Election year concession to cost economy dearly

LAHORE: The budgetary concession to the employed urban middle class was the masterstroke of this government in this critical election year, but whether it would pay off is another story.

The minimum taxable income has been raised from Rs400,000 to Rs1200000, which is unprecedented in the history of the country. The concession is meant for the most educated and influential working middle class of the country.

Besides bureaucrats, teachers, engineers, young doctors and junior executives in private sector would benefit from this concession. The cost of this concession to the exchequer is above Rs100 billion. The timing of the announcement coincided with the last 45 days of this government. It’s hard to say with certainty if it would impact the election results. The last Pakistan People’s Party (PPP) government increased the minimum support price of wheat from Rs900 to Rs1300/37.5 kg. This was done to please the rural farming community.

It did increase the wheat area but the support price was much higher than the global wheat rates, and the surplus wheat cannot be exported without government subsidy. The pro-farmer policies of the last government however did not pay off as it lost the elections by huge margin.

One reason was that wheat being the staple food of the country impacted entire population. This led to high food inflation that was complemented by higher global crude oil rates. The urban poor were devastated and non-farm rural poor were also hit by the inflation.

Never in its five years tenure did the present regime increase the support price of wheat, which despite devaluation of rupee is still higher than global wheat rates. This stability in wheat rates was complimented by low crude oil rates to keep average inflation during last five years at 4 percent.

The low inflationary pressures did not hurt the consumers with the same severity they experienced during the last tenure of the PPP. This regime made sure the inflation remains in acceptable range throughout its stint.

The last two regimes left it to the caretaker governments to take hard decisions like increasing the petroleum products rates that they kept stable in the last year of election. Both the governments also relaxed their control on commodity hoarders. This resulted in higher inflation during interim governments but the blame was pinned on the outgoing government.

The present regime has been continuously increasing the petroleum products rates and the wheat availability is abundant. The caretaker setup would not be able to influence inflation during its two-month tenure. The impact of higher petroleum rates and rupee devaluation has already been factored in the inflation. The impact of tax concessions would be felt by the next regime.

Going forward it would be an uphill task for the next government to control inflation and plug the revenue gap created by these concessions. The only way to increase revenue is to challenge the elite class and plug revenue leaks.

Only a government that gets absolute majority in the next elections would muster the courage to challenge the influentials. In case of a hung parliament there would be more compromises and accommodations. Given the circumstances the chances of a single party’s forming a majority government are next to nil.