‘Prudent fiscal policy uplifts economy, reduces inequality’

LAHORE: Prudent fiscal policy according to an IMF study can not only lift economic growth but also reduce inequality when accompanied with structural reforms to boost employment, investment, human capital, and innovation.
The analysis of growth acceleration episodes in 112 countries confirms that average growth increased substantially during the decade following reforms and such accelerations occurred significantly more often when countries had implemented fiscal reforms. “We should review our fiscal policy in light of this report,” said senior economist Naveed Anwar Khan.
He said creating jobs is the most urgent need of the country, which can be done through fiscal policy measures. Citing the study, he said improving the design of social benefit programmes and active labour market programmes can strengthen work incentives and better assist job seekers.
He said targeted measures to support labour market participation of specific groups, such as women, youth, older workers, and low-skilled workers, are often important tools.
He said advanced economies subsidise the hiring of unemployed youth.
He said at least half of the Rs102 billion reserved for Benazir Income Support Programme should be used for subsidising the employment of youth by the private sector.
He said the IMF study states that investment is a key driver of growth, and tax policies, in particular, can influence private investment decisions. He said high corporate tax discourages investors. Although the government reduced the corporate tax rate by 1 percent this year; it is still 5-7 percent higher than its regional economies.
Moreover, he added other taxation measures like super tax and penalty tax for not paying dividends has deprived the corporate sector to accumulate reserves that could be used for further investment or balancing and modernisation.
Khan asked our financial planners to take cue from the IMF study.
“Though tax incentives are often used to attract investment, appropriate targeting is crucial to their effectiveness. Incentives that directly reduce the cost of capital (such as investment tax credits) must be favoured over open-ended and profit-based incentives (such as tax holidays),” he said.
Evidence shows that the latter erode the tax base and undermine revenue collection—without providing noticeable benefits for investment or growth. He said private investment; public investment in infrastructure can also yield significant returns and boost growth.
Economist Faisal Qamar said planners in Pakistan have always neglected its human capital, which is the main force that benefits all successful economies. He said fiscal policy should ensure that all citizens have equal opportunity to grow according to their full potential.
He said educational outcomes for poor in Pakistan tend to be much inferior to those achieved by richer segments of society. In fact, he added, the quality of education and health improves in our society according to the affluence; being best for the rich and worst for the poor. “This way we limit the opportunities for 10 percent of the population comprising rich and upper middle class,” he said, adding that the majority is deprived.
He said there should be provisions in the fiscal policy to improve access to healthcare and education for the poor. This, he added could be achieved by increasing investment in primary education, better healthcare facilities at grassroots level and reducing charges for the poor.
Qamar said prudent fiscal policy through transparent tax incentives could promote investment in new technologies.
There should be tax incentives for research and development that would promote innovation.
He said it is now established that productivity and growth increase with innovation.
Financial analyst Amina Usman said the resources needed for implementation of growth-friendly fiscal reforms should be generated in least harmful ways.
She said to increase revenues; emphasis should be on broadening tax base through equitable taxation on all incomes; eliminating exemptions, and improving tax administration.
She said expenditures could be reduced by cutting wasteful expenses without compromising the quality of public services and improving the efficiency. Subsidies, she added should target only the poor.
She said fiscal measures accompanied by complimentary reforms help in achieving the growth potential.
However, she added success depends on the stakeholders; if they are convinced to own the reform measures through in depth dialogue.
If the taxes collected are used to ensure equitable health and education outcomes, it would benefit the poor more, she added.