The new budget is not only expansionary in nature but also expects a sharp drop in commodity prices to close its books.
budget for the next financial year, Finance Minister Miftah Ismail announced On the floor of the National Assembly earlier today, while not expansionist in nature – in a constrained financial environment against a backdrop of geopolitical instability and a potential global recession – it also expected a substantial fall in commodity prices to close its books. does.
For starters, the price of petroleum products, which fundamentally affect the growth trajectory and sustenance of the economy, is projected to fall sharply, as evidenced by a target inflation rate of 11.7 percent and a fairly liberal petroleum and investment portfolio of ₹750 billion. The development is evidenced by the Levi assumption. ,
In reality, however, as the impact of the hike in fuel prices passes, inflation is projected to remain close to the 20 per cent mark, or may even exceed it. The target inflation rate of 11.7 pc creates expectations for a significant drop in commodity prices – a prayer that may or may not work.
hit and miss
Nonetheless, the new budget appears to be an attempt to pull the economy out of the boom-and-go cycle and increase dependence on export-oriented growth through increased competition. This is a welcome departure from the specific focus on import substitution.
The budget targets a growth rate of 5 percent in the next fiscal year without expanding the current account deficit, while also reducing imports – something we haven’t been able to do in the last 20 years with the exception of pandemic-related declines Huh.
Similarly, the launch of the laptop scheme and support for IT infrastructure worth Rs 17 billion is a welcome addition. More importantly, efforts have been made to increase the post-tax disposable income of a large section of salaried taxpayers through adjustment of tax slabs and increase in minimum income for taxation purposes. In a double-digit inflation scenario, this will certainly help the households in balancing the budget.
targeting non-productive areas
One of the more significant structural changes in the new budget is the introduction of the concept of deemed rental income, and a property tax on real estate, which is not a primary residence.
The introduction of 15 per cent capital gains in real estate would reduce speculative activity in the real estate market, which was spiraling out of control, primarily driven by excess cash in the economy. Through such a structure, the intention is to redirect capital from non-productive sectors such as real estate to more productive sectors such that they can generate incremental revenue and jobs, which have a high economic multiplier. There is an expectation that the government will stick to this proposal and will not succumb to pressure.
Increasing the allocation of Benazir Income Support Program (BISP) to Rs 364 billion from Rs 250 billion last year will provide additional comfort to the most vulnerable sections of the population, with over eight million households getting direct cash transfers of Rs 2,000 per month. This will be in addition to the normal transfers in lieu of fuel subsidy which is done through BISP.
Swapping subsidies with cash transfers would avoid market distortions, while facilitating soft landings for the most vulnerable sections of the population.
The tone of the budget has been largely pro-poor as taxes have been increased on sectors that were not previously taxed, or were expecting windfall gains. An example of such segments are private banks, which will benefit from the high interest rate environment and end up earning windfall gains. Taxing at a higher rate of 42 per cent instead of 39 per cent would generate valuable incremental revenue for the government.
expanding the tax net
Another innovative measure is bringing retailers under the tax net through electricity bills, with a fixed tax payment ranging from Rs 3,000 to Rs 10,000. Much clarity is not available at this stage, but it will ensure that all retailers with electricity connections can suddenly become tax payers. Although similar schemes have been introduced in the past, how this tax is levied, and how it is converted towards a tax driving more economic activity, will remain a question of execution.
The new budget is a little different from the usual boilerplate that is presented every year.
There is a gradual inclination towards shifting of capital from non-productive segments to more productive sectors. The expansionary nature of the budget, and the underlying expectation that commodity prices may go down in the target, is quite optimistic.
In the absence of such a scenario, we may look at some more mini budgets to bridge the deficit or keep them under control. Bringing retailers under the tax net, providing relief to the salaried class, and an expanded BISP umbrella are changes that will provide some relief in an environment of double-digit inflation.
Taking inspiration from the 1986 chart buster: “We’re Halfway, We’re Living on a Prayer”.
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