The mini-budget

The ‘mini budget’ declared by the PTI as the tonic our moribund economy needs to get it kick-started ended up being less of a budget and more a series of policy changes that will excite the business community. Facing hostile opposition benches, on Wednesday Finance Minister Asad Umar delivered a fiery speech high on polemics, which put the blame for Pakistan’s economic woes on the Sharif and Zardari governments that preceded the PTI terms. At a time when austerity is the keyword of the day, the policies announced by Umar are sure to reduce government revenue and increase the budget deficit. Taxes on corporate income and capital gains have been significantly reduced while the withholding tax on banking transactions has been removed for those who file their income tax returns.

The thinking behind reducing capital gains taxes is that it will spur activity in the stock market and arrest the rapid decline it has experienced since the PTI government took power. That may well be true but turning off another revenue source for the government may not be the wisest decision when we are facing a debt crisis. The government has not reduced its revenue projections for the year or revised the fiscal debt target. It claims that removing the ban on purchase of 1300 cc cars and above by non-filers as well as increasing duties on imported luxury items will make up for any loss in revenue caused by the tax decreases. This is wishful thinking that assumes that demand for luxury items will be inelastic. More likely than not, revenue projections will once again have to be revised downward at a later date.

To the extent that the PTI has an economic ideology, it is that distributing goodies to the business community will spur rapid economic growth. This is essentially a continuation of the policies of previous governments. In fact, much of the policies that Umar announced reminded one of the now discredited consumer debt-led economic boom in the Musharraf-Shaukat Aziz period. Whatever small increase tax breaks spur in the short run rarely end up being lasting. It has also been shown time and again in every country where such policies have been implemented that the benefits are limited to the rich and rarely trickle down to the rest of the population. Already the government has slashed development budgets in the name of austerity and more cuts are likely to follow because of this mini-budget.

What was most dispiriting about the budget speech is that it lacked any larger vision. No lasting reforms were announced, nor any plans to reduce Pakistan’s debt or any explanation for how the government plans on cracking down on tax dodging. As such, it was an opportunity wasted for a government that has shown little aptitude for taking on systemic problems in the economic during its six months in power.