The federal deficit for the first half of the current fiscal year has gone up almost 30% despite increased revenue and an extreme cut in development spending
More significantly, it has also increased in terms of share of GDP, rising from 3
1% last year to 3
3% in the current year
Meanwhile, new policies to increase tax revenues, even if successful, may not make a significant dent in the deficit because a large amount of that revenue also has to be transferred to the provinces
To illustrate, revenues worth Rs1
7 trillion, of a total of Rs3
68 trillion, to date have been transferred to the provinces, leaving the federal government with just Rs1
95 trillion
Tax revenue may also be hit by policies to control rising imports, which have caused inflation, devaluation, and a record current account deficit
Notably, most of the additional revenue is from import-related sources, and non-tax revenue is actually down by about 17%
It should also be noted that the federal deficit is usually higher in the second half of the fiscal year due to increased spending in the final months of the year
That would imply that the deficit — currently Rs1
8 trillion — is likely to cross the Rs4 billion annual target
In fact, the total spending of Rs3
75 trillion was almost twice the government’s net revenue
The main contributor to the spike was increased spending under current expenditure heads, accounting for 92% of all government spending
Also of concern is the fact that 40% of current expenditure, or 72% of total revenue, was on loan interest payments
Defence spending, which has also increased, accounted for over a quarter of all government revenues
There is also concern that much of the revenue gained through the mini-budget might be lost due to the SBP decision to raise interest rate
A 1% change in interest rate is said to impact government revenue by about Rs150 billion, meaning that returning the interest rate to the lower pre-hike levels could cut the deficit by over Rs400 billion
But with this unlikely, it remains to be seen what, if anything, will be done to narrow the gap
Published in The Express Tribune, January 22nd, 2022
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| Date: | 23-Jan-2022 | Reference: | View Original Link |
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