Budgetary Comparison (Static): Development Strategies of Punjab & KPK

The political competition between the two provincial governments (Punjab & KPK) has expectedly or unexpectedly resulted in an apparent convergence across the two budget papers. At the aggregate level there does appear to be certain differences, however, they do not stand much ground when accounting adjustments are made for a consistent comparison. The first impression is that of an uncomfortable similarity. Nonetheless, there are major priority differences at the micro level - distinctly reflecting respective party manifestos - which can only be inferred through a careful analysis of the allocations under annual development expenditure.

Table 1: The %ages have been calculated using corresponding tables (on General Revenue and Expenditure 2014-15) in both the budget documents (given at the end).

Two key adjustments are to be noted when looking at Table 1. Firstly, the apparent difference across the two provinces under the heading of General Public Services (GPS) and Education Affairs & Services (EA) is only due to how the district level education expenditure is treated. Punjab government has divided the education expense into provincial (82bn) and district level (181bn). I infer that the Punjab government has recorded all of the district level expenditure under the GPS since this is where 236bn worth of transfers are made to 'the district government.'  This is contrary to the KPK who appear to have recorded the corresponding expense under the EA. Therefore, I have taken this out of the GPS and placed it under EA to ensure consistency and facilitate comparison. An identical adjustment has been made for health. 37bn of the health related district level spending is taken out of the GPS and moved under 'Health.' Secondly, the entry for Punjab under 'B' has been adjusted by eliminating the double counting (related to state trading + repayment of commercial bank loan) - in line with the KPK format. 

After the aforementioned adjustments, the only difference at the aggregate level is the negligible allocation for 'social protection' by the Punjab government arguably compensated by relatively higher spending under health. Other than this, higher level of Development expenditure (C) in KPK is mostly due to a relatively higher proportion of foreign assistance (most of which is grants). With these points in mind, the potential difference across the two provinces can therefore only be observed in how the annual development expenditure (ADE) is allocated.

In what follows, I start with a breakdown and cross-comparison of Education and Health. I then move on to the breakdown of the annual development expenditure (ADE) which is where the respective development strategies are reflecting themselves.

1) EDUCATION & HEALTH

Note that there are two primary heads under which the sectoral expenditures fall: Current expenditure (CE) in the form of salaries etc; and, annual development expenditure (ADE). I give estimates for each of these to allow you for self-reflection.

Punjab

i) CE: Allocation of 228bn for education (20.8% of the Budget) and 91bn for health (8.3% of the Budget).  

ii) ADE: Allocation of 45bn* for education (13% of total ADE and 4.1% of the Budget) and 31bn for health (9% of total ADE and 3.6% of the Budget). 

*I have taken out the 2.9bn for 'Sports and Youth' from education to stay consistent with the KPK allocation.

Summary: Total allocation of 24.9% and 11.1% (of the budget) for education and health, respectively.

KPK

i) CE: Allocation of 87bn for education (21.6% of the Budget) and 21bn for health (5.2% of the Budget).  

ii) ADE: Allocation of 25bn for education (18% of total ADE and 6.1% of the Budget) and 11bn for health (8% of total ADE and 2.7% of the Budget). 

Summary: Total allocation of 27.7% and 7.9% (of the budget) for education and health, respectively.

2) ADE: PRIORITY BREAKDOWN

While there is little difference at the aggregate level, some significant differences can be observed in the development strategies of the two provinces. 

i) One of the contributing factor (education) has already been pointed out. Education has a share of 18% in ADE for KPK whereas it is 13% for Punjab. 

ii) Industry & commerce gets an allocation of 3.7% by KPK. For Punjab it is 2% of the ADE.

iii) 13.4% of the ADE in KPK is going to district/regional development. For Punjab it is only 5.3%. 
iv) Water & Senitation gets 7.6% and 5% (of ADE) in KPK and Punjab, respectively.
v) Infrastructure development gets a major 43% of the ADE in Punjab. For KPK it is only 24%

   a) Roads: 9.2% of ADE for Punjab; 12.4% of ADE for KPK.

   b) Irrigation: 10% of ADE for Punjab; None

   c) Energy: 9% of ADE for Punjab; 4% for KPK

   d) Buildings: 2.3% of ADE for Punjab; 1% for KPK

   e) Urban Development: 12.2% of ADE for Punjab; 6.3% for KPK

vi) For Punjab, 9.5% of the ADE is going the 'Special Initiatives.' For KPK, an almost similar heading of 'Pro-poor initiatives' has an allocation of 5.7% of the ADE. KPK has explained these pro-poor initiatives to include 'health insureance scheme, insulin for life, mother and child health programme and nursing training programme' (Dawn, 17/06/2014). For Punjab, it is less clear as to what these initiatives are.
vii) Lastly, KPK also has a significant allocation of 8.9% going to 'Home' and 'Finance.' I am uncertain about their explanation.

