Budget 2011-12: Hard measures to curtail inflation
May 27, 2011
The State Bank of Pakistan while urging on more fiscal measures to keep inflation under check announced on Friday last to retain interest rates at 14%, one of the highest in the world, and will revise the same after seeing the effects of the budgetary measures on the inflationary trends. The major issue is government spending and its inability to keep prices of kitchen items under check.
A day after, Dr. Hafeez Shaik, the federal finance minister, appeared in Karachi, to tell the media that his government is going to take harsh measures but will try to save the skin of the poor in its effort to stabilize the economy. Among these include extending the tax net to .7 million people who have resources but don’t pay their share to the national kitty. During this public exposure he also disclosed that the budget would be presented in the first week of June not on July 28. What a relief for the poor segment of population he has in mind is that they will not be further taxed.
Dr. Hafeez Shaikh has negotiated with the IMF to release its sixth tranche of $1.7 billion out of $11.3 billion standby arrangement program, which was stopped due to non-implementation of certain measures which the bank had suggested.
The major hurdle in the release of delayed tranche was the country’s inability to enforce Reformed General Sales Tax (RGST) which the opposition as well as some of its urban-based allies was resisting. This step has been held back, as per the understanding reached between Pakistan and IMF against the promise of keeping fiscal deficit around 4% and inflation 13%.
The President on Tuesday last promulgated three ordinances and issued a sales tax executive order, to levy new taxes worth Rs53 billion including flood surcharge (15%) on existing payable taxes, increase in special excise duty (SED) and imposition of a 17 per cent sales tax on the sale of tractors.
The RGST would have been levied at 15% have been delayed and the sales tax will continue to be levied at 17%. The withdrawal of exemptions and zero-ratings will bring additional revenue of Rs 90 billion. So while the coming budget will probably not hurt the businessman, the burden will once again be borne by the ordinary consumer, as the end of exemptions cause a fresh round of inflation in addition to that caused by the hike in international oil prices.
The Annual Plan Coordination Committee (APCC) announced on May 13 grimly declared that the country has missed the GDP growth target of 4.5% this year but only by the margin of 0.2%. The next years target can’t be enhanced further. Flood and non-implementation of reforms have been described as the major causes for such a miss. It was also made public that around 171 projects, which had already consumed 30% of the funds, have been shelved for indefinite period.
Dr. Sheikh joined the government as the advisor to the PM on finance was elevated to the position of the Senator to qualify for the ministerial slot. His major preoccupation has been to arrange a breathing space for the government which has set war on terror as its top priority and has to win over political parties through ministerial slots and tax reliefs, has to rely on foreign loans to bridge the mounting fiscal deficit. The US has pumped into Pakistan $14.5 billion since 2005 but is now emphatic on accountability vis-à-vis spending the money. The IMF is concerned about subsidies, if not on government spending.
Though the salaries of the government employees are not going to be raised, but no such a hint has been given clearly about defense expenditure. The government is not interested in the world-wide trend of undertaking the austerity measures whereby the non-development expenditures are slashed to curtain inflation and strengthening the purchasing power of the people. Irony is that neither non-development expenditure is cut but also no way out has been brought forth to dispose off the public run enterprises running in loss.
The upcoming budget is not going to be people-friendly, for sure. The issue is not levying taxes on the lower and middle income groups further but to lighten their burden as they constitute the major source of the government revenue. Too, there is no guarantee that the well offs which are going to be taxed now will not pass the same to the poor. Unlike the past, the upcoming budget will not be pro-business as well, energy crisis will not let anyone grow and prosper.
The taxation policy will keep the downtrodden and well-off on the same page. Those who are being increasingly pushed down the poverty line can feel the pinch of equality and take pride in having a democratic government as well. Time has not probably come to break the myth that taxing the rich less urges them to invest and create job opportunities for the poor.
In a country where 7 million children are unable to attend schools and 70% of the population doesn’t have access to clean drinking water, the cost of governance is Rs. 500 billion. Another Rs 400 billion is suck by the state-owned-enterprises like PIA, Pepco, Pakistan Railways and Pakistan Steel Mills.
No serious efforts have been taken to strengthen domestic market and enhancing the purchasing power of the people as means to attract foreign direct investment. Only tourism sector has the potential to foot the entire cost of governance given the fact that Pakistan has monuments and shrines which are highly sacred to Hindu, Sikh and Buddhist communities of India, China and Southeast Asia.
Taxing the kitchen items and energy constitutes offence at a time when pushing more people under poverty line can create the problem of law and order. Crime rate will go higher and the incidents of violence call it terrorism, will increase. Poor governance, which is the case right now, is the mother of all evils. The situation can be reverted for the good only through devolution of power and spending more on education, health and environment.
Taxing the kitchen items and energy is offense at a time when pushing more people under poverty line can threaten peace and stability. Crime rate will go higher and the incidents of violence — call it terrorism — will increase. Poor governance, which is the case right now, is the mother of all evils. The situation can be reverted for the good only through devolution of power and spending more on education, health and environment.
The taxation policy will keep the downtrodden and well-off on the same page. Those who are being increasingly pushed down the poverty line can feel the pinch of equality and take pride in having a democratic government.