The tax:GDP ratio of the government exceeded budgetary estimates and improved to 12.5% compared with the earlier projection of 11.8% in 2007-08, largely driven by a revenue-led fiscal consolidation strategy. Union Budget 2008-09 has, therefore, estimated an even higher tax:GDP ratio of 13% in 2008-09, according the Medium-Term Fiscal Policy Statement, released by finance minister P Chidambaram here on Friday .
Fiscal 2007-08 was the fourth year of fiscal correction in the economy being guided by the Fiscal Responsibility and Budget Management Act, 2003 (FRBM). However, while announcing that the economy had entered into a ?positive loop of high growth and high tax receipts,? the finance minister said some areas of concern for fiscal correction still remained.
The target for zero revenue deficit has been deferred by one more year. The budget estimates for revenue deficit in 2008-09 have been set at at 1.0% of GDP. In his Budget speech, Chidambaram declared that he ?will meet the target of annual reduction of 0.5%.? The deferment was ?entirely acceptable,? as there had been a ?conscious shift in expenditure? in favour of the social sector, he added. Budget 2008-09 has proposed a hike in spending on education by 20% and health by 15%. In addition, the expenditure on women and child welfare has been raised by 24%.
Stating that the government?s improved fiscal performance had removed initial apprehensions about the mandated goals set by the FRBM Act, the policy statement said the revenue deficit target would require to be rescheduled and is ?sought to be balanced by containment of other non-Plan expenditure,? like interest payments, salaries, pensions, defence etc. For both revenue and fiscal deficit, the FRBM Act roadmap has set an annual reduction of at least 0.5 percentage points and 0.3 percentage points, respectively. However, the mandate is to completely eliminate revenue deficit and bring fiscal deficit down to not more than 3% of GDP by March 31, 2009.
However, in his Budget speech, the finance minister admitted that both the fiscal and deficit were ?understated? as significant liabilities of the government like oil, food and fertiliser bonds had not been included.
?This accounting arrangement is consistent with past practice. Nevertheless, our fiscal and revenue deficits are understated to that extent. There is need to bring these liabilities into our fiscal accounting?, he said.
All eyes, therefore, are now on the Sixth Pay Commission, which is slated to present its report by March 31, 2008. The 13th Finance Commission, too, may be asked to revisit the roadmap for fiscal adjustment once the pay commission report is final. The reduction in revenue deficit was mainly facilitated by the high growth in revenue receipts at 25.5%, relative to growth in revenue expenditure which has been pegged at 18.0% over that of BE 2007-08.
The rise in revenue receipts has been attributed mainly to tax buoyancy. The share of taxes in the Centre?s revenue receipt basket is projected to increase from 83% in BE 2007-08 to 84.1% in BE 2008-09. The many reasons for the ?better than budgeted? performance of tax revenue are like broadening of the tax base, wider service tax net, rationalisation of exemptions and wide-ranging changes in tax administration. However, the policy statement said these reforms would have to be taken further to sustain the momentum in tax collections and expand the coverage to agriculture and the services sectors.