Operating under large financial constraints and a recovering economy, the Pakistani Government has embarked on an ambitious journey to collect unprecedented revenue, enlarge social security, and ramp up development spending under the new budget, in the fiscal year (FY) 2024-2025.
The budget also envisions a paradigm shift in the trajectory of the national economy by shifting from a consumption-based and state-controlled economy to an investment and savings-based one. The government aims to reduce its economic footprint and push the economy toward a market-driven model based on neoliberalism.
Short of some structural changes, the budget is undoubtedly a step in the right direction. On June 12, the newly elected coalition government presented the cumulative budget outlay of Rs.18.9 trillion (tr) in the national assembly for FY 2024-2025.
Broad contours of this ambitious and aggressive budget encapsulate a growth rate of 3.6 % of GDP, an aggressive tax revenue of Rs.13 tr, and an inflation target of 12% in the following year.
Role of the International Monetary Fund (IMF) in the Budget 2024-25
Amidst talks with the IMF for a long-term “Extended Fund Facility” of $6 billion (bn), the government has trodden a careful path by placating the valid demands of the institution, particularly through widening and increasing tax revenue.
In line with IMF’s demands and working under tremendous financial constraints, the budget looks inward at domestic revenue sources to break the cycle of dependency on foreign loans in the long term.
The breakdown of the budget in different heads and allocations for the next fiscal year is as follows:
Debt Repayments and Debt Servicing
Unfortunately, Pakistan is struggling to escape a classic debt trap. Under a spiraling debt cycle, interest payments comprised a major chunk of the budget.
Due to this stark reality, the federal government has allocated Rs.9,775 bn for debt servicing. Pakistan’s debt obligations cover domestic and foreign borrowing including external, circular, and government-to-government debts.
Defence Spending
An undeclared arms race with India—presses the need to sustain a large army and a modern military. Many experts argue that “the military spending in Pakistan has been at the cost of development expenditure.” This regional calculus puts Pakistan in a precarious position in the classic guns vs butter curve.
Defense analysts also point to the asymmetry with India’s ambitious plans for military upgradation as a justifiable rationale for huge defense spending. For instance, India’s defence budget was more than five times Pakistan’s spending in FY 2015-16 which incentivised Pakistan to reluctantly up its defence budget with each passing year.
Amidst this contentious debate, defense expenditures constitute a whopping Rs.2,122 bn reflecting a rise of 17% compared to the outgoing fiscal year. This spending represents 1.71% of total GDP.
Pensions and Salaries
With a surge of 15% in pensions, the budget for FY25 has doled out Rs.1.014 tr or Rs.1014 bn to cover pension expenses. Similarly, Rs839 bn is set aside for running the civil government and administration as per the “Budget in Brief” published by the Finance Division.
Salaries of government employees have also surged with a 25% raise for grade 1-16 officials and a 20% hike for grade 17-22 officers.
Subsidies
The government’s subsidies to various sectors and regions constitute Rs.1363 bn or Rs.1.36 tr in FY25 as compared to the Rs.1.07 tr spent in the outgoing fiscal year. The power sector will consume Rs.1.19 tr, representing the bulk of subsidies, distributed mainly to the Water and Power Development Authority (WAPDA), Pakistan Electric Power Company (PEPCO), and Karachi-Electric (KE).
Other important subsidy dole-outs include the Rs.108 bn Tariff Differential Subsidy (TDS) to Azad Jammu Kashmir (AJK), Rs.15.87 bn in wheat subsidy to Gilgit-Baltistan, and Rs.65 bn to the Federally Administered Tribal Areas (FATA), now merged with KP under the 25th amendment.
Considering the recent wheat crisis in the country, the government has also allocated Rs.12 bn in subsidies to Pakistan Agricultural Storage and Services Corporation (PASCO) for “maintaining wheat reserve stocks.”
Allocations for Education
In the FY 2024-25, overall spending on education stands at Rs.103.781 bn. Higher education will receive Rs.79 bn representing a decrease of Rs 2 bn. Furthermore, it will also get a Rs.66 bn receipt as part of PSDP.
The Federal Ministry of Education will be allocated Rs.25 bn to spend on Islamabad’s local education and development.
Post-18th Amendment, education has become a provincial matter. Therefore, it is imperative to outline provincial spending on education for a complete perspective. It also helps to rationalize the narrative of disproportionality in social spending.
For instance, Punjab, Sindh, KP, and Balochistan have allocated Rs.669.7 bn, Rs.454 bn, Rs.362.68 bn, and Rs.32 bn respectively in their provincial budgets. Overall, the federal and provincial governments are set to spend around Rs.1622.161 bn on education in the next fiscal year.
