A flawed fiscal policy

May 23,2018

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The financial year 2018-19 began with an unprecedented move when an unelected finance minister presented the incumbent government’s sixth full-year budget in a five-year term.

Other than the apparent scorn of democratic principles reflected in the presenting of the budget in the National Assembly, there are deeper political dilemmas that the country’s fiscal policy paradigm reflects and which the 58 percent of Pakistan’s people struggle to decode.

In established democracies around the globe fiscal policy or ‘budget’ acts as a sluice for translating an elected government’s vision or manifesto into monetary terms via pragmatic policies for expenditure, planning and taxation. Perhaps, it is useful to quote an apt remark from a recent interview of the former secretary general of the UN Kofi Annan with The Washington Post: “the developing world is an easy target for populists”. For Pakistan, the notion remains an established fact.

Consider the budget preparation process. Rather than paying attention to the underlying modus operandi that guides the budgeting process, the focus of the government seems to have remained on populist measures throughout its tenure. In Pakistan, the medium-term budget framework (MTBF) guides the preparation of the federal budget. Ironically, the MTBF has no link with any underlying economic rationale that could connect the channelling of funds to underdeveloped areas with socioeconomic needs. Hence, the system in essence is devoid of a nexus between need and spending.

Consequently, the focus of the fiscal paradigm on exorbitant metros, trains and infrastructure projects shouldn’t be taken as a surprise in a country which according to the World Economic Forum’s Global Competitiveness Report 2017-18 ranks 129th out of 137 economies and lowest in South Asia in terms of health and primary education. One wonders what makes us worse than Zimbabwe, Ghana and Sierra Leone in terms of health and education and why is our fiscal policy unable to address these areas?

In tandem with a variety of factors, inequality spurring government spending and taxation policies under a futile mechanism of allocations, oversight and monitoring have alienated the fiscal paradigm. In lieu of being a public utility tool, the fiscal policy announcement every year eventually ends up multiplying the penury of the common man.

For FY 2018-19, the government has forecast collection of revenues to the tune of Rs5.8 trillion. A substantial 64.6 percent of these tax collections are to be indirect, having no direct connection with the level of income. Notably, within the indirect taxes’ pool lie the 76.47 percent increase in the petroleum levy, which will have an inflationary effect as well, and 567 percent increase in the Gas Infrastructure Development Cess. Moreover, the finance minister has also proposed a 30 percent increase in cooking oil import duty –a commodity of day-to-day use of the poor. It is rather astounding to note that Pakistan’s direct tax-to-GDP ratio during the last decade has declined from 1.8 percent to 1.3 percent, whereas the ratio of indirect tax-to-GDP has increased from 8.5 percent to 10.3 percent.

To put things into perspective, the predominant source of Pakistan’s tax revenues are the poor and downtrodden who will continue to pay 64.6 percent of the tax burden this year as well, while the tax share of the rich in the country’s revenue pool will continue to follow the downward trajectory.

On the administrative side of tax collections, it is unfortunate that in terms of the efficacy of taxation systems, Pakistan, which globally ranked 156th last year, now ranks 172nd – only four places ahead of war-torn Afghanistan – according to PwC and World Bank’s Paying Taxes Report 2018. With the taxation system having deteriorated and a collection appetite that clearly benefits the rich, would it be wrong to say that under the PML-N government the country’s taxation paradigm has become plutocratic and inefficient?

So after having collected the majority of taxes from the poor, one tends to think where the government is spending it. The latest budget estimate says that after paying 30 percent of the total taxes as their provincial share, 25 percent will be paid off in debt-servicing, 13 percent in development expenditure and defence each, while 12, 5 and two percent will be allocated for the federal government’s expenses, grants and transfers, and subsidies respectively. With debt-servicing consuming the major proportion, it is interesting to note that the PML-N government has added $33 billion to external debt during its tenure, which is almost twice ($17 billion) the debt acquired during the PPP’s tenure. The party was heavily criticised for its economic policies. In terms of domestic debt, Rs12 trillion have been added to the debt portfolio by the government; the highest addition to the national debt by a government in Pakistan’s history.

Nonetheless, the more alarming facet of the budget is the fiscal deficit, as critical line items from the expenditure side seem to be missing. The budget presented in the National Assembly makes no mention of the approximately Rs1 trillion circular debt of the power sector. The budget also does not account for the debt of public-sector enterprises, backed by the sovereign guarantee of the government of Pakistan, which has soared up to Rs1.2 trillion as compared to Rs400 billion in the PPP’s tenure. In addition, the balance sheets of export-oriented sectors have substantial amounts booked as payables by the government in terms of refunds and rebates, but the budget paper makes no mention of it. If all of this is added to the budget, we will have a picture of a horrendous fiscal deficit haunting our economy.

In a nutshell, the government’s taxation policies are a reflection of plutocracy and social injustice.

The writer is a chartered accountant.

Email: shahzadtahirkgmail.com

Twitter: Shahzad_91


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