Budgetary outcome in 2024-25
The outcome of the operations has sometimes been referred to as inadequate because of a big shortfall in federal tax revenues collected by the FBR. The agreed target for these revenues was of Rs 12,970 billion in 2024-25, requiring a growth rate of as high as 40 percent. The actual collection was Rs 11,744 billion, implying thereby a big shortfall of Rs 1,226 billion, equivalent to 9.5 percent of the target and 1.1 percent of the GDP. Such a large shortfall has seldom been seen before.
However, the distinctly positive side of the outcome is that the budget deficit target of the consolidated operations was more than achieved. It had been set at 5.7 percent of the GDP in the targets of the IMF Programme for 2024-25. The actual outcome is a lower deficit of 5.4 percent of the GDP. Also, the primary surplus at 2.4 percent of the GDP is higher than the targeted level.
The contraction in the budget deficit is also sizeable. It was 6.8 percent of the GDP in 2023-24. This implies a big reduction of 1.4 percent of the GDP in only one year. Consequently, along with relatively stability in the value of the rupee, the central government's debt to GDP ratio has remained, more or less, unchanged at close to 66 percent of the GDP in 2024-25.
The fundamental question is how, despite a big fall in the FBR revenues, the budget deficit target was more than achieved? The achievement of the targets could only have been possible with higher non-tax revenues and/or lower expenditures. In fact, this has been the outcome in both budgetary heads.
The non-tax-to-GDP ratio is higher than the original target by 0.3 percent of the GDP. The overall public expenditure to GDP ratio is lower by 0.5 percent of the GDP. The higher non-tax to GDP ratio is because of somewhat larger revenues than budgeted from the SBP profits and the petroleum levy.
The big success is the large containment in debt servicing in relation to the budget estimate for 2024-25. This was set at Rs 9,775 billion. The actual cost of interest payments on debt has been restricted to Rs 8,887 billion, implying thereby a large saving of Rs 888 billion. This alone has covered up 72 percent of the shortfall in FBR revenues. The primary reason is the precipitate decline in interest rates, with the policy rate plummeting from 22 percent to 11 percent during the year.
Also, despite the shortfall, FBR revenues have shown an extraordinary increase in the tax-to-GDP ratio from 8.9 percent of the GDP to 10.1 percent of the GDP in one year.
The other good news is that faster growth has taken place in direct taxes versus indirect tax revenues. Income tax revenues have risen by almost 28 percent, while the increase in indirect tax revenues was closer to 24 percent. Consequently, the federal tax system is moving in a progressive direction. The focus must now be on further broadening of the direct tax base.
There is need, however, to highlight the severe contraction of development spending at the federal level. It has been restricted to Rs 768 billion in 2024-25, equivalent to only 0.7 percent of the GDP. A decade ago, it stood at 1.6 percent of the GDP, and earlier at above at 2.5 percent of the GDP.
There are three key sectors of development spending by the federal government. These are water resources, highways, and electricity generation and distribution. They are critical components of infrastructure from the viewpoint of the future growth of the economy.
The throw-forward of costs of ongoing projects in these sectors was to Rs 3163 billion in 2024-25, with the actual level of spending of Rs 344 billion. Implementation fully of these projects will take more than nine years at the current rate. Meanwhile, there will be a large escalation in costs.
The expenditure on projects in the water resources sector has acquired much greater priority after India's unilateral withdrawal from the Indus Waters Treaty and the risk thereof of diversion of water. The throw-forward cost of ongoing water resources projects in 2024-25 was Rs 1,448 billion, and the allocation to the sector for the year was only 9 percent of this cost. It is worrying that there has been no significant increase in the development allocation to this sector even in the current fiscal year.
There is also a need to focus on the performance of provincial governments. There has overall been a shortfall in the generation of a cash surplus by the four provincial governments combined. The target was Rs 1,217 billion in the budget estimates for 2024-25. The actual surplus was Rs 921 billion, implying a shortfall of Rs 296 billion.
The basic reason for failure to achieve the target is the big shortfall in federal transfers of over Rs 650 billion and the runaway growth in provincial current expenditure and development expenditure of over 26 percent and 54 percent respectively. Clearly, there is need for stronger expenditure management by the provincial governments to ensure that the cash surplus target is achieved. Also, these governments must adopt a more aggressive stance on resource mobilization.
An appropriate indicator of the performance of a provincial government is the growth rate in the cash surplus. It is the highest in Sindh at 106 percent, followed by Khyber Pakhtunkhwa at 71 percent, Punjab at 64 percent and Baluchistan at 1 percent.
Turning to the outlook for 2025-26, based on the budgetary outcome and performance in 2024-25, the first critical task is for the federal and provincial governments to target for continued big reduction in the budget deficit. It was reduced by 1.4 percent of the GDP in 2024-25. The target in 2025-26 is to reduce it further by 1.5 percent of the GDP, from 5.4 percent to 3.9 percent of the GDP.
This is likely to be a difficult task. FBR revenues will have to increase by over 20 percent in 2025-26, when the nominal GDP is expected to rise by 12 percent. Already, there are indications of a shortfall in FBR revenues in the first month of July 2025.
The expectation is also that the growth rate of current expenditure will be only 4 percent in relation to the level in 2024-25. In particular, debt servicing is projected to be actually lower than the level in 2024-25 by almost 8 percent. However, interest rates have remained unchanged by the SBP in the first meeting of the Monetary Policy Committee in 2025-26 and the outlook for interest rates in 2025-26 is unclear at this stage.
Overall, there is a need to recognize the achievements in the realm of public finances in 2024-25, while highlighting some of the shortfalls. 2025-26 also promises to be a challenging year. The requirements are for continued high growth in FBR revenues and substantial containment of the increase in current expenditure. Otherwise, the very low budget deficit target of 3.9 percent of the GDP will remain elusive and continue to be the focus of the IMF Programme in 2025-26.
Copyright Business Recorder, 2025
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