KARACHI (July 31 2010): The Federal Board of Revenue tax-to-GDP ratio has declined to 9.0 percent in fiscal year 2010, which is the lowest since fiscal year 1968. According to SBP's Monetary Policy Statement (MPS), lower revenue generation and higher current expenditures are the underlying reasons for the stressed fiscal position.

Low tax revenues of the government have become a serious concern, the SBP said and added that without increasing the resource envelope it would be difficult to sustain the fiscal deficit at manageable levels and ensure adequate development expenditures. Reliance on cutting development expenditures rather than current expenditures is only going to decrease investment and productive capacity of the economy.

Despite realisation of non-tax revenues such as Rs 109 billion Competitiveness Support Fund and transfer of Rs 230 billion SBP profit, the lower than targeted tax collection by the Federal Board of Revenue may have caused shortfalls in total revenues.

According to MPS, provisional estimates of tax collection by the FBR stood at Rs 1327 billion in FY10 shows a shortfall of Rs 53 billion or 0.4 percent of GDP from the target of Rs 1,380 billion for the year. With current shortfall FBR tax to GDP ratio has now declined to 9.0 percent, which is the lowest since FY68. Similarly, high growth in current expenditures, 17.3 percent during the first nine months, may have contributed towards likely fiscal slippages despite cuts in development spending.

The difference between total revenues and current expenditures, the revenue deficit, has already widened to 1.8 percent of GDP during July-March FY10 against the full year target of 0.7 percent. This deficit may have widened further in last quarter of FY10. Revenue deficit, if remains un-addressed, will have strong implications for debt sustainability, the State Bank indicated.

For FY11, the target for budget deficit has been set at 4.0 percent of GDP. Given an ambitious FBR tax revenue target, higher requirement of security-related expenditures, and a sizeable development budget, reducing the fiscal deficit close to the target level, though imperative, would be quite challenging.

Meeting the FBR tax collection target of Rs 1667 billion would require 25.6 percent growth or a 0.8 percentage point improvement in the tax to GDP ratio, which seems unlikely. Moreover, the target of 4.0 percent deficit, announced in the budget speech, assumed a 5 percent deficit of the federal government and a combined surplus of 1.0 percent by the provinces. However, consolidated provincial figures reflect almost a balanced budget. This suggests that FY11 fiscal deficit could be around 5.0 percent of GDP.

Moreover, higher current expenditures will add to the aggregate demand, putting pressure on available supplies and thus inflation. To close the gap, there will be little choice but to rely on foreign borrowings. Delays or shortfalls in such inflows could put pressure on external accounts sustainability.

Copyright Business Recorder, 2010