundamental reforms, change will never really happen. Again, I am very positive about budget, though it is also a fact that it is not something unprecedented. Closing with a quote of Albert Einstein is most apt here:

If you always do what you always did, you will always get what you always got.

Albert Einstein

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