Economy
 
The Federal Budget 2012-13 and the Way Forward
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June 01, 2012
The federal budget 2012-13 is around the corner. It is going to be a test case for the present government that is going to present last budget of its current term as to what measures it will take in the budget to steer the economy out of troubled waters. The current state of the economy is very disappointing as all the components of the economy are showing very slow growth trend. This is evident from the fact that Pakistan’s economic growth slowed to an average of three percent per annum over the last five years. Our two immediate neighbors, China and India, have shown impressive economic growth and are forecasted to emerge as strong economies of the world in near future.

However, Pakistan’s economy is on a declining trajectory and is plagued with various problems like rising fiscal deficit, persisting double digit inflation, macroeconomic and political instability, energy shortages, security problems, declining domestic and foreign investment, shrinking capacity to create jobs, mounting public debt burden reaching Rs.13 trillion, emerging debt payment crisis, depreciating exchange rates, exorbitant interest rates and reducing confidence of the private sector in economic management etc.

We should not forget that Pakistan’s total stock of public debt in June 2008 stood at Rs6.0 trillion, while the present government has doubled it in just a brief period of four years. This rising public debt would increase the burden of interest payments, particularly, at a time when our currency is on a depreciating spree, thus leaving little resources for education, health and physical infrastructure.

Pakistan has to repay $ 7.8 billion to the IMF in less than three years, while the country is running annual current account deficit of around $5 billion, putting lot of pressure on foreign reserves. Pakistan’s foreign reserves, after touching the highest figure of $18 billion few months ago, have now come down to $ 11.8 billion.

Despite hefty increase in support prices of various agricultural commodities, agriculture growth averaged 2.2 percent per annum, large scale manufacturing grew by 0.7 percent on average and services sector registered a growth of 3.8 percent per annum. With such slow growth, the economy is unable to create more jobs, increasing unemployment and poverty in the country.

Will the government be able to address these big economic challenges in the forthcoming budget? The general perception is that the budget 2012-13 will be a politically-motivated budget focusing on winning the next elections, and the government might resort to taking populist measures in the budget which would entail reckless spending.

The prime minister has also announced that the last budget of his government would aim at creating 100,000 jobs. Already, the hefty raise given by this government to the salaries of federal employees in last two budgets is costing the economy dearly, and one wonders how the economy would afford creating more jobs at a time when financial resources of the country are shrinking.

However, it would be wise that instead of taking measures which may aggravate damage to the economy, the government should put in place a mechanism that leads the economy towards a direction of resuming growth and improving the living standard of majority of people. The one best approach to improve the economy is to improve the taxation system of the country to increase tax revenue.

Over the years, different governments have taken a number of initiatives to improve tax collection, but unfortunately these initiatives have failed to address the basic problems of our tax system which is marred by many flaws due to which we currently have one of the lowest tax-to-GDP ratios in the world. Our tax system burdens the poor more and does not help in distributing the resources amongst various segments of society as per their paying capacity. The end result is that low tax to GDP ratio has always been a problem for economic development and major cause of high budget deficits in Pakistan.

The major flaw of our tax system is that more than 60 percent tax revenue is collected through indirect taxes such as sales tax, excise & customs duties and withholding tax, which is totally against a progressive tax regime and is almost totally opposite the trend in developed world where direct taxes have a greater share. Moreover, our tax policy is very discriminatory against different sectors of the economy. For example, agriculture constitutes about 20 per cent of GDP, but its contribution to tax revenue is less than one per cent. Similarly services sector contributes about 53 percent to GDP, but its share in tax revenue is far below its true potential. Given the shortfall in agriculture and services, industry carries the major tax burden and contributes more than 60 percent to tax revenue while its contribution to GDP is less than 26 percent.

These are the major problems that are holding Pakistan back from making fast economic progress. However, following measures, if taken in next budget and implemented sincerely, can help the country move on the road to better growth:

• A fair tax system should be developed to collect tax from all sectors of economy as per their paying capacity, and all tax exemptions should be removed to end discrimination.

• The taxation system should be made fair and stable that should have minimal compliance burden.

• Special measures should be taken on a war-footing basis for broadening the tax base instead of taxing the already burdened taxpayers.

• Sales tax & other taxes should be rationalized, which will help in documenting economy, broadening tax base and increasing tax revenue.

• Tax collection system should be completely automated to minimize direct interaction between taxpayers and FBR officials. It will also help in reducing the element of harassment and eventually corruption being the major handles in revenue shortfall.

• Government should introduce Privilege Cards Scheme like platinum, gold & silver cards for high taxpayers, and such card holders should be given preferential treatment at airports, hotels, banks and other places to give them recognition. It will also motivate others to pay tax and get recognized.

• Government should upload the details of all non-development and development expenditures, except for defense sector, on the websites of Finance Ministry and other relevant organizations to bring transparency in public sector expenditure. It will enable people to know how the taxpayers’ money is being utilized.

• FBR should arrange on its website the segment-wise monthly, quarterly and annual tax collection details for the information of taxpayers and other interested stakeholders.

• Professional Tax Policy Wings should be established in FBR, SBP, Finance Ministry and Planning Commission to develop and announce long-term tax targets.

• Efforts should be made to increase direct tax collection and gradual decrease in all presumptive taxes to promote a progressive tax regime.

• All bank account holders with Rs.1 million plus deposits in banks should be made to file returns.

• Special tax courts should be established to settle all tax disputes speedily with special benches at the High Court and Supreme Court.

• Government should eliminate the culture of under invoicing and SROs in the larger interest of economy.

• Petroleum levy should be abolished to provide relief to industry and the common man.

• SBP should further reduce discount rate to provide easy credit facility to businessmen and promote industry, which will help in improving tax revenue.

• After the 18th Amendment, the Federal Government has been left with only 30-35 percent of divisible pool that also has to cater debt servicing, defense, federal PSDP and many other expenses. Therefore, the new budget should put responsibility on the provinces for more revenue generation while federal government should reduce its expenditure and restructure all loss making public sector organizations to make them profitable.

• Instead of making budget preparation process an accounting exercise, government should make budget a planning framework for socio-economic development of the country.

• The country has no debt sustainability strategy and over 30 percent of current account expenditure is spent on interest payments. The government should move toward targeted subsidies to provide real benefit of these subsidies to poor people.

So going forward, the government, instead of borrowing further, should try to pay off some part of both internal and external debt, improve tax collections, resolve power crisis to put the industrial sector back on track, adopt austerity measures and focus more on improving the supply side indicators of the economy. If the governance is improved and management is done on professional lines, our economy has the potential to bounce back to become one of the rising economies of South Asia.


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