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Extra-taxation steps: IMF stresses decrease in fiscal deficit

Extra-taxation steps: IMF stresses decrease in fiscal deficit

ISLAMABAD: The International Monetary Fund (IMF) wants the government to take additional taxation measures of Rs195 billion in the next budget to bring fiscal deficit down to 4.2 percent. The second IMF staff review report on the $6.64 billion Extended Fund Facility (EFF) released here, stresses that an additional revenue from tax base broadening including withdrawal of SROs would need to total at least 0.5 to 0.75 percent of GDP (in real terms between Rs130 to Rs195 billion) per year over the next two years to achieve the fiscal consolidation targets without increasing tax rates.

This strongly implies a total Rs390 billion revenue measures over the next two years to reduce fiscal deficit to 4.2 per cent from a projected target of 5.5 per cent for the current fiscal year under the EFF. Under the medium-term macroeconomic framework, the country’s fiscal deficit is projected to decline to 3.4 per cent in fiscal year 2015-16. The Gas Infrastructure Development Cess (GIDC) would provide Rs93.6 billion to the government and elimination of Statutory Regulatory Orders (SROs) Rs91 billion annually.

The review report states that the revenue growth will pick up in the second half of the year with the GIDC now entering the government coffers. The increase in the GIDC coupled with higher than envisaged quantities, is expected to deliver around 0.36 percent of GDP, Rs 3.6 billion, (annualised) in additional revenue. On the expenditure side, the programmed reduction in electricity subsidies and tight current spending must create room for a pick-up in capital spending in the second half of the fiscal year while still meeting program targets. The GIDC increase will not only strengthen tax revenues but will also lead to better utilisation of gas.

Another key component that would broaden the tax base is a plan to eliminate many Statutory Regulatory Orders (SROs). The FBR has completed an analysis of the fiscal cost of all SROs, and has started developing plans to either eliminate or incorporate them into legislation. The elimination of SROs is estimated to yield about 0.35 percent of GDP (Rs91 billion) but more is expected once they finalise consultations with the private sector.

The fund report also pointed out that the current revenue sharing arrangements were not conducive to fiscal consolidation and did not create incentives for provincial taxation. Under the Council of Common Interest (CCI), the provinces agreed to fiscal surpluses to support the consolidation efforts – and so far the outturn has been broadly in line with that envisaged under the programme. Nevertheless, with adjustment concentrated on the revenue side on the second and third years of the programme, progress in the negotiations towards a new National Finance Commission (NFC) award will be key for the sustainability of the programme, but may not be ready for the next budget. In this context, the authorities will need to identify a suitable mechanism to ensure that the savings materialise for the next fiscal year.