First federal budget: Some priorities for PTI
PTI’s first budget is being formulated in the backdrop of a recently agreed program with the International Monetary Fund (IMF). Under this program, Pakistan has committed to structural reforms which should have been undertaken long ago. However, undertaking them now, when the damage has already been done due to a lack of political action in the past is bound to bring great pains for the common man.
Taxes will increase. Subsidies will be slashed. Electricity and gas prices will be jacked up to reflect the true cost of generation, transmission, and distribution. There will be greater flexibility and reflection of market sentiments in the exchange rate. All these factors in the short term are bound to create inflation, dampen economic activity and possibly contribute to temporary unemployment and underemployment.
The interest rate will be used as an instrument to curb short-term demand. A high-interest rate will imply that it will become difficult for the private sector, particularly the exporters, to borrow. This, in turn, will accentuate the economic slowdown. Will all this be short lived?
The answer essentially depends on how quickly the government executes, among other things, the much-desired reforms in taxation, the power and gas sector, and loss-making public sector enterprises – all essential to bringing down the gap between low government revenues and ever-expanding expenditures.
A good starting point for the government could be its first budget due to be announced in June this year. The new economic team could use this as an opportunity to put in place progressive tax and expenditure policies which not only insulate the poor from painful adjustments, which accrue from the IMF program but also provide impetus to inclusive economic growth through targeted public sector investment.
In the past, governments have been guilty of not following two important principles of taxation. Both are essential. First, direct and indirect taxes must be designed in a manner that the rich pay a larger share of their income relative to the poor. Second, the imposition of any tax should not stifle production or economic growth.
Having a more equitable tax system will require PTI’s first budget to focus on improving tax policy, administration in tax collecting bodies, and cultivating a tax culture.
Dr. Vaqar Ahmed
A failure to follow the above-mentioned path has resulted in a tax regime which does not encourage the documentation of the economy and resultantly a large segment of economic activity continues to operate in the informal sector. The latter among other things also gives rise to undesirable financial transactions in the economy highlighted to the government authorities by Financial Action Task force (FATF).
Having a more equitable tax system will require PTI’s first budget to focus on improving tax policy, administration in tax collecting bodies, and cultivating a tax culture. A large part of tax effort could involve greater revenue mobilization in the provinces which currently contribute very little to the exchequer. Both Khyber Pakhtunkhwa and Punjab, where PTI is in power could improve collections under agriculture, transport, professional services, and property taxes. Long pending management reforms at the Federal Board of Revenue, as well as the provincial tax authorities, could go a long way in curtailing corruption, harassment faced by taxpayers, prevent arbitrary fines and penalties, and reduce the overall time spent on tax compliance.
On the spending side, it is widely understood that enhancing and prudently managing funding for human resource development contributes to long term growth and poverty reduction. Also, public investment in infrastructure can enhance long term economic growth. One way to create additional fiscal space for spending on human resource and infrastructure could be to reduce the overall size of the government. While an independent performance audit of all federal government institutions is long overdue, PTI’s own manifesto had suggested merging several public sector institutions together in a bid to increase efficiency and cut costs.
Commerce, textile, industries divisions and Board of Investment could be merged. The Planning Commission could be transitioned to become secretariat of the Council of Common Interests. Likewise, federal level ministries dealing with education, health, food security, social protection, and climate change are already less financially endowed and understaffed. The government could consider merging them into a social sector and human resource development ministry. Likewise, maritime, railways and communications ministries could also be merged. Such measures will easily bring down the cost of governing the federal administration and give greater room for public sector development programs. After all, Malaysia — a country Pakistani Prime Minister covets — runs with almost half the number of ministries compared to Pakistan. Similarly, several regulatory bodies in Pakistan have overlapping mandates and can easily be merged.
Finally, one hopes that this year, the federal the government will give more teeth to the Fiscal Responsibility and Debt Limitation law. This law has repeatedly been violated and past governments have breached the promise of reducing public debt to maintain it within 60 percent of national income and also protect allocations for social sectors. The law still requires amendments which put in place strong penalties if economic managers do not move in the above-mentioned direction.
– Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.