Amid protests from the opposition, the PTI-led government presented its first annual budget on Tuesday, setting a meagre 2.4% economic growth rate and a double-digit inflation forecast.
The government desperately needs money, which comes from your taxes, and wants to curb spending to fight the twin deficits (trade and budgetary losses) that are steering the economy towards a default. Simply put, we are looking at another difficult year because Hammad Azhar, minister of state for revenue, proposed several new taxes and policy measures that will not only create inflationary pressures but also slow down economic growth and keep the job market under pressure.
The cherry on top
Critics say the budget will unleash a storm of inflation. We will come to that later. First, we’ll discuss the relief part because there is not much to write about.
Non-filers can once again buy property worth more than Rs5 million, which was restricted in the previous budget.
The government will also reduce withholding tax (WHT) on the purchase of property from 2% to 1%. However, it will charge WHT regardless of the property’s value — in the past they charged WHT only on property worth more than Rs4 million.
They have also increased minimum wage to Rs17,500 and abolished the 3% value addition tax on mobile phone imports. The raw material, about 19 items, used to make medicines will also be exempt from the 3% duty previously charged from importers.
The government has also decided to give tax incentives to employers willing to hire fresh graduates — those who graduated after June 1, 2017.
Brace for inflation
The budget for FY2019-2020 has seen an increase in both direct and indirect taxes. On one hand, your disposable income will shrink while on the other your purchases will cost more.
From tea to your favorite desserts, everything that uses sugar will be more expensive as the price of sugar will increase by Rs3.5 per kilogramme following an increase in sales tax. Similarly, processed food like meat, chicken, fish and cooked and semi-cooked meals will have a 17% sales tax imposed on them. The government believes these items are usually consumed by people who are financially well off.
Those who like to have a cold drink with their meal will have to pay a bit more as the duty on carbonated drinks has increased from 11.25% to 13%. The purpose is to discourage the consumption of sugary drinks, the minister said. Yes, you guessed right. They are also imposing a 5% duty on non-aerated drinks like syrups and squash juices. And only if you were thinking that you won’t be affected because you don’t have a sweet tooth, you’d be wrong because other foods like fried items will also see a rise in tax. The government is abolishing the Rs1 per kg tax on ghee and cooking oil, but increasing the federal excise duty (FED) on these items to 17%.
Besides food and drinks, smoking will also become expensive. The government has raised the duty on tobacco from Rs4,500 per 1,000 sticks to Rs5,200 per 1,000 sticks for the top slab. The other two slabs have been merged into a single slab and will be subject to Rs1,650 per 1,000 sticks.
Similarly, buying motorcycles and cars will also cost more since the FED on all automobiles of 100cc and above will increase. You will be charged an FED of 2.5%, 5% and 7.5% on vehicles with engine capacities in the range of 100 and 1000 cc, 1001 and 2000 cc, and 2001 cc and above respectively. Even driving your car on gas will cost more. The federal minister has also proposed to increase taxes on CNG, saying taxes were not increase proportionately when the sector was deregulated. He has proposed to increase it from Rs64.8 per kg to Rs74.4 per kg for region one and from Rs57 per kg to Rs69 per kg for region 2.
You may already be paying an additional Rs70 on a 50kg bag of cement after Karachi-based companies increased prices last week. The budget may provide an explanation why companies did so. The government has proposed to increase FED on cement from Rs1.5 per kg to Rs2 per kg.
All these tax increases will create inflationary pressure and the government seems to be quite aware of it, as evident from their inflation forecast for the next fiscal year. The government expects the inflation rate, currently at 9%, to go as high as 13%.
Some of this inflation could be offset if income tax was lowered, but the opposite will happen. The government has revised the minimum taxable income limit from Rs1.2 million, set by the former government, to Rs600,000 for the salaried class and Rs400,000 for the non-salaried class. They have also proposed 11 progressive tax slabs from 5% to 35% for salaried people with an annual income of Rs600,000 or more and and eight for non-salaried people earning less than that.
What does the government want from this budget?
In case you have not been following the news, Pakistan has just entered a loan programme with the International Monetary Fund (IMF), which requires the government to fix the economy. Since coming into power, the PTI government has been facing the daunting task of a twin deficit. On the local front, its expenses are far greater than its income, causing a deficit of more than Rs2,000 billion (Rs2 trillion). On the international front, it is spending $2 for every dollar earned because our exports have not increased in the last 10 years while imports kept rising. This trade imbalance ate up our dollar reserves, leaving us with little to no dollars to continue our imports and repay our foreign loans. If we didn’t get more dollars, we could face a default.
However, the IMF loan comes with conditions that require painful reforms. This include reducing fiscal and trade losses, fixing or selling off loss-making government companies and leaving the exchange rates free of the central bank’s intervention, even if the dollar goes up. Let’s cut through the economic jargon and understand that the government needs to reverse growth to get there. When an economy grows, businesses expand and more jobs are created. People get promotions, salary increments and start spending money on food, clothing, recreation, automobiles and even houses. And all of this reverses, when it shrinks. This is exactly what the government is doing.
Higher inflation and a tighter job market will slow down economic growth, which will bring the demand for imports down and stop the dollar drain as well as reduce the trade gap. On the other hand, higher taxes and lower spending will help government reduce budget deficit and save enough money to spend on development projects: roads, power plants, dams, schools, hospitals etc.
How long it take? Experts say the next two years are difficult and if the government is able to fix the largest economic problem, taxing the rich (read tax dodgers), the economy will bounce back in the third year. If not, we may need another bailout from the IMF at the end of this government’s tenure.