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Budget 2018-19 : Slippage is structural, not populist

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This presentation was delivered by Rathin Roy, Director and CEO, National Institute of Public Finance and Policy, at the "Five-Institute Union Budget Seminar 2018-19: Reforms and Development Perspectives", Leela Palace, Chanakyapuri, New Delhi, February 10, 2018.

The seminar was organised by the National Institute of Public Finance and Policy in partnership with CPR, ICRIER, NCAER and IDF.

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Budget 2018-19 : Slippage is structural, not populist

  1. 1. Budget 2018-19 -Slippage is structural, not populist Dr. Rathin Roy Director National Institute of Public Finance and Policy, New Delhi February, 2018
  2. 2. Slippage is structural, not populist  The government has not been able to adhere to its fiscal deficit targets for 2017-18.  Was it unexpected? NO  Bond markets had factored in fiscal slippage-rise in bond yields by 110 basis points over the last four months  The fiscal slippage was not as bad as markets feared.
  3. 3. RD/FD ratio- Centre- a long term structural problem 4.5 29.5 41.7 49.3 64.5 71.671.1 74.3 79.7 62.463.1 56.3 41.3 75.1 81.0 67.6 76.4 74.3 71.171.6 64.1 60.0 59.4 73.8 66.6 1981-82 1986-87 1990-91 1995-96 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18BE 2017-18RE 2018-19BE
  4. 4. Fiscal Stance (% of GDP) 2016-17 2017-18 BE 2017-18 RE 2018-19 BE Revenue Deficit 2.1 1.9 2.6 2.2 Fiscal Deficit 3.5 3.2 3.5 3.3 Revenue/Fiscal Deficit Ratio 60.0 59.4 73.8 66.6 Revenue Receipts (A+B) of which 9.0 8.99 8.97 9.22 i) Gross Tax Revenue 11.24 11.28 11.59 12.13 ii) States share 3.98 4.0 4.0 4.21 A. Net Tax revenue to centre (i-ii) 6.91 7.28 7.56 7.91 B. Non-Tax Revenue 1.83 1.71 1.41 1.31
  5. 5. What has driven the rise in Revenue Deficit? Fiscal Item BE 2017 (% of GDP) RE 2017(% of GDP) BE2018(% of GDP) Revenue Receipts 8.99 8.97 9.22 Tax Revenue 7.28 7.56 7.91 Non-Tax Revenue 1.71 1.41 1.31 Non-Debt Capital Receipts 0.50 0.70 0.50 Total Expenditure 12.74 13.21 13.04 Revenue Expenditure 10.9 11.58 11.44 Capital Expenditure 1.84 1.63 1.60 Source: Author’s calculations from Budget documents, 2018-19.
  6. 6. What has driven the rise in Revenue Deficit?  Total expenditure is higher than projected by 0.47% of GDP.  Revenue expenditure is higher by 0.68% of GDP and capital expenditure lower by 0.21 % of GDP.  Tax revenues are in fact 0.28% of GDP higher than projected in 2017 budget.  There has been a precipitous fall in non-tax revenue, compared to projections, of 0.3% of GDP.
  7. 7. What has driven the rise in Revenue Expenditure? Components RE2017 over BE2017 (in Rs. Crores) Revenue Expenditure (i+ii) 107,372(+) (i) Central Expenditure of which, 40,747(+) Establishment 31,528 (+) Central Sector Schemes 5,267(-) Other Central Expenditure 14,486 (+) (ii) Transfers of which, 66,624 (+) Central Sponsored Schemes 7,359 (+) Finance Commission Transfers 1,611 (-) Other Transfers 60,875 (+) Source: Author’s calculations from Budget documents, 2018-19.
  8. 8. Slippage is structural, not populist  Revenue expenditure is higher by 1.07 lakh crores.  The 60,000 crores extra spent on other transfers is equal to the GST compensation paid to the states and is an important driver of the slippage.  For the rest, establishment expenditure is significantly higher chiefly due to an increase in pension expenditure, and unanticipated increases in defence revenue expenditure and interest payments.  Thus increases in non-development revenue expenditures have driven the increase in the RD.
  9. 9. Revenue (% of GDP) 2017-18 RE 2018-19 BE Difference Gross Tax Revenue 11.59 12.13 0.54 Corporate Tax 3.35 3.32 -0.03 Taxes on Income 2.63 2.82 0.19 Customs 0.81 0.60 -0.21 Union Excise Duties 1.65 1.39 -0.26 Service Tax 0.47 0.0 -0.47 GST 2.64 3.97 1.33 States’ share in Taxes 4.0 4.21 0.21
  10. 10. Changes in Revenue structures 2017-18 RE over BE in Rs Crore Gross Tax Revenue 34,540 (+) Corporate Tax 25,000 (+) Customs 109,758 (-) Union Excise 129,905 (-) Service Tax 195,493 (-) Total indirect Taxes 435,156 (-) GST 444,631 (+)
  11. 11. Slippage is structural, not populist  2017-18 tax revenues are higher in the RE than in the BE.  It is non-tax revenue that has seen a short fall of 53000 crores, which is almost exactly equal to the slippage in the fiscal deficit/GDP ratio- largely on account of much lower dividends from public undertakings and the RBI.  The fiscal deficit would have been on target were it not have been the lower than projected non-tax revenues.  Getting 12 months of GST revenue instead of 11 would have been useful but is not a driver of the slippage.
  12. 12. Slippage is structural, not populist  Thus, stepping away from the noise and fury, it is clear that the fiscal slippage has not been due to electoral populism or the exigencies of transition to GST.  The slippage reflects structural weaknesses in the fisc, rather than any significant strategic or operational errors in budget formulation.
  13. 13. Outlook For 2018-19  PESSIMISTIC ! WHY?  Tax revenues are not projected to rise by very much.  Non-tax revenues are projected to fall even further and the reduction in fiscal deficit will require further expenditure compression.  The RD/FD ratio is projected to fall to 66 %, still much higher than the 59% targeted in 2017-18 reflecting continued fiscal stress as the government continues to borrow for recurrent expenditure rather than investment, and;  The share of interest payments continues to rise.
  14. 14. Key Takeaways  There has been a slippage in key macro-fiscal numbers which is worrying.  It is important to understand that this is not because of election-driven fiscal profligacy or poor budget formulation.  Stakeholders need to realise that the macro-fiscal situation is a serious one and important structural measures are required to get back on the path of fiscal reforms. “This is not something the Finance Minister can tackle without co- operation from other stakeholders- to increase non-tax revenue and control committed expenditure”.
  15. 15. Key Takeaways  The Finance Minister’s statement accepting the FRBM committee recommendations is welcome.  Some specifics regarding a hard budget constraint, like a medium-term budgeting framework, and;  The institution of a fiscal council would have been significant confidence building measures. I would urge that these commitments made soon, rather than waiting for the next budget.
  16. 16. THANK YOU

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