Budget, taxes and development

Performance of the tax managers is highly disappointing. For the last two years the fiscal deficit has been over 9 percent of the GDP

After tax proposals were invited by the Federal Board of Revenue (FBR), there has been a virtual avalanche. From trade and professional bodies to tax bars, even individuals, everybody has been making suggestions. Many have been published in the print media and discussed in pre-budget webinars and on social media. All these, it is understood, will end up in the waste baskets of our ‘revenue-cracy.’

The budget for fiscal year 2021-22 and Finance Bill 2021 will likely be the ritual it has been year after year. It remains a closed-door bureaucratic exercise. The central theme is abiding by the agenda of the International Monetary Fund (IMF). More taxes are to be imposed to cripple the growth of the economy under the conditions the government led by Pakistan Tehreek-i-Insaf (PTI) has agreed to.

Interestingly, Finance Minister Shaukat Fayaz Ahmed Tarin has told the nation that no new taxes will be levied and the Rs 5.8 trillion revenue target agreed with the IMF will be achieved by broadening the tax net and making the FBR more efficient. Electricity tariffs, he says, will not be increased.

However, Adviser to the Prime Minister on Revenue and Finance Dr Waqar Masood told the Standing Committee on Finance of the National Assembly on May 27: “The government will try to impose less than Rs 500 billion worth of additional taxes in the budget. The increase in the power tariffs has been deferred only for the time being.” This shows where the power lies, with the IMF and not Shaukat Tarin.

Our economic managers, faithful to lenders/donors never think of using tax policy as a tool for economic development. Their focus remains on increasing revenue targets at the time of making annual budgets, without a corresponding strategy for growth and development. The result is 13 bailouts and 22 IMF programmes in 60 years — elaborated in Decades of subjugation, TNS, [Political Economy] The News, August 9, 2020.

This year’s budget, expected to be announced on June 11, will be no different. As IMF and World Bank consultants have no workable recipe for our economic woes, these will keep on increasing. Research papers and books by local authors will be ignored by our policymakers.

How the mould may be broken was discussed in More on the fiscal fiasco, TNS, [Political Economy] The News, February 28, 2021. Those who matter in the land ignored it. Resultantly, we are facing a disaster on the debt front as debt servicing alone is eating up 75 percent of the resources.

The Ministry of Finance, in its Annual Debt Review and Debt Bulletin for FY2019-20, complying with Section 7 of the Fiscal Responsibility and Debt Limitation Act of 2005 covering the second year of the government of PTI confesses that the total public debt-to-GDP ratio “has increased from 86.1 percent in June 2019 to 87.2 percent in June 2020”. The limit fixed in Fiscal Responsibility and Debt Limitation Act of 2005 is 60 percent of the GDP. Viable solutions to debt enslavement involve inclusive growth, development of natural and human resources and fundamental structural reforms for good governance, among others.

The have-nots, instead of being hooked on meagre cash handouts from Ehsaas and others, must be trained in various vocations to become self-reliant participants in growth. Tax incentives should be used to induce investments in human resource and infrastructure development, rather than free and concessional plots to judges, generals and civil servants in grades 21 and 22.

Taxes affect growth in two ways: first, by influencing the aggregate supply of the main factors of production by raising or lowering their net (after tax) returns; and second, by influencing the efficiency of resource utilisation (total factor productivity). We keep on saying that a low tax-to-GDP ratio is our main problem, whereas the reality is that agricultural sector contribution to direct tax collection is negligible and tax expenditure is as high as 40 percent of collection at national level.

Lotz and Morssan analysed a sample of 72 developed and developing countries to examine the relationship between tax ratio variations and differences in per capita income and degree of openness. The sample included a wide spectrum of dissimilar economies ranging from Nepal to Singapore. They showed that it is erroneous to compare Nepal’s mostly rural and agricultural economy with a highly commercial and industrial city-state of Singapore.

The higher tax ratio for industrialised countries is primarily due to the higher level of revenue from social security, payroll taxes, corporate taxes and taxes on domestic consumption while taxes from international trade and non-tax revenue are lower. In contrast, Pakistan, like many developing countries, gets a major portion of revenue from indirect taxes, particularly taxes on international trade and domestic consumption, while direct taxes have a small share.

Tax increases with growth and present system of multiple taxes (mostly collected at import stage and/or advance tax, including dozens of withholding tax provisions) and fragmented administrations to collect the same are impediments to growth of the economy.

Unshakable determination, consistency and political will are required to dismantle harmful and growth-slaying tax policies and to revamp the entire tax administration.

In the coming budget, the PTI government must devise a tax policy based on research cited above so that it can be a catalyst for development. The primary function of a tax system is to raise revenue for the government for its public expenditure and for local authorities and public bodies. So, the first goal in a development strategy as regards taxation policy is to ensure that this function is discharged effectively.

Performance of the Pakistani tax managers is highly disappointing as fiscal deficit in the last two years was over 9 percent the of GDP if losses of Public Sector Enterprise (PSEs) and circular debt and blocked refunds by the FBR are taken into account. It has remained high for many decades as tax targets fixed annually for the FBR were revised downwards many times while budgeted expenditures exceeded multifold.

We need a paradigm shift in fiscal policy. The collection of fair taxes wherever due, by abandoning the policy of appeasement towards the powerful and the rich.

It is essential to dismantle elitist structures and lease out expensive state lands in the heart of cities, occupied by privileged classes, for high rising commercial and residential blocks for growth, fetching billions of rupees for state and jobs for millions of people — Doing Development Better by Nadeem Ul Haque, Hanid Mukhtar, Nohman Ishtiaq and John Gray.

The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE).

Budget, taxes and development