Every year, the finance minister undergoes the hassle of incessantly orating for around two hours when he presents the fiscal policy in parliament. However, the exercise fails to inspire the chair’s fellow parliamentarians. They either thump the treasury desks or tear copies of the budget.
The fiscal policy is a sluice to translate the vision of an incumbent government into monetary terms and achieve strong and sustainable growth through expenditure planning and taxation policies. To the hoi polloi in Pakistan, the fiscal policy or the ‘budget’ is a valueless exercise owing to the popular perception that it brings no discourse to their penuries.
The interpretation of the budget every year widely hovers around the number trends. Negligible attention is paid to the underlying mechanisms of tax revenues and expenditures that hamper the delivery of its utility to the people.
In Pakistan, the medium-term budgetary framework (MTBF) governs the preparation of the budget process. Ironically, under the MTBF, the budgetary allocations have no link with an underlying economic rationale. As a result, a mechanism that links and prioritises the socioeconomic needs of the country with budgetary allocations is lacking.
Consequently, the focus of the fiscal paradigm towards extortionate metros and huge infrastructure projects shouldn’t be taken as a surprise in a country which, as per the World Economic Forum’s Global Competitiveness Report 2016-2017, ranks the lowest in South Asia in terms of health, primary education, labour, goods market efficiency and financial market development and, according to the Asian Development Bank’s statistics, has an estimated 29.5 percent of its population living below the poverty line.
Following the budgetary allocations, the modus operandi for the validation of the allocations rests with the Office of the Auditor-General of Pakistan under the aegis of the Public Accounts Committee. The setup remains inefficacious in its role in public service delivery. This is mainly because the AGP Office’s lacks the capacity and its auditing methodologies fall short of the standards of best practices. Furthermore, the validation of projects is limited to expense verifications as there is no mechanism to gauge the project’s envisioned socioeconomic impact post factum. This weak mechanism of oversight and accountability over budgetary expenditure explains Pakistan’s 116th ranking out of 176 countries in 2016 – as per the Annual Corruption Perceptions Index of Transparency International.
With a deficit of Rs2,053 billion equating to 3.9 percent of the GDP, the idea of incorporating risk management in the fiscal policy as a tool to narrow down the fiscal deficit seldom seems to have crossed the minds of our lawmakers. A study released by the IMF in June 2016 – titled ‘Analyzing and Managing Fiscal Risks - Best Practices’ – underscores the need to incorporate ‘risk management’ in fiscal policy development and enable a comprehensive understanding of potential risks. This results in the development of mitigation strategies to achieve macroeconomic stability and efficient public service delivery.
Adopting risk management practices can help us achieve focused results to avoid unplanned increases in project costs. The practice is notably in place in Australia, South Africa, New Zealand, the US and the UK. For instance, the UK has established a fiscal risk group within the HM Treasury to identify and monitor fiscal risks. It produces a dashboard of fiscal risks, with estimates of total exposure and rankings using the traffic light system.
Pakistan’s budget deficit is equally attributable to the mechanics on the revenue side. Tax revenue as a percentage of the GDP ranks low among both the comparable emerging economies and regional economies. According to the World Bank’s datasets, Pakistan ranked 6th among eight South Asian economies. It is only ahead of Bangladesh and Afghanistan in terms of average tax revenue as a percentage of the GDP for the period between 2011 and 2015.
The ranking could partly be explained by an IMF working paper released in August 2016, titled ‘Unlocking Pakistan’s Revenue Potential’. It states: “Pakistan’s tax capacity is estimated to be 22.3 percent of [the] GDP, which implies a tax revenue gap of 10 percent of [the] GDP as of 2016. Even though Pakistan’s estimated tax effort improved from 0.43 in 2011 to 0.56 in 2016, Pakistan is still significantly below the average of comparator countries (0.64) and high income countries (0.76)”. In simple terms, the above statement suggests that Pakistan collects significantly less tax than its potential.
Pakistan’s agriculture sector contributes 19.5 percent of the GDP and, as per the Economic Survey 2016-17, employs 42.3 percent of the labour workforce. Following the 18th Amendment, the taxing authority over this rests with the provincial governments, which needs attention to improve capacity-building and secure incentives for local revenue mobilisation to tax the sector to its full potential.
On the administrative side of taxation mechanisms, Pakistan ranks at the 156th position globally on the overall paying taxes ranking as per PwC and World Bank’s ‘Paying Taxes – 2017’ report. The ranking is based on four indicators: the total tax rate; the time to pay the three main taxes; the number of tax payments; and the post-filing index.
When analysed with the objective of creating an equitable society, Pakistan’s taxation system appears heavily skewed towards indirect and non-income based taxes which comprise about 63.2 percent of tax revenues.
The failure to document all assets and businesses by the government, the declared value of immovable property being significantly less than market value, the lack of incentives by the government for the corporatisation of businesses, the non-existence of an authority to resolve inter-provincial tax disputes post the 18th Amendment and the lack of unison between the capacity of the FBR and the tax potential of the country add to impediments of the tax collection.
Would it be unfair to conclude that the fiscal policy for 2017-2018 has failed to redress the structural issues on the revenue and expenditure sides and ultimately hampers the delivery of utility to the people? I’ll leave this for the readers to decide.
The writer is a chartered accountant.