New Budget Offers Relief To Salaried, Lower Income Groups. But The Road Ahead Is Bumpy

New Budget Offers Relief To Salaried, Lower Income Groups. But The Road Ahead Is Bumpy
It is an annual ritual to comment on the budget speech, criticise new taxes, especially on petrol, and urge the government to provide relief to the poor and middle classes. Governments are supposed to mobilise resources and allocate them to different sectors. However, no government has or can change the fundamental nature of the priorities of the national security state that Pakistan is.

Here is the crux as reflected in how we use our resources: Pakistan’s total defence spending (including pensions & nuclear energy) was Rs2.3 trillion in 2021-22. It was Rs553bn more than the combined spending of Rs1.75 trillion on the running of the federal govt (Rs479 bn), the aggregate of federal and provincial education spending of Rs 663 bn, and the combined federal and provincial health expenditure of Rs610 bn.

Given this and the country's parlous state of foreign exchange reserves and a record level of the national debt, Finance Minister Miftah Ismail has a tough and unenviable job. His options are very limited because the country has no choice but to accept whatever conditions the IMF is reportedly imposing to resume its 2019 programme. I have never praised any finance minister’s budget speech but I have to admit that his speech was brilliant for the remarkable clarity of thought, identification of the key issues and the direction which the economy should take. He is perhaps the most well-qualified person to lead the finance ministry in decades but at an unfortunate time when Pakistan faces a double whammy of a political turmoil and a teetering economy that could default if the IMF doesn’t come to its rescue soon. Though it may not come to that as the government has met the most critical IMF condition to remove subsidy on petrol. 

Pakistan is facing its worst economic crisis since 1998 at a time when the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation, according to the World Bank’s latest Global Economic Prospects report.  Global growth is expected to slump from 5.7 per cent in 2021 to 2.9 per cent in 2022— significantly lower than 4.1 per cent that was anticipated in January. It is expected to hover around that pace over 2023-24.

Among emerging market and developing economies, growth is also projected to fall from 6.6 per cent in 2021 to 3.4 per cent in 2022 but is expected to recover to 4.2per cent in 2023. 

Nobel laureate economist Robert Shiller sees a ‘good chance’ of a US recession that’s at least in part the result of a ‘self-fulfilling prophecy’ as investors, companies and consumers grow increasingly worried about a downturn. 

Pakistan’s new budget is based on two key assumptions:

 1) economy will only moderately slow down to 5 per cent in FY 2022-23 from almost 6 per cent and,

 2) inflation will slow down to 11.5 per cent from 11.7 per cent. 

Finance Minister Miftah Ismail hopes that “at least 5 per cent growth will be achieved without a balance of payment problem.” 

Given the expected sharp deceleration in the global growth amidst the worst commodity price shock since the 1970s, rising inflation and interest rates, the government’s hopes to achieve 5 per cent growth without any rise in inflation appear to be more than just optimistic. They may turn out to be highly unrealistic. The plan to grow exports to $35 billion (or by 11.8 per cent) may fall short of expectations given the significant slowdown in Pakistan’s largest markets of textile exports which accounted for almost 2/3 of the growth in exports last year.

I won’t be surprised if Pakistan’s economy slows down to 4 per cent and the inflation spikes to 20 per cent due to the record increase in petrol prices and a depreciation of the rupee. 

On the fiscal side, the total revenue receipts are projected to rise by 23 per cent to Rs 9 trillion, current expenditure by 15.6 per cent to Rs8.7 trillion. The Petroleum development levy is expected to fetch Rs750 billion or 37.5 per cent of the total non-tax revenues of Rs2 trillion. Gas infrastructure development cess is budgeted to raise another Rs200 billion. In short, the different levies on energy products will account for a staggering 50 per cent of Rs 2trillion in non-tax revenues, continuing the historic pattern of heavy reliance on petroleum and gas products to raise revenues.

The fiscal space is likely to reduce due to the mounting debt burden. The debt servicing is projected to rise by 29 per cent to Rs3.95 trillion, amounting to 56% of the tax revenue target of Rs7 trillion. As usual, real defence spending has been presented under different heads, a practice which has always understated real spending. The total defence spending is as follows:

The total defence spending budget of Rs.2.46 trillion represents an increase of 6.7 per cent and 35 per cent of the tax revenue target of Rs7 trillion. 

In simple words, the country will spend 92% of the tax revenues on just debt servicing and defence, compared to 89 per cent in the prior year. This is the main reason for reliance on petroleum products on the so-called ‘non-tax revenues’.

It was refreshing to note that Miftah Ismail acknowledged that a “major part of the wealth of rich people is parked in the real estate sector in Pakistan.”  This is a double-faceted menace, he declared, and rightly noted that “it leads to the accumulation of unproductive assets and raises the prices of housing for the poor and lower-income groups.”


In simple words, the country will spend 92% of the tax revenues on just debt servicing and defence, compared to 89 per cent in the prior year. This is the main reason for reliance on petroleum products on the so-called ‘non-tax revenues’.


Therefore, all persons who have more than one immovable property exceeding Rs.25 million situated in Pakistan shall be deemed to have received rent equal to 5% of the fair market value of the immovable property and shall pay tax at the rate of 1% of the fair market value of the said property. However, one house of each individual will be excluded. In addition, a capital gain tax of 15 per cent on the sale of property has been proposed if the holding period of such property is one year or less. The capital gain payable on such assets will reduce to zero after a holding period of 6 years, reducing tax liability by 2.5 % with each subsequent year.

Although this is a good move, there was no mention of how much revenues are expected to be raised from the imposition of taxes on property. 

The budget offers relief to the salaried and lower income groups. This is a matter which needs a detailed analysis that we plan to do later. But whatever little relief measures have been announced are unlikely to help as the spiralling prices will push more people into poverty as the inflation will wipe out the benefits from tax relief and payments under the income support programmes. It is perhaps for this reason that an overwhelming majority of the people probably don’t bother listening to budget speeches and don’t expect their conditions to improve anytime soon.

The writer is former head of Citigroup’s emerging markets investments, and was responsible for managing investments and macro-economic strategy across 40 countries in the emerging markets, covering Asia, Latin America, Eastern Europe, Middle East and Africa.