Budget with a sanity deficit

Inayatullah Khan
Wednesday, Jul 06, 2022

At a time when Pakistan is going through some of the worst economic challenges in its chequered history, the federal government has come up with a budget that speaks volumes about its lack of commitment to austerity, insensitivity to the misery of the people, complete surrender to the IMF, and rent-distribution among the elites in what Dr Ishrat Husain rightly calls an ‘elitist state’.

More than the fiscal deficit, the budget clearly betrays a serious deficit of sanity and sensitivity on the part of those in the power corridors. According to the Economic Survey for FY2021-22, Pakistan faced current account deficit of $13.8 billion in the first nine months of FY2021-22, fiscal deficit of 3.8 per cent of GDP expected to increase to 7.0 percent by end of June, inflation at 11.3 per cent, a trade deficit of $32.9 billion during July-April FY20021-22, dwindling Pak rupee vis-a-vis US dollar, rising unemployment, skyrocketing public debt of Rs44,366 billion, and depleting forex reserves. In such a depressive situation, the government was supposed to take well thought-out short-, medium- and long-term measures to address the structural and systemic issues bedeviling Pakistan’s economic landscape and worsening the hardships of the person in the street. Yet, once again the elites managed to capture the major pie.

The government’s claim of taking tough decisions really sounds strange as no such decision has been taken except to burden the poor while generously distributing rent, perks and privileges among the elite by increasing institutional budgets, increasing the salary of bureaucrats, and continuing unchecked concessions and exemptions to the industrialists. A tough decision would be one that ensures equitable resource distribution, taking more from the rich and giving more to the poor. On the contrary, the budget framers have further overburdened regular people and left the rich better off than before. It is true that Pakistan could ill afford the lingering and rising burden of subsidies, and true that there was a need to slash them down to address the country’s fiscal deficit, but instead of so hugely slashing down subsidy on fuel, gas and electricity in one go, a more rational, targeted and equitable approach was warranted. There is much to learn from the successful model of targeted subsidy regime maintained by Iran.

A glance at the budget estimates reveals several important facts that expose the serious systemic policy and institutional faultlines hampering the country’s economic progress and worsening the people’s woes. The sad part is that the government has done little to address those policy and institutional trouble spots. Estimates vary but