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Monday December 06, 2021

Cleaning up the budget

June 18, 2020

The writer is a former adviser to the World Bank.

Pakistan’s corona-related ‘lives and livelihood’ crisis is grave. One was hoping that the prime minister would make a clarion call, during the budget session, to all citizens, political parties and organs of state – similar to what President Kennedy made during his inaugural address.

As a bold leader, Kennedy pivoted his address on the following: (i) “Ask not what your country can do for you, ask what you can do for your country. Ask not what America will do for you, but what together we can do for our people”; (ii) “United, there is little we cannot do. Divided, there is little we can do”; (iii) “And if a beachhead of cooperation may push back the jungle of suspicion, let all sides join in creating a new endeavor”.

Disappointingly, the PM neither displayed the leadership nor the boldness to pull Pakistan out of the crisis. Because of the PM’s disdain for parliament and his misplaced combativeness towards other political parties, his government has missed an historic opportunity to establish a Naya Pakistan.

One was also hoping that the PM would personally highlight the stark reality that the federal government is almost entirely living off borrowed money. Thus in FY19-20, federal revenues were Rs5.5 trillion. After transferring Rs2.4 trillion to provinces and paying Rs2 trillion for debt service, the federal government was left with only Rs200 billion. Its expenses (excluding debt service) during the year were Rs4 trillion.

So for every Rs100 spent on legislature and legislators, military or higher judiciary, four dozen ministries, subsidies and SOE losses, Rs95 was borrowed domestically or externally. Most in government – from the highest to the lowest, from legislators to judges, from generals to secretaries, are oblivious to the fact that 95 percent of their salary is paid by loans.

The absence of the ‘deep hole’ narrative was compounded by a deeply flawed budget – comprising bad taxes and wasteful expenses – and the PM’s misplaced global crusade that we are a poor country. As a middle income nuclear nation with ballistic missiles, the PM continued to portray Pakistan as a sub-Saharan African country while begging for debt relief. There is no doubt that budget-making was going to be a very challenging exercise during times of deep crisis and huge uncertainty, but the PM and his economic team fell far short of the mark.

The proposed budget is very much a business-as-usual budget. It fails to adequately address the key challenges facing Pakistan: (i) a medical crisis getting out of hand; (ii) a livelihood crisis and a sinking economy, because of the medical crisis and global recession; and (iii) public debt of close to 100 percent of GDP and fiscal deficit of close to 10 percent of GDP. Intriguingly, the budget speech was silent on ‘on-ground’ implementation of the relief package for daily wagers, factory workers, and SMEs.

When an economy is sinking, an increase in taxation will further depress it. This is what the additional Rs1 trillion of taxes will do. Any increase in taxes, whether from old or new taxes, is a burden on business. When businesses have been closed for months, and the future is so uncertain, imposing an additional burden of Rs1 trillion is a terrible policy. This additional taxation must be taken back to revive the economy. It is also clear to everyone, other than the economic team and the IMF, that generating an additional Rs1 trillion from a sinking economy will simply not happen.

The government should instead raise the additional Rs1 trillion, which is needed to lower fiscal deficit and slow down growth of public debt, through the following measures: (i) across the board cutting of waste; (ii) one-time ‘corona tax’ on the wealthy; and (iii) cutting SOE losses and untargeted subsidies.

Waste is embedded in every nook and corner of government. When the livelihood of 200 million people is at stake, when three million businesses are virtually closed and the economy is sinking, then every rupee – spent from borrowed funds – must be mercilessly questioned. The starting point should be: ‘what would happen to the state of Pakistan, if a ministry, an agency or a project was de-funded and shut down?’ And ‘what would happen if some development projects were deferred by a year, or if underperforming/ excess employees were furloughed?”

When 95 percent of funds are borrowed, the majority being domestic debt at very high rates, and our debt is touching 100 percent of GDP, why is Rs259 billion being spent on roads and highways – when we have a good road network? Why is the defence ministry spending Rs160 billion on Civil Works? What is the worst that would happen if these two large expenses were deferred by a year? Why is the HEC provided Rs64 billion, for poor quality higher education and why shouldn’t the provinces be asked to pay for higher education? Why should the HEC get Rs12 billion for spending Rs52 billion? Why do each of the 45 divisions have budgets for development spending?

When the country is facing a financial crisis, why does the cabinet division have a budget of Rs77 billion? When banks have thousands of branches, which can market NSS products, why is NSS not shut down and Rs4 billion saved? When exports have been stagnant for a decade and the performance of the commerce ministry has been wanting, why is its budget Rs14 billion? Why shouldn’t most of the ministry staff be furloughed or retired for such poor performance? In today’s digital world, with vibrant private providers of mail services, why is Rs20 billion being allocated for the Post Office? When airports will be operating at low capacity, why have the CAA and ASF’s budgets not been reduced?

When 20 million poor families need financial support, why is Rs11 billion spent on the president, prime minister, National Assembly and Senate? Why is Rs100 billion allocated to a dismally performing Railways? Why does the Ministry of Food Security need Rs13 billlion, especially the Rs10 or so billion for the 12 agencies under it? What does the science and technology ministry have to show for the Rs15 billion allocated to it? Why shouldn’t the many useless scientists and officers working in these two Ministries and its agencies be retired or furloughed?

A deep no-holds-barred cleaning out is needed of the current and development budget, with the aim to save at least Rs350-400 billion. Pakistan will not crumble if these expenses were de-funded or deferred by a year.

The government must impose a one-time ‘Corona Tax’ on the wealthy as follows: one, a one percent tax on moveable and immovable assets and financial assets, in excess of Rs10 million – increasing to 2-3 percent for assets in excess of Rs100 million. Pakistan has one of the lowest property taxes in the world. Two, a 10 percent tax on inheritance over Rs10 million. Three, 30 percent Capital Gains, irrespective of holding period, on sale of shares over Rs10 million and property over Rs20 million.

Four, 30 percent tax on dividends exceeding Rs1 million. Five, a ‘symbolic’ 50 percent tax on salaries of legislators and senior civil/ military officers and judges, and de-funding of cars and perks for a year. The aim should be to raise at least Rs300-350 billion. The wealthy must realize that if a society cannot help the many who are poor, it cannot save the few who are rich.

Finally, SOE losses and untargeted subsidies must be surgically reduced. When every airline in the world is letting go of staff, why is PIA not laying off staff and pilots? Why is the senior management of DISCOs not being fired for system loss of 30 kwh of electricity out of the 100 kwh purchased from GENCOs – thereby losing Rs300-350 billion. The government must aim to cut SOE losses and untargeted subsidies by at least Rs250-300 billion.

In conclusion, the prime minister must display leadership and boldness by rolling back the Rs1 trillion of additional taxes, and instead raise an equivalent amount from cutting waste and SOE losses, and taxing the wealthy.