Sunday March 03, 2024

Mr Tarin’s budget

We should note that over the last three years, the PTI has decreased the tax-to-GDP ratio from 12.6 percent to 9.9 percent, writes Miftah Ismail

June 12, 2021
Finance Minister Shaukat Tarin presenting Budget 2021-22 in the National Assembly on Friday. Picture NA Twitter

Presentation of the upcoming fiscal year’s budget with much fanfare is an established political ritual in Pakistan. Even during martial law periods, finance ministers would give a long speech on TV justifying the previous year’s performance and laying out the next year’s plan. This ritual was maintained yesterday when Finance Minister Shaukat Tarin gave a budget speech full of praise for his (new) leader.

I have had the occasion to deliver a budget speech in 2018. Even though we had an agreement then with PTI and PPP that they would allow the budget speech to proceed smoothly, while the PPP honoured its commitment, the PTI didn’t, and their legislators kept shouting throughout my speech on the pretext that I was not an elected minister and as such shouldn’t be delivering the budget speech. Of course, Mr Tarin is also not elected but then again the PTI is not known to shy away from hypocrisy.

A finance minister has very little discretion when it comes to most government expenses. Provincial share in taxes, debt servicing, defence, pensions and even civil government expenses are mostly fixed. The only discretionary spending left for the ministry is around development spending and some subsidies and grants. Of course, debt servicing also depends on the interest rates the State Bank sets and hence in some measure is controlled by the government.

On the revenue side, however, things get interesting where the ministry has a lot of discretion on what taxes to impose and on whom. These decisions punish or incentivise businesses, affect employment, inflation and the growth rate, and set the course for the economy for the coming year.

Yesterday was the PTI’s fourth budget. Asad Umar presented its first budget in September, 2018 – a month after coming to power, imposing additional taxes of over Rs300 billion, increasing tax rates, cutting development expenditures and giving a new direction to the economy from the course set by the PML-N over the previous few years. However, the government ended the year not meeting any of the targets and also decreasing Pakistan’s growth rate by 62 percent and giving Pakistan the largest fiscal deficit in history. Even though PTI leaders made many statements about increasing exports and industrialisation, when the rubber hit the road, the PTI’s first year saw a decrease in exports of around $500 million and large-scale manufacturing going down by 3 percent. When it was clear that the economy was driven into a recession, Asad Umar was replaced in April 2019, even as Pakistan was in the final stages of negotiations with the IMF.

The next budget was by Hafeez Sheikh and had the IMF stamp of approval. This budget saw an imposition of another Rs700 billion in new taxes. For added measure, the State Bank raised interest rates rapidly to a punishing 13.25 percent. Not surprisingly, this budget gave us negative growth for the first time in over 50 years and another record deficit. Mr Sheikh’s last year’s budget was during Covid-19 and with a temporary waiver from the Fund.

Now we have Shaukat Tarin, formerly a finance minister under president Asif Zardari, back for a second stint. Mr Tarin was quite forthcoming in his negative assessment of the PTI’s economic performance a few days before his appointment, though he has tempered his criticism since.

The budget aims to raise Rs5829 billion in FBR taxes. That is a 24 percent increase in revenues over this year. Like every PTI tax target, this too will not be met. With a targeted economic growth target of 4.8 percent and an inflation target of 8 percent, the government would need a 11.2 percent increase in tax collection over and above inflation and growth to achieve this. That’s not possible, even if the FBR has hidden a lot of small tax increases that have not yet come out. Given the inelastic nature of Pakistan’s tax collection, even with hidden or transparent additional measures, such a huge tax increase is not possible. We can easily see that they will be short by Rs500 billion to Rs600 billion – or one percent of GDP – even if some mini-budgets are going to be forthcoming.

We should note that over the last three years, the PTI has decreased the tax-to-GDP ratio (the true measure of tax collection efforts) from 12.6 percent to 9.9 percent. Besides, the ruling party has also increased reliance on indirect taxes that disproportionately burden the poor.

The current government’s target of the federal budget deficit of less than 7 percent or Rs3990 billion is also unrealistic and won’t be below 8.5 percent. This is not only because taxes won’t be what the target is, but also because the non-tax revenue target of Rs2080 billion is also too optimistic. And of course current expenditures will surpass targets, just as they have done in each of this regime’s three years.

There is a plan to spend Rs900 billion in ‘development’ spending. I put this in quotation marks because a lot of these are simply pork-barrel projects that will be undertaken by PTI MNAs in their constituencies. The alert reader will recall that Imran Khan used to say that these projects are the source of all corruption in politics. The world-weary reader will however resign herself to the conclusion that there isn’t a single promise Imran Khan isn’t willing to betray to stay in power.

Since the PTI has come to power, at least five million Pakistanis have been forced into unemployment. Mr Tarin said in his remarks at the launching of the Economic Survey that the number of employed Pakistanis has decreased from 56 million to 53 million in the last two years. But an additional 1.8 million people enter the labour force every year so the number of employed people should grow by 1.8 million people to keep the unemployment rate from going up. But here the number of employed has actually decreased.

Moreover, independent economists estimate that two crore Pakistanis have been forced below the poverty line (defined as a family of six having income of less than Rs18,600 per month) into abject poverty. This means an additional one and a half crore children go without adequate food and nutrition every day.

From his speech, it seemed that Mr Tarin understands that the way to reduce poverty is to give people jobs and opportunities. Langar Khaanas, which are run by the Saylani Welfare Trust and not the government, are not a substitute for opportunities. To make a dent in unemployment, we need industrial and agricultural growth. There was much good intention shown in the budget speech but little by way of specific incentives.

Food inflation in Pakistan is about 15 percent right now. Every week since March, the Sensitive Price Index has grown by 13 percent year-on-year. Under such high inflation, this budget needed to deliver a respite to the average Pakistani by bringing down the price of essential food items. This the budget has failed to do.

Finally, the finance minister talked about increasing exports, but I should note that exports this year are now expected to be only $25 billion, which is only 0.8 percent or $200 million above the level generated by PML-N in 2018. After a 35 percent devaluation, that is hardly an achievement, especially given that imports are increasing rapidly and the trade deficit this year will be 20 percent above last year.

The writer has served as federal minister for finance, revenue and economic affairs.

Twitter: @MiftahIsmail