Govt advised to increase public spending

ISLAMABAD: Economists on Thursday advised the government to increase its development expenditures to boost the growth and create more jobs.
They said since the economy has achieved the stabilisation – a fact which is certified by the International Monetary Fund – the government should take the Fund into confidence to switch to the revival mode to achieve the GDP growth rate of five percent in 2015/16. The economists gathered under the auspices of the Institute for Policy Reforms (IPR) to discuss its proposed budget strategy papers for 2015-16.
The speakers said the government should bring tax-free budget, focusing on broad-basing the various taxes rather than raising tax rates and bring a quantum jump in the size of the public sector development program (PSDP) not only to create a large fiscal multiplier but also to enable the inclusion of China-Pakistan Economic Corridor projects with an access to large Chinese finance.
“Fiscal multiplier for development expenditures is large almost 2 in Pakistan, and ‘crowds in’ private investment because of better infrastructure,” said Dr Hafiz Pasha, managing director of IPR.
Senior Economist Dr Hafiz Pasha, Managing Director IPR, and former Finance Minister while giving the presentation said. Monetary policy should be more accommodative and should also remove the overvaluation of Pakistani rupee aimed at increasing competitiveness and restrict imports.
“The government should embark upon the path of revival, once the inflation is low, balance of payment position is positive and the reviews from the Fund and the rating agencies are positive,” Pasha added. The government’s focus on stabilisation under the IMF program comes at the cost of growth of the economy. Unemployment and poverty have both increased during the last six years.
Pasha, who has been finance minister, termed the fiscal consolidation in the last two years as draconian. Huge cuts in PSDPs made for meeting the budget deficit targets had suffocated the economy.
He said enhancing tax has remained counterproductive. “For God’s sake, tax rate increase should come after growth, as it cripples economic growth. Once the growth is achieved, you can increase tax,” he added.
Pointing at the loopholes in the tax collection, he said out of around 62,000 companies registered with the Securities and Exchange Commission of Pakistan, only about 24,000 are paying corporate tax and interestingly only 98 companies are contributing 70 percent of the total corporate taxes. About value-added tax (VAT), Pasha said input tax invoicing is more than output tax invoicing in the country. There is about three-fourth difference. One percentage point input is about Rs20 billion. “VAT works, if we have zero rating regime or have one rate.”
The focus should be on corporate taxpayers and not only on individuals. In Pakistan, the revenue cost of expenditures and concessions is about Rs600 billion. In the last 10 months, credit to private sector dropped 37 percent, as banks are investing in government papers. GDP growth for the fiscal 2014/15 will fall short of government’s target of 5.1 percent. The actual rate will likely be close to 4 percent. Growth in large-scale manufacturing was a paltry two percent for July-February 2014-15, as sugar, textile, fertiliser and other sectors are not doing well.
IPR said government must send a positive signal to the private sector by reducing the corporate tax rate from 33 to 30 percent. It also recommended Rs500 billion for the both federal and provincial PSDPs. The IPR recommended that the State Bank of Pakistan may cut the policy rate to seven percent and allow concessionary credit at five percent for exports. Government must limit borrowing from commercial banks to 2.5 percent of GDP and enable more diversion of credit to the private sector.
Economist Dr Ashfaq Hassan Khan said if we exclude more than 300 percent growth in steel the overall growth of the sector will leave to only 0.9 percent.