Is red the new green?

LAHORE: A couple or more green-flashing economic indicators cannot be termed a sign of a turnaround and with this in mind it’s not hard to surmise that economy, no matter what its managers claim, will continue to remain suspect as long as the system is flawed to its core.

We aspire to collect Rs4,900 billion this fiscal from taxes. This would be an uphill task. However even if the target is achieved the government will still be short of over Rs3,500 billion to meet its yearly expenses. Any shortfall in the target will increase the deficit correspondingly. In addition, the budgeted expenditure will also increase in view of the general hike in prices. Moreover, this government has overshot the budgetary allocation in the last two years. That is going to further widen the budget deficit.

The pilferages in the government revenues are much larger than the budget deficit. The public sector enterprises alone incur over Rs2000 billion losses annually. That includes Rs1,100 billion loss in power sector and Rs200 billion loss in gas distribution companies. Even the Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM), and Pakistan Railways (PR) operate on loss.

No company in the private sector can survive while running such colossal losses but public sector companies remain operative as the state books their losses. Public sector in regional economies is also not as efficient as private, but is much more efficient than ours. They post nominal and tolerable losses that the state can comfortably subsidise.

Our government with a high budget deficit cannot keep the technically no longer viable PSEs (Public Sector Entities) on state-sponsored life support. There is no justification for the losses posted by Pakistan Steel, Railways and PIA (aviation did suffer in COVID-19). These commercial enterprises do not incur losses in the public sector in other countries. We have taken no step to stop the bleeding in state-owned companies.

Previous governments are as much responsible for this debacle as is the present regime. In fact, losses in many PSEs have increased during the tenure of the present regime, which shows its careless attitude towards state losses. Simply by introducing full transparency in the affairs of these PSEs with strict rule-based operation through staff appointed on merit the losses of PSEs from current Rs2000 billion could be reduced to Rs500 billion (with huge necessary subsidies). This can bring down the budget deficit to Rs2,000 billion.

Then there are huge losses that the state exchequer suffers because of smuggling and under-invoicing. We see smuggled cars, televisions, air-conditioners, crockery, many other home appliances and cigarettes being openly sold in the markets (cars are an exception as these are in the use of highly influential untouchable persons).

The tax evasion on these smuggled items is not less than Rs500 billion (impact of illicit trade on cigarettes alone is calculated to be Rs44 billion). Smuggling is a curse and a question mark on the competence of regulators. Besides bringing in consumer items, smugglers also bring in arms and ammunition for the terrorists. If all taxes on smuggled items are collected the budget deficit can reduce to Rs1,500 billion.

Under invoicing is a norm in Pakistan. There is hardly any finished production in Pakistan that is not under-invoiced. We safely lose at least Rs300 billion under invoicing besides marginalising our manufacturing industries. Technology could easily eliminate this menace and add Rs300 billion in the national kitty, reducing the budget deficit to Rs1,200 billion.

Furthermore, rent-seekers in the revenue department do not have the heart to plug tax evasion as it will impact the bribe money they cannot survive without. It is now openly acknowledged that the size of non-documented economy in Pakistan is larger than the formal economy. We expect to collect Rs4,900 billion from our formal economy this fiscal. The expected revenue from the non-documented sector if regularised will be higher.

To start with the government should first bring high-earning professionals like doctors, lawyers, architects, and accountants under the tax net by documenting their actual incomes. It will be able to collect Rs600 billion (sales tax and income tax) from these professions that can be easily documented with the help of technology. The budget deficit will come down to Rs600 billion only. A deficit of Rs600 billion is tolerable for the size of Pakistan’s economy.

Presently, we are funding our deficit through loans both domestic and foreign, which is unsustainable. The deficit has increased with every passing year in the last 15 years.

We need better governance, transparency, and appointments purely on merit to put our economy back on track through our own resources. We risk our survival when we try to boost our economy through loans and that too for consumption instead of development projects.