ajpirzada
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In this post, I have simplified all the statistics in the budgetary paper uploaded by theFinance Ministry. I do not intend to get into what the Govt. plans to spend the money on. Here i only concern myself with past year's performance and how the government plans to finance the expenditure for the coming year. The objective is to predict the potential short falls and the probable measures Govt. will resort to, using previous years behaviour of the PML-N's Govt. as a predictor. Moreover, the analysis has been kept free from any economic or political inclination except as a guideline. Now let us turn to the task at hand:
BUDGETARY ADJUSTMENTS IN 2013-14
The point of this section is to understand how ad-hoc measures are taken to meet the ends when the revenue targets are missed. Looking at past years performance will make us better acquainted with what to expect in the coming year.
In 2013-14 there were no major revisions/adjustments seen on the expenditure side as per the document. However, there were significant adjustments carried out over the year to meet the financing needs. The govt started with 75.5% of the total expenditure being financed with internal and external resources while the remaining 24.5% of the financing was put under the head of bank borrowing. Over the period, bank borrowing was only used to finance 9.3% of the expenditure. To get a feel of it, bank borrowing was reduced by 600bn (from the planned amount of 974bn to only 374bn). This was achieved by raising an additional 670bn of the resources generated internally and externally.
An approximate breakdown of the 670bn
Each sub-heading provides further breakdown in the respective category:
1) 106.8 billion was raised under the Net Capital Receipts:
i) Recovery of loans was revised down by around 116 billion
ii) Public Accounts head was also revised down by 77.3 billion
iii) To make up for the downward revision and also raise 106.8 billion of additional resources, government increased the borrowing from the public by 264.4 billion. This was further aided by a reduction of around 35 billion in disbursements.
2) 137.7 billion were raised from external resources:
i) External grants declined by 70 billion (from expected 108.9 billion to actual of 38.8 billion)
ii) To make up for it, government borrowed an addition of 207.9 billion externally (total of 675.3 billion)
3) Provinces contributed an additional of 159.9 billion in surplus
4) 266 billion came from the increase tax and non-tax revenues. This is interesting. lets have a look in detail:
i) Taxes collected by FBR saw a 200 billion shortfall. FBR seems to have missed the targets under all the headings and sub-headings of direct and indirect taxes.
ii) This shortfall was primarily overcome by using ad-hoc taxation measures and increasing non-tax revenue. Under ad-hoc taxation measures:
a) While petroleum levy was decreased by 12 billion
b) Gas Infrastructure Dev. Cess was increased by 50 billion, and
c) Natural Gas Dev. Surcharge was increased by around 4.6 billion.
There were various revision in the non-tax revenue. Most of them cancel each other. The few significant ones are:
a) Increase of roughly 45 billion under 'Mark up (PSEs & Others)' and unexpected 67.6 billions under Other Profits. I dont know what any of these represent.
b) Further there was an additional: 60 billion of profits from SBP; 6 billion under defence services; and, 6 billion under General Administration Receipts.
c) Most important of all the contributions is the additional 174 billion under the foreign grants (possibly the $1.5 billion from Saudi Arabia).
Summary of adjustments
To make up for the missed targets and to reduce bank borrowing by 600 billions, there was heavy reliance on:
i) public borrowing (264 billion);
ii) external borrowing (207.9 billion);
iii) provincial contribution (159.9 billion);
iv) ad-hoc taxation (42.5 billion); and,
v) 334.6 billion increase in non-tax revenue. It can be safely understood that 50% of this was the grant from Saudi Arabia; 17.6% due to increased profits from SBP; 34% contributed by 'other profits' and 'mark up (PSEs & others).'
Key point
What you should get out of it (for future reference) is that the major shocks coming from the ambitious targets set by the federal govt are absorbed via all sorts of borrowing measures, ad-hoc unplanned taxation, provincial sacrifices and one off good luck shocks.
BUDGET 2014-2015: ALL YOU NEED TO KNOW
As mentioned before, my focus in this post is on the revenue side due to significant uncertainty surrounding the estimates. However, for the sake of completeness, I start with the expenditure side giving a brief overview of the notable differences vis-a-vis previous budget:
Expenditure brief 2014-2015
Total Expenditure is expected to be Rs. 4.3 trillion.
Otherwise, there is not much happening on the expenditure side. Also any breach on the expenditure side is often internally adjusted by cutting the development expenditure (PSDP primarily). Nonetheless, few noteworthy points are:
i) allocation for subsidies have been reduced from 323 bn to 203 bn. All of this reduction is coming from less subsidy for both WAPDA/PEPCO and KESC. This will be a challenging task.
ii) Grants to provinces is expected to decrease from 53.8 billion to 24.3 billion. What is surprising is that the Grants under other various heads have been increased from 282 billion to 338 billion.
iii) Allocation for BISP has been increased from 70 billion to 97 billion which is very pleasing to me personally.
Planned Financing for 2014-2015
Following is the breakdown of financing sources for the planned expenditure:
i) 16% will be financed by Net Capital Receipts. All of this will be government borrowing from the public in the form of bonds and national savings etc. The two other items (loan recovery and disbursements) cancel each other out.
ii) 20% will be financed by External Receipts. 72% of these (external receipts) will be external borrowing while the remaining will be in the form of grants and privatization receipts.
iii) 6.7% will be via provincial surplus.
iv) 5.3% will be financed by the bank borrowing.
v) 51.7% will be financed by tax and non tax revenue.
What to Expect Over 2014-2015
Lets now focus on some of the revenue targets which were missed last year. As we have already seen, most important of them are:
i) FBR's tax collection target of 2.8 trillion which is 25% more than this year's revised target. It is most likely to be revised downward by a big margin. Tax collection target was revised several times in 2012-2013 from the target of 2.38 trillion to 2 trillion whereas for 2013-14 it was revised down to 2.27 trillion from 2.47 trillion. Without legal action against tax evaders, it is no exaggeration that the tax target will be missed by somewhat 200 billions.
In case - which is most likely - FBR misses the target, there is little room for ad-hoc taxation measures since Gas related taxes have already been increased in the proposed budget by 64 billion. This is in addition to a 15 billion increase in the petroleum levy.
ii) Privatization receipt of 198 billion under external resources. This roughly equals $2 billion of foreign investment from privatization alone. Nonetheless, its an ambitious but an achievable target. However, there is a possibility of significant political roadblocks in the process towards privatization.
Potential panics
Any shortfall on the revenue side, as has been the case in the past year, will force the government to domestic and international bond markets. The government already plans to borrow another 100 billion from the international market (50 bn via euro bond and 50 bn via sukuk bonds). It is likely, following last year's example, that the govt may resort to borrowing from the international market more than what she plans. Domestic bank borrowing - which is proposed to be kept at 227.9 billion for 2013-14 - may also be breached. Since International donors have already been fully engaged, the third source is borrowing money from the public through savings schemes. All these options will push up the interest rates and crowd out investment especially when the govt is only borrowing to meet the expenses rather than to invest.
(the unit of currency is Pak. rupee unless otherwise stated)
finding a Highway to HOPE: Simplified: Budgetary Accounting and What to Expect (2014-2015)
BUDGETARY ADJUSTMENTS IN 2013-14
The point of this section is to understand how ad-hoc measures are taken to meet the ends when the revenue targets are missed. Looking at past years performance will make us better acquainted with what to expect in the coming year.
In 2013-14 there were no major revisions/adjustments seen on the expenditure side as per the document. However, there were significant adjustments carried out over the year to meet the financing needs. The govt started with 75.5% of the total expenditure being financed with internal and external resources while the remaining 24.5% of the financing was put under the head of bank borrowing. Over the period, bank borrowing was only used to finance 9.3% of the expenditure. To get a feel of it, bank borrowing was reduced by 600bn (from the planned amount of 974bn to only 374bn). This was achieved by raising an additional 670bn of the resources generated internally and externally.
An approximate breakdown of the 670bn
Each sub-heading provides further breakdown in the respective category:
1) 106.8 billion was raised under the Net Capital Receipts:
i) Recovery of loans was revised down by around 116 billion
ii) Public Accounts head was also revised down by 77.3 billion
iii) To make up for the downward revision and also raise 106.8 billion of additional resources, government increased the borrowing from the public by 264.4 billion. This was further aided by a reduction of around 35 billion in disbursements.
2) 137.7 billion were raised from external resources:
i) External grants declined by 70 billion (from expected 108.9 billion to actual of 38.8 billion)
ii) To make up for it, government borrowed an addition of 207.9 billion externally (total of 675.3 billion)
3) Provinces contributed an additional of 159.9 billion in surplus
4) 266 billion came from the increase tax and non-tax revenues. This is interesting. lets have a look in detail:
i) Taxes collected by FBR saw a 200 billion shortfall. FBR seems to have missed the targets under all the headings and sub-headings of direct and indirect taxes.
ii) This shortfall was primarily overcome by using ad-hoc taxation measures and increasing non-tax revenue. Under ad-hoc taxation measures:
a) While petroleum levy was decreased by 12 billion
b) Gas Infrastructure Dev. Cess was increased by 50 billion, and
c) Natural Gas Dev. Surcharge was increased by around 4.6 billion.
There were various revision in the non-tax revenue. Most of them cancel each other. The few significant ones are:
a) Increase of roughly 45 billion under 'Mark up (PSEs & Others)' and unexpected 67.6 billions under Other Profits. I dont know what any of these represent.
b) Further there was an additional: 60 billion of profits from SBP; 6 billion under defence services; and, 6 billion under General Administration Receipts.
c) Most important of all the contributions is the additional 174 billion under the foreign grants (possibly the $1.5 billion from Saudi Arabia).
Summary of adjustments
To make up for the missed targets and to reduce bank borrowing by 600 billions, there was heavy reliance on:
i) public borrowing (264 billion);
ii) external borrowing (207.9 billion);
iii) provincial contribution (159.9 billion);
iv) ad-hoc taxation (42.5 billion); and,
v) 334.6 billion increase in non-tax revenue. It can be safely understood that 50% of this was the grant from Saudi Arabia; 17.6% due to increased profits from SBP; 34% contributed by 'other profits' and 'mark up (PSEs & others).'
Key point
What you should get out of it (for future reference) is that the major shocks coming from the ambitious targets set by the federal govt are absorbed via all sorts of borrowing measures, ad-hoc unplanned taxation, provincial sacrifices and one off good luck shocks.
BUDGET 2014-2015: ALL YOU NEED TO KNOW
As mentioned before, my focus in this post is on the revenue side due to significant uncertainty surrounding the estimates. However, for the sake of completeness, I start with the expenditure side giving a brief overview of the notable differences vis-a-vis previous budget:
Expenditure brief 2014-2015
Total Expenditure is expected to be Rs. 4.3 trillion.
Otherwise, there is not much happening on the expenditure side. Also any breach on the expenditure side is often internally adjusted by cutting the development expenditure (PSDP primarily). Nonetheless, few noteworthy points are:
i) allocation for subsidies have been reduced from 323 bn to 203 bn. All of this reduction is coming from less subsidy for both WAPDA/PEPCO and KESC. This will be a challenging task.
ii) Grants to provinces is expected to decrease from 53.8 billion to 24.3 billion. What is surprising is that the Grants under other various heads have been increased from 282 billion to 338 billion.
iii) Allocation for BISP has been increased from 70 billion to 97 billion which is very pleasing to me personally.
Planned Financing for 2014-2015
Following is the breakdown of financing sources for the planned expenditure:
i) 16% will be financed by Net Capital Receipts. All of this will be government borrowing from the public in the form of bonds and national savings etc. The two other items (loan recovery and disbursements) cancel each other out.
ii) 20% will be financed by External Receipts. 72% of these (external receipts) will be external borrowing while the remaining will be in the form of grants and privatization receipts.
iii) 6.7% will be via provincial surplus.
iv) 5.3% will be financed by the bank borrowing.
v) 51.7% will be financed by tax and non tax revenue.
What to Expect Over 2014-2015
Lets now focus on some of the revenue targets which were missed last year. As we have already seen, most important of them are:
i) FBR's tax collection target of 2.8 trillion which is 25% more than this year's revised target. It is most likely to be revised downward by a big margin. Tax collection target was revised several times in 2012-2013 from the target of 2.38 trillion to 2 trillion whereas for 2013-14 it was revised down to 2.27 trillion from 2.47 trillion. Without legal action against tax evaders, it is no exaggeration that the tax target will be missed by somewhat 200 billions.
In case - which is most likely - FBR misses the target, there is little room for ad-hoc taxation measures since Gas related taxes have already been increased in the proposed budget by 64 billion. This is in addition to a 15 billion increase in the petroleum levy.
ii) Privatization receipt of 198 billion under external resources. This roughly equals $2 billion of foreign investment from privatization alone. Nonetheless, its an ambitious but an achievable target. However, there is a possibility of significant political roadblocks in the process towards privatization.
Potential panics
Any shortfall on the revenue side, as has been the case in the past year, will force the government to domestic and international bond markets. The government already plans to borrow another 100 billion from the international market (50 bn via euro bond and 50 bn via sukuk bonds). It is likely, following last year's example, that the govt may resort to borrowing from the international market more than what she plans. Domestic bank borrowing - which is proposed to be kept at 227.9 billion for 2013-14 - may also be breached. Since International donors have already been fully engaged, the third source is borrowing money from the public through savings schemes. All these options will push up the interest rates and crowd out investment especially when the govt is only borrowing to meet the expenses rather than to invest.
(the unit of currency is Pak. rupee unless otherwise stated)
finding a Highway to HOPE: Simplified: Budgetary Accounting and What to Expect (2014-2015)
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