The above breakdown (plus health) accounts for around 90% of the total ADE for both the KPK and Punjab. The higher spending by Punjab under v) and vi) can explain all of the spending difference between the two provinces under i), ii), iii), iv) and vi). 

CONCLUSION

The difference between the two development strategies can be adequately attributed to the varying priorities across Social Development Spending and Infrastructure Development Spending. While KPK is more focused on education and district level social spending in an attempt to directly target the middle and lower-middle class, Punjab has its emphasis on large scale infrastructure projects in both energy and road network. Which one is better? It is a subjective question. In the end what matters without any ambiguity is the institutional mechanism through which the funding is directed.

Source material: I have used the following two documents for my analysis.

http://www.financekpp.gov.pk/FD/attachments/article/251/White%20Paper%202014-15.pdf

http://www.finance.punjab.gov.pk/system/files/WP2014_15.pdf

Note: It is very difficult to compare the two documents since the divisions and sub divisions are not consistent. Unlike Punjab, KPK seems not to have followed the layout of Federal Budget which makes comparison very difficult. 

Simplified: Budgetary Accounting and What to Expect (2014-2015)

In this post, I have simplified all the statistics in the budgetary paper uploaded by the Finance Ministry. I do not intend to get into what the Govt. plans to spend the money on. Here i only concern myself with past year's performance and how the government plans to finance the expenditure for the coming year. The objective is to predict the potential short falls and the probable measures Govt. will resort to, using previous years behaviour of the PML-N's Govt. as a predictor. Moreover, the analysis has been kept free from any economic or political inclination except as a guideline. Now let us turn to the task at hand:

BUDGETARY ADJUSTMENTS IN 2013-14

The point of this section is to understand how ad-hoc measures are taken to meet the ends when the revenue targets are missed. Looking at past years performance will make us better acquainted with what to expect in the coming year. 

In 2013-14 there were no major revisions/adjustments seen on the expenditure side as per the document. However, there were significant adjustments carried out over the year to meet the financing needs. The govt started with 75.5% of the total expenditure being financed with internal and external resources while the remaining 24.5% of the financing was put under the head of bank borrowing. Over the period, bank borrowing was only used to finance 9.3% of the expenditure. To get a feel of it, bank borrowing was reduced by 600bn (from the planned amount of 974bn to only 374bn). This was achieved by raising an additional 670bn of the resources generated internally and externally. 

An approximate breakdown of the 670bn

Each sub-heading provides further breakdown in the respective category:

1)   106.8 billion was raised under the Net Capital Receipts:

i)    Recovery of loans was revised down by around 116 billion

ii)   Public Accounts head was also revised down by 77.3 billion

iii) To make up for the downward revision and also raise 106.8 billion of additional resources, government increased the borrowing from the public by 264.4 billion. This was further aided by a reduction of around 35 billion in disbursements.

2)    137.7 billion were raised from external resources:

i)   External grants declined by 70 billion (from expected 108.9 billion to actual of 38.8 billion)

ii)  To make up for it, government borrowed an addition of 207.9 billion externally (total of 675.3 billion)

3)    Provinces contributed an additional of 159.9 billion in surplus

4)    266 billion came from the increase tax and non-tax revenues. This is interesting. lets have a look in detail:

i)   Taxes collected by FBR saw a 200 billion shortfall. FBR seems to have missed the targets under all the headings and sub-headings of direct and indirect taxes.

ii)  This shortfall was primarily overcome by using ad-hoc taxation measures and increasing non-tax revenue. Under ad-hoc taxation measures:

a) While petroleum levy was decreased by 12 billion

b) Gas Infrastructure Dev. Cess was increased by 50 billion, and

c) Natural Gas Dev. Surcharge was increased by around 4.6 billion.
There were various revision in the non-tax revenue. Most of them cancel each other. The few significant ones are:
a) Increase of roughly 45 billion under 'Mark up (PSEs & Others)' and unexpected 67.6 billions under Other Profits. I dont know what any of these represent.

b) Further there was an additional: 60 billion of profits from SBP; 6 billion under defence services; and, 6 billion under General Administration Receipts.

c) Most important of all the contributions is the additional 174 billion under the foreign grants (possibly the $1.5 billion from Saudi Arabia). 

Summary of adjustments

To make up for the missed targets and to reduce bank borrowing by 600 billions, there was heavy reliance on: 

i)   public borrowing (264 billion); 

ii)  external borrowing (207.9 billion); 

iii) provincial contribution (159.9 billion); 

iv) ad-hoc taxation (42.5 billion); and, 

v)  334.6 billion increase in non-tax revenue. It can be safely understood that 50% of this was the grant from Saudi Arabia; 17.6% due to increased profits from SBP; 34% contributed by 'other profits' and 'mark up (PSEs & others).' 

Key point

What you should get out of it (for future reference) is that the major shocks coming from the ambitious targets set by the federal govt are absorbed via all sorts of borrowing measures, ad-hoc unplanned taxation, provincial sacrifices and one off good luck shocks.

BUDGET 2014-2015: ALL YOU NEED TO KNOW

As mentioned before, my focus in this post is on the revenue side due to significant uncertainty surrounding the estimates. However, for the sake of completeness, I start with the expenditure side giving a brief overview of the notable differences vis-a-vis previous budget:

Expenditure brief 2014-2015

Total Expenditure is expected to be Rs. 4.3 trillion.

Otherwise, there is not much happening on the expenditure side. Also any breach on the expenditure side is often internally adjusted by cutting the development expenditure (PSDP primarily). Nonetheless, few noteworthy points are: 

i)   allocation for subsidies have been reduced from 323 bn to 203 bn. All of this reduction is coming from less subsidy for both WAPDA/PEPCO and KESC. This will be a challenging task. 

ii)  Grants to provinces is expected to decrease from 53.8 billion to 24.3 billion. What is surprising is that the Grants under other various heads have been increased from 282 billion to 338 billion. 

iii)  Allocation for BISP has been increased from 70 billion to 97 billion which is very pleasing to me personally.
iv)  138 billion were spent in the settlement of the circular debt during 2013-14. However, nothing has been allocated for 2014-15. This is surprising since no significant energy sector reform has been carried out in the recent memory which could have possibly eliminated this problem. At the same time, it has already been reported to have risen to significant levels. Recently government was reported to have borrowed 30 billion from the banking sector in an attempt to clear some of the circular debt (and push the problem further into the future as before).

Planned Financing for 2014-2015

Following is the breakdown of financing sources for the planned expenditure:

i) 16% will be financed by Net Capital Receipts. All of this will be government borrowing from the public in the form of bonds and national savings etc. The two other items (loan recovery and disbursements) cancel each other out.

ii) 20% will be financed by External Receipts. 72% of these (external receipts) will be external borrowing while the remaining will be in the form of grants and privatization receipts.

iii) 6.7% will be via provincial surplus.

iv) 5.3% will be financed by the bank borrowing.

v) 51.7% will be financed by tax and non tax revenue.

What to Expect Over 2014-2015

Lets now focus on some of the revenue targets which were missed last year. As we have already seen, most important of them are:

i)    FBR's tax collection target of 2.8 trillion which is 25% more than this year's revised target. It is most likely to be revised downward by a big margin. Tax collection target was revised several times in 2012-2013 from the target of 2.38 trillion to 2 trillion whereas for 2013-14 it was revised down to 2.27 trillion from 2.47 trillion. Without legal action against tax evaders, it is no exaggeration that the tax target will be missed by somewhat 200 billions. 

In case - which is most likely - FBR misses the target, there is little room for ad-hoc taxation measures since Gas related taxes have already been increased in the proposed budget by 64 billion. This is in addition to a 15 billion increase in the petroleum levy. 

ii)   Privatization receipt of 198 billion under external resources. This roughly equals $2 billion of foreign investment from privatization alone. Nonetheless, its an ambitious but an achievable target. However, there is a possibility of significant political roadblocks in the process towards privatization.

Potential panics

Any shortfall on the revenue side, as has been the case in the past year, will force the government to domestic and international bond markets. The government already plans to borrow another 100 billion from the international market (50 bn via euro bond and 50 bn via sukuk bonds). It is likely, following last year's example, that the govt may resort to borrowing from the international market more than what she plans. Domestic bank borrowing - which is proposed to be kept at 227.9 billion for 2013-14 - may also be breached. Since International donors have already been fully engaged, the third source is borrowing money from the public through savings schemes. All these options will push up the interest rates and crowd out investment especially when the govt is only borrowing to meet the expenses rather than to invest.

(the unit of currency is Pak. rupee unless otherwise stated)