Pakistan Cuts Taxes, Raises Salaries Risking Deficit Target

Pakistan cut taxes and raised government salaries in an election-year budget that risks missing a target to narrow the deficit from a three-year high.

The government pledged to narrow the budget gap to 4.7 percent of gross domestic product in the year ending June 30, 2013 from 7.4 percent of GDP in the previous 12 months, Finance Minister Abdul Hafeez Shaikh said in his budget speech in Islamabad yesterday. Opposition lawmakers shouted anti-government slogans, held up placards and scuffled during the presentation.

Prime Minister Yousuf Raza Gilani’s government, facing a general election by February at the latest, is under pressure to counter growing public anger over power blackouts, the fastest inflation in Asia and an insurgency on the Afghan border. The government is relying on domestic borrowings after aid flows from the U.S. and the International Monetary Fund dwindled.

“Raising salaries, reducing duties and increasing expenditure means they are likely to miss the fiscal deficit target once again,” said Saad Khan, fund manager and economist at Askari Investment Management Ltd. in Karachi which oversees 25 billion rupees ($267 million) in stocks and bonds.

Salaries, Pensions

Government salaries and pensions were raised by 20 percent and subsidies were cut by 60 percent to 208.5 billion rupees, Shaikh said. The government will increase cash transfers to the poor to 70 billion rupees from 50 billion rupees this year.

“We kept our promise to honest tax payers by not putting further burden on them and in fact providing relief,” Shaikh said at his post-budget news conference in Islamabad today.

Federal excise duties were abolished on 10 items including livestock insurance, customs duties were reduced to curb smuggling and the turnover tax on businesses was cut to 0.5 percent from 1 percent. A levy on cement was cut by 100 rupees a metric ton, tax relief was provided to voluntary pension schemes and the income tax exemption limit was raised by 100,000 rupees, Shaikh said.

The 2.96 trillion rupee budget was unveiled after the nation’s financial markets closed. The Karachi Stock Exchange 100 Index rose 0.7 percent today and has climbed 14.5 percent in the past year. The Pakistan rupee was at 93.67 against the dollar, having declined 7.7 percent over the past 12 months.

‘Huge Challenge’

“The rising fiscal deficit is posing a huge challenge for policy makers,” said Raza Jafri, head of research at AKD Securities Ltd. in Karachi. “They need to find ways to increase tax income and cut subsidies without hurting growth.”

The government set a tax collection target of 2.38 trillion rupees for the 12 months ending June 30, 2013, a 22 percent increase, Shaikh said.

Pakistan recorded its highest budget deficit of 8.8 percent of GDP in the year ended June 1991, according to government data. The administration estimates 3.7 percent economic expansion in 2011-2012 and has a goal of 4.3 percent growth for the next fiscal year.

Pakistan is trying to mend a fractious relationship with its main aid provider, the U.S., which scaled back funds over differences on how to stop militant groups from operating in the country’s tribal areas and a refusal to re-open supply routes for NATO troops in Afghanistan. The Senate Appropriations Committee has requested $1 billion in aid for Pakistan for fiscal year 2013, down from about $1.5 billion.

Defense Budget

Pakistan raised defense spending by 7 percent to 545 billion rupees for the year starting July 1, according to the budget documents.

With a view to wooing voters ahead of the election, the government on May 24 said it would increase spending on roads, electricity, education and healthcare by 19.5 percent to 873 billion rupees in the 12 months starting July 1. The Prime Minister will move to a “small house,” giving up the official mansion so it can become an institute of advanced studies, Shaikh said.

As aid dried up, the administration borrowed 442 billion rupees from the central bank in the first 11 months of the fiscal year, defeating its zero-borrowing target. That was double the amount borrowed last year, State Bank of Pakistan data shows.

Rising Borrowings

Borrowings may still rise. An $11.3 billion IMF loan to Pakistan expired in September, with disbursements suspended in May 2010 after the country failed to meet conditions attached to it.

The Washington-based lender, which has described the country’s economy as “highly vulnerable,” said in February the government should widen the tax base, curb some subsidies and curtail central bank financing of the budget deficit. Inflation accelerated to a 10-month high of 12.29 percent in May, limiting room to cut interest rates to support the $200 billion economy. The pace of price gains is the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

The government plans to spend 183 billion rupees to reduce a record shortage of power and is willing to commit ”unlimited resources,” to end this crisis, Shaikh said in his speech, as protesters burned tires and destroyed state property in Faisalabad and Multan, Gilani’s hometown.

Energy shortages are adding to challenges and may slice 4 percentage points off economic growth in the current fiscal year, according to the Planning Commission of Pakistan.

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