Budget changes little

By Staff Reporter

Finance Minister Muhammad Aurangzeb has presented his government’s third consecutive IMF-compliant budget, and the central fact about it is the simplest one: nothing in its design points toward growth. A deficit target of 3.6 percent of GDP and a 4 percent growth projection sit comfortably within the Fund’s parameters, as they were always going to. That isn’t a criticism of the finance ministry. It’s a description of what an IMF programme is for. The Fund’s mandate is external balance, not expansion — a government inside it can manage a crisis, but it cannot choose to grow faster than the programme allows.

The budget’s language gestures at something more, talk of moving from stabilisation to growth. But 4 percent growth against population growth of 2.5 percent is barely an improvement per head. Three budgets into this programme, the country sits roughly where it started: external accounts steadier, growth model unchanged.

The relief measures are real. Salaried workers get eased tax slabs, the super tax disappears below Rs500m in income and falls from 10 to 8 percent above it, property transaction taxes are halved, and contraceptives and sanitary products are exempted from tax, something the IMF blocked outright last year. After three years of austerity, a budget that doesn’t take more from people is itself notable. But relief isn’t a growth strategy, and the gap between the two is where this budget’s real story sits.

Growth in Pakistan has to come from exports, because exports are the only channel that brings in the dollars the economy structurally lacks. Remittances, now above $40bn a year, have helped avoid a worse external crisis, but they finance consumption, not factories. On exports, the budget offers tariff cuts on roughly 90 industrial input lines and modest relief for exporters — sensible, incremental, and not the kind of intervention that shifts a trajectory that has been flat for over a decade.

Meanwhile, the most generous incentives in the entire budget go to property: transaction taxes halved, the deemed-income tax on real estate abolished after a court ruling, and housing subsidies above Rs70bn. Property generates construction activity and a flattering GDP number. It has never, under any government, generated a dollar of export revenue. Making it the centrepiece of this year’s stimulus suggests a government optimising for next year’s growth print, not for the capacity that would make that growth durable.

There is also the question of who is paying for this year’s consolidation. The headline deficit reduction depends on the provinces giving up roughly Rs1.8tn of their share of federal revenue, an arrangement now locked in until 2029. The federal government’s own spending is essentially untouched. Debt servicing alone is budgeted at Rs8.054tn — eight times the entire federal development programme of Rs1tn. That ratio says more about the real constraint on growth than any line in the budget speech: it is not about which sectors get tax breaks, but about how little is left once the bills are paid.

The tax base, the underlying reason for that shortfall, remains essentially where it was. An informal economy estimated at 40 percent of GDP stays largely outside the net. The voluntary 1 percent turnover tax on retailers and the loose agreement with traders are measures that have failed before. The FBR has been set a collection target of Rs15.26tn, up almost 18 percent on a year in which it missed by more than Rs800bn, with nothing new in this budget to explain why this year will go differently. When the shortfall comes, the choices will be familiar: a mid-year mini-budget, cuts to development spending, or a request to the Fund for room on the primary surplus.

What the budget leaves out is also telling. There is little on health, education, and food security at a time when spending in these areas has reportedly fallen below 1 percent of GDP while the population grows 2.5 percent a year — a number that quietly erodes most of the headline growth figure. Agriculture barely features. On growth and tax, both fronts. The technology and manufacturing sectors that ministers describe as the future get tariff adjustments rather than a plan.

There is a case for giving the government some credit. Remittances are running above $40bn a year, Pakistan has returned to the Eurobond market after four years, and it has placed its first Panda bonds in China. External confidence is returning, slowly. But confidence is not the same as capacity, and a budget that holds the line on IMF targets while deferring every hard structural choice is not a foundation for growth — it is a placeholder for the budget that will eventually have to do that work.

None of this makes the budget reckless. Holding the IMF line while still finding room for tax relief, against conflict in the Middle East and a more protectionist global trade environment, is a genuine achievement of sorts. But it is best understood as careful macroeconomic management dressed in the language of a turning point. The Rs8.054tn spent servicing debt, against Rs1tn spent on development, is the number that tells you which one this actually is.