Allocations for Health
As a devolved subject to the provinces, healthcare has been given Rs.27 bn in the new budget. At provincial levels, spending on healthcare by Punjab, Sindh, KP, and Balochistan is Rs.539.1 bn, Rs.300 bn, Rs.232.08 bn, and Rs.124.7 bn respectively. The federal and provincial government’s healthcare expenditure is around Rs.1195.7 bn.
Allocation for Social Protection and Security
As a social safety net, the Benazir Income Support Programme (BISP) funds have increased by 27% to Rs.592 bn. These funds will sponsor various social protection programs such as the Benazir Kafalat Programme (BKP), Benazir Taleemi Wazaif (BTW), and Benazir Nashunuma Program (BNP).
This year, BKP will be expanded to include 10 million beneficiaries compared to the 9.3 million in the outgoing year. In addition, a million more children from underprivileged families will be benefited under BTW. Finally, BNP, aimed at curbing stunting in the first 1,000 days of a child’s life, will expand to cater to half a million more families in the coming fiscal year.
Development Funds
Public Sector Development Programme (PSDP)
The Public Sector Development Programme (PSDP)—the main lever for gaining socio-economic development and macroeconomic stability—has received the highest grants in the country’s history. With a surge of 58% in PSDP, a total of Rs.3.7 tr has been allocated for development-related projects.
Rs.100 bn is allocated for Public-Private Partnerships (PPP) with another Rs.196.8 bn set aside for state-owned enterprises (SOEs) on various development projects.
Provincial Transfers
For this fiscal year, the federal government has announced Rs.7.438 tr to be given to provinces under the National Finance Commission (NFC). Collected by the Federal Board of Revenue (FBR), the divisible pool is distributed under a new formula agreed upon by all federating units in the 7th NFC Award. Provincial transfers also include federal grants to provinces under PSDP.
As a step towards a strong federation, KP’s government will receive an additional 1% of the total divisible pool on top of its share in NFC as compensation for the War on Terror (WOT).
Revenue Generation
Tax Revenue by the Federal Board of Revenue (FBR)
The budget has recognized the need to expand revenue through taxation. In this regard, an ambitious plan has been devised to collect Rs.13 tr in taxes, an increase of 39% compared to the last fiscal year. In line with the IMF’s demand to bridge the fiscal deficit and unlock another IMF program, the government aims to raise the tax-to-GDP ratio by up to 13%.
Progressive Taxation on Income Taxes
A progressive tax regime has been devised to generate Rs.5.545 tr, an increase of 48% compared to the outgoing year, through income and corporate taxes.
Similarly, with a 36% increase in general sales tax (GST), revenue is likely to touch Rs.4.9 tr in fiscal year 2024-2025.
Non-tax Revenue
Under non-tax revenue, the federal government aims to generate Rs.4,845 bn. The highest revenue source under this pertains to the petroleum levy of Rs.1.28 tr or Rs.1281 bn. To achieve this financial target, the petroleum levy on petroleum products has been increased from Rs.60 to Rs.80 per liter, thus increasing its annual yield by 47%.
Other non-tax revenue sources for the federal government consist of levies and fees of Rs.24.809 bn, income from property enterprises amounting to Rs.477.12 bn, and receipts from civil administration and other functions of Rs.2555.74 bn.
Privatization of SOEs
Privatization of state-owned enterprises (SOEs), especially Pakistan International Airlines (PIA), is expected to raise Rs.30 bn in the coming year. Other strategic government assets, including the Roosevelt Hotel in New York and Hotel Scribe in Paris, are also up for privatization.
Hopes and Hurdles
The new budget gives an optimistic outlook on revenue generation. It offers hope that Pakistan will revamp its tax system to catch up with its neighbors in the tax-to-GDP ratio. India had a tax-to-GDP ratio of 17% compared to Pakistan’s 9% in the outgoing fiscal year. A progressive tax regime has been introduced to achieve a 12% tax-to-GDP ratio in the upcoming years.
It is equally ambitious in promoting social security and development through unprecedented spending on social protection and development projects.
Moving towards a sustainable future, the budget has extended tax exemption on imports of raw materials used in solar panels. The government is also committed to achieving a reformed tax policy by cracking down on non-filers by various means including withholding taxes (WHT).
Digitizing the economy and documenting the large informal sector are the cornerstones of a sustainable tax regime as underscored in the new budget. The 2024-25 budget will also unlock financial inflows from the IMF to stabilize the exchange rate and increase reserves because of its strong commitments to the IMF conditions.
Furthermore, the government has raised the minimum wage to Rs.37,000 per month from Rs.31,000 to adjust for rising inflation and support the working class. This represents a 19% increase in the minimum wage.
Finally, despite high hopes of economic recovery by increasing domestic revenues and unlocking an IMF program, the government has had an opportunity to reduce its expenditures through fiscal consolidation and austerity measures. In addition, untaxed and undertaxed segments such as traders, retailers, and real estate should have been documented in this tax regime to avoid “tax deepening.”
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