More taxes, so what?

Are we heading towards economic
stability after the imposition of new taxes?

By Abid Qaiyum Suleri

Taxes imposed through presidential ordinance to add another 53 billion rupees in the national exchequer was a predictable move: not only because it was part of the commitments that the government of Pakistan made with the IMF, but also due to the fact that the government wanted to send a signal to the international community that it can mobilise domestic resources to face emerging economic challenges.

One needs to recall the budget speeches made by Shaukat Tareen and Hafeez Sheikh in 2009 and 2010 respectively. Both of them mentioned that Public Sector Development Programme (PSDP) would be funded through external assistance. Shaukat Tareen was banking on Tokyo Pledges (made during Friends of Pakistan (FoP) forum in Tokyo) to meet fiscal deficit, whereas Hafeez Sheikh had been relying on Kerry LugarÕs (KL) money.

Unfortunately, neither the Tokyo Pledges nor Kerry Lugar aid materialised. Out of the US$ 1.5 billion, KL money allocated for the fiscal year 2010-11, we only received US$210-250m during the first eight months. On top of it, Pakistan faced one of the worst floods in its modern history, which did not only affect economic activities and overall economic growth, but also had a direct cost on flood relief, rehabilitation, and reconstruction.

Pakistan was hoping to receive external assistance to cope with floods, just as it received during the earthquake of 2005. However, it got very strong messages from almost all donor countries for mobilising its domestic resource to increase its revenue.

The budgeted revenue was already short of meeting expenditures. Floods had their direct and indirect impact. Suspension of the last two tranches of IMF programme (due to non-implementation of RGST, lack of reforms in power sector, and lack of reforms in public sector enterprises) further aggravated the fiscal deficit. The suspension also had an impact on other lender and donors. A country where an IMF programme is active has to produce a letter of comfort from IMF if it wants to borrow from other lenders such as the World Bank and Asian Development Bank. Pakistan was not able to produce this letter of comfort for last many months.

Economic situation became worse when the government could not pass on the impact of rise in international fuel prices to domestic consumers due to political compulsions. Likewise, reform in the public sector enterprises were also shelved due to political compulsions.

One completely agrees with some political parties that these measures are painful, especially for poor and lower-middle class. One also agrees that bringing in new taxes through presidential ordinance can never be appreciated in a democratic regime. It is also true that 50 percent of Pakistanis are food-insecure and would not be able to absorb shock from increased power tariffs and increased fuel prices. There is no doubt that the imposition of sales tax on agricultural input would escalate production cost that would not only affect the production capacity of small farmers but would also affect the consumption power of urban consumers.

However, it is also a fact that Pakistan is no more in a position where it can continue providing non-targeted subsides. Having said that, one should not imply that nothing needs to be done for poor and lower-middle class that will face the maximum brunt of macro-economic measures.

I have been writing on these pages that the solution to economic issues lies in political wisdom and not in their politicisation. One can blame the PPP government for various mistakes that it made during last three years. They could not formulate and implement a viable economic agenda. They could not get rid of the accusations of corruption. They did not implement austerity measures, and so on. However, one must be mindful that if interim elections are held today, none of the opposition parties would be willing to form government in the centre as none of them has an easy solution to tackle economic crisis.

Without using the ground realities as excuse to give grace marks to PPP government, one must realise that we would hardly be able to generate 1.6 trillion rupees as revenue. Out of which 860 billion would be spent on debt-servicing. Another 600 billion would be spent on defence and security budget. Thus, the government has around 150 billion rupees in hand to take care of its lavish expenses, day-to-day administration, federal public sector development programme, flood reconstruction, payments to provinces through NFC Award, and petroleum subsidies.

We are back to square one. In order to reduce the gap between income and expenditures the government needs to increase its revenues and reduce its expenditures. While doing this, it also needs to operationalise a well thought-out social protection system to protect the poor and lower-middle class from inflation.

Preparations for the next budget are already on. We would again be relying on loans and external assistance to fill in the wide gaps between budgeted revenue and budgeted expenses. External assistance and loans would not come unless we document our economy, we plug in resource leakage by implementing power-sector reforms, and we reshape loss-making public sector enterprises.

Reliance on external resources can be minimised by boosting our economy through uninterrupted energy supply to small and medium industries that would lead to job creation and economic growth. On top of it, broadening our tax net by bringing non-tax payers in the loop not only through punitive measures but through incentives would also help in reducing loan dependency. Based on a thorough homework, an upper threshold should be determined for tax-free income from agriculture, real estate, services, and wealth gain from stock markets. Beyond that threshold, all type of income should be taxed.

To reduce our expenditures, public sector development programmes should be the last one to face budget cuts. We have to freeze all non-developmental expenditures. The austerity at government level should not mean freezing of budget of various ministries and line departments, thus turning them non-functional. The austerity should come from top and should curtail all discretionary expenses as well as entitlements.

Finally, political parties should propose a convincing and viable social protection system for fifty percent of Pakistanis who are food-insecure. One can learn from Malaysia, Indonesia, and Chile about their fuel subsidy programme. Likewise, the Indian experience of Òminimum employment guarantee schemeÓ can also be improved and replicated in Pakistan.

To me, both the people as well as the government feel the heat Ñ the government because it has to take non-popular decisions, the people due to the impact of those decisions. But the worst crisis that the country is facing today is that of the crisis of trust that does not exist between the government and the international community and between the government and people of Pakistan. Same is the situation between the people of Pakistan and the international community. Trust cannot be built through presidential ordinances and requires a thorough political discussion to reach a broader consensus. The challenge is can we use political wisdom without politicising these issues any further?