June 9, 2019 (MLN): The federal budget for FY19-20 is likely be declared on 11th June 2019, where government will face an unsteady ride as it struggles to restrain accretion in expenditures and hike revenues.
With stringent IMF prior actions and targets to be met including slashing the primary deficit approx. 1.5% FY19E to 0.6% in FY20, it is sensible to say that the upcoming budget would be a tough one for the government where significant revenue enhancement measures are required to curtail deficit as room to significantly reduce expenditure is very small.
Budget, FY20 would aim at achieving a revenue target of Rs 5.550 trillion — almost 35.4% or Rs1.45 trillion higher than current year’s revised estimate of Rs4.1 trillion.
Such a tax heavy budget with ambitious revenue targets would result in furthering inflationary pressures, incremental slowdown in aggregate demand, and restricted corporate earnings growth in the short-term.
A research report published by Next Capital, highlights the effects that several expected revenue enhancing measures in the forthcoming budget would have on the economy in general.
The expected increase in standard rate of GST would have a negative impact, since 1% increase in GST rate would generate an additional approx. PKR 85 billion for the government but it would have a negative impact on inflation.
In addition to this, imposition of a uniform GST across all sectors, will have negative impact on economy, as this would mean significant price increases in prices of sensitive commodities including fertilizers, tractors, sugar, milk, etc. which would be a politically difficult decision for the government. Additionally, it would have considerable inflationary repercussions.
Similarly, withholding of 1ppt annual reduction in corporate tax rate will impact negatively, as Corporate tax rate is scheduled to be reduced by 1% annually to 25% by FY23, which has already been incorporated in earnings forecasts of the coverage universe. However, freezing the tax rate at 29% for companies other than banks and E&Ps, would result in earnings downgrade of 1.4-2.7% during FY20-21.
Correspondingly, re-imposition of 3% Super Tax on non-banking companies will also have an adverse impact, as restoration of Super Tax on non-banking companies would result in earnings downgrade by 3%.
With these stringent measures, the forthcoming budget would be seen as bringing IMF’s conditions into execution for the next year and to be fiscally focused to reign in the economy.
Having said that, FY20 would be the year of stabilization and steps would be taken to strengthen economy and protect it from dangers to set sustainable basis for growth and development.
Nevertheless, this budget should be seen in the backdrop of current year’s economic performance, chronic issues such as budget deficit, poverty, unemployment, inflation, public debt, low rate of savings and investment, monetary stability, foreign reserves, exchange rate and sustained inclusive growth. As these issues require sustained and long-term efforts, the forthcoming budget could be used as steps for setting the direction.
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