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June 12, 2021

Budget for votes?

ISLAMABAD: The Friday’s annual budget packed with incentives for key stakeholders came with an obvious message – that prime minister Imran Khan’s government was seeking to lift its sagging credentials in the build up to the 2023 elections.

But in contrast to finance minister Shaukat Tarin’s budget speech in parliament, the scenes of rowdy government clerks just outside showcased the gap between the official view versus the reality across Pakistan. Even before Tarin spoke, the clerical staff rejected earlier reports of an expected 15 per cent increase in salaries – a figure which was further reduced to 10 per cent in the finance minister’s speech.

Though some such as investors in the stock market and prospective buyers of small new cars stood to gain from lower taxes, the budget came short of answering key questions on Pakistan’s economic future.

Following the government’s controversial lift to this years’ estimated economic growth rate, the budget unveiled an estimated Rupees 900 billion for development spending in the next financial year – more than a third over the allocation for the present financial year.

Signalling the official intent behind the approximately Rs 8,500 expenditure target in the new budget, Finance Minister Shaukat Tarin announced “going towards prosperity and development” beyond laying the ground for Pakistan’s economic revival. But notwithstanding the government’s push to create a ‘feel good factor’, Friday’s budget came with two apparent gaps.

On the one hand, meeting the revenue target requires a significant jump in Pakistan’s tax collection. Successive governments for years have begun the financial year in July every year, only to find themselves lagging behind targets with the passage of time. A variety of factors have driven these repeated failures. These have ranged from a largely dysfunctional tax collection machinery to gaps in policy mechanisms.

But the proverbial mother of all ailments driving poorer than expected tax collections has been none other than a failure under successive regimes to come down heavy on tax evaders. The widespread story of Pakistan’s tax evasion begins just a couple of kilometers from the Parliament in Islamabad’s central commercial district known as the Blue Area, and stretches all across the country. Across the Blue Area, episodes of evasion vary from eating out places boldly giving receipts on plain paper without charging a sales tax, to shops selling imported items again without issuing formal receipts and of course without charging a sales tax. The same pattern then extends to other large cities elsewhere too.

On the other hand, a recurring failure to lift Pakistan’s prospects for growth has resulted from a long term policy failure surrounding key sectors of the economy. Friday’s budget included promises of financial allocations followed by meaningful support for vital sectors notably agriculture and industry. Finance Minister Tarin has rightly pointed out that Pakistan needs to sustain a higher economic growth rate and a surge in exports over years to come, to stabilize the economy for the long haul.

Yet beyond Friday’s budgetary allocations, Pakistan needs to address key challenges that have pulled down performance in vital sectors. These include Pakistan’s failing infrastructure such as research institutions, once at the heart of supporting key crops notably cotton and rice. Similarly, Pakistan’s industrial sector includes segments that have simply failed to innovate to make robust inroads across global markets.

In the short term, the budget reportedly still needs to be at the center of an agreement between Islamabad and the International Monetary Fund (IMF) that demanded higher taxes than those announced on Friday.

Prime minister Khan and Finance Minister Tarin may well find themselves returning to the drawing board in case of a failure to agree with the IMF. If so, that would be a repeat of another unfortunate legacy from Pakistan’s economic history – the matter of mini budgets or an interim budget just months after the main budget is announced.