Given the hype that the government and opposition create days before the budget, some citizens start expecting a little too much from this exercise. They are often disappointed to learn when informed that the budget exercise may do well in keeping government operations running but will do little to create a dent in structural ills facing the socio-economy.
For the vast majority of population, budget also doesn’t result in higher levels of salaries and payoffs; minimum wages announced are rarely enforced; given the vested interests involved in negotiations (within the coalition government) there is little potential of reduction in medium-term budget deficits, due to which budget’s impact on inflation is also marginal. Budget is also not the answer to missing structural reforms in public finance management, energy and state-owned enterprises.
It is due to these reasons that fiscal policy should be viewed not just as a one-off budget presentation but a strategic opportunity to put the country on the path to economic recovery, growth, productivity and job creation. I do see a couple of good beginnings. For example, GDP growth of 3.9 percent amid Covid-19 is good news for all stakeholders.
One still has to see how sustainable this growth will be as in the past whenever we had growth spurts, Pakistan landed into either a current account predicament or higher fiscal deficits. One is also not sure about the future waves of Covid-19 and how these will bring back micro lockdowns, in turn negatively affecting production in several sectors.
Second, I see hope in the way things have taken shape on the tax front. The Federal Board of Revenue (FBR) was able to collect Rs 4.2 trillion during the period between July 2020 to May 2021. This exceeds the target of Rs 3.9 trillion and represents 17 percent growth over the same period last year.
More needs to be done now to reduce compliance costs faced by genuine taxpayers and narrow the trust deficit with corporate taxpayers and wholesale and retail sectors. Ultimately, we need to understand that a modern tax system is one of the pre-requisites to sustainably finance human development and infrastructure across the country.
Third, I believe that after a very long-time consideration of environment, food security, and climate change have factored in our economic discourse. It is only now that we see our Finance Division and Planning Commission taking ownership of climate change adaption and protecting budget allocations towards this.
The positive spillovers of going this path can be enormous. These developments have given rise to innovative financing of clean energy, including the launch of green bonds. We are also noticing how tree plantation drives and reversing land degradation in several provinces, and particularly Khyber Pakhtunkhwa over the past few years, has led to the revival of several economic activities, including tourism and benefited local communities.
Among other bright spots in the economic performance, the government can also take credit of growth in digital sector businesses, e-commerce, and integrating Pakistani sellers with international platforms like Amazon. The policies for the construction sector, and most notably Naya Pakistan Housing Scheme, are also starting to bear fruit with allied industries showing an uptick in turnover. This has also been fuelled by facilitation provided to diaspora now sending record high inflows.
Going forward, government’s key test would be to negotiate some fiscal space with the International Monetary Fund (IMF), to ultimately use resources for sustaining above 4.5 percent GDP growth in the next fiscal year. This is going to be an uphill task. Any revenue target beyond Rs 5.5 trillion will require significant fiscal effort and a political resolve to go after those involved in tax evasion and avoidance.
A failure to put brakes on our borrowing needs will result in great injustice to our future generations whom we will leave extra burdened with inflation, higher needs for revenue collection and even higher borrowing requirements.
We also note that this year’s target was met by higher reliance on indirect taxes that are regressive in nature and hurt the poorest of the poor segments. Gradually, efforts need to be geared towards improving collection of progressive and direct taxes which will shift the burden of taxation to higher income groups.
The Finance Division will also need to exercise care with regard to the quality of economic growth. If growth gives rise to non-essential imports then, coupled with high expected oil and commodity prices, this could result in balance of payments difficulties and jeopardise the nascent economic recovery.
The role of provincial governments remains critical to Pakistan’s fiscal consolidation.
Having seven different tax regimes in the country and provincial levels really means that a fragmented tax system is leading to higher costs for genuine taxpayers. Possibly, the government is also losing revenue because of this fragmentation. The lack of a unified tax return system implies that taxes are being filed separately with federal, provincial and local administrations. This leads to a high cost of doing business.
The long-pending agenda of tax harmonisation is awaiting the attention of the Council of Common Interests. Provinces have struggled to tap into large income segments in agriculture, property, transport and services sectors. If it is politically not feasible for the provinces to tax their agriculture incomes or large land lords, the function may be given to the FBR which could collect and transfer the revenue to provinces.
The drive towards greater documentation of the economy also needs care. Only smart documentation should be considered. Complex filing requirements could end up stifling the growth of startups and freelancers seen in several dynamic sectors, including IT and digital products and services. These sectors are just starting to see growth and integration with global value chains.
Greater efficiency in public spending is the need of the hour. The Public Finance Management law was a step in the right direction. However, its understanding and implementation by line ministries remains slow. With interest payments and liabilities as high as 40 percent of the overall federal spending, little is left for financing growth and productivity ambitions of the government. In near future, most social protection schemes, including Ehsaas, Kamyab Jawan, and pensions expenditures may have to be financed by raising more debt.
A recent report by the Economic Advisory Council suggests that rationalisation in government expenditures is possible to the tune of Rs 300 billion annually if steps to reduce the size of the government are taken on priority. A moratorium may be introduced on development projects and no new politically motivated or ‘look good’ projects should be added to the Public Sector Development Programme (PSDP) until the time existing ones are completed or shut down to make room for new initiatives.
The pandemic is going to leave us with unprecedented levels of debt. We, therefore, need a more promising debt management strategy. A failure to put brakes on our borrowing needs will result in great injustice to our future generations whom we will leave extra burdened with inflation, higher needs for revenue collection, and even higher borrowing requirements. The public debt to GDP ratio of around 94 percent could easily climb up in the event of future depreciation in the value of rupee. Last but not the least, diplomatic efforts to obtain debt relief, including waivers or reprofiling of future repayments should be a priority of the current and future governments.
This article was originally published at: https://www.thenews.com.pk/tns/detail/848572-what-the-budget-may-not-deliver
The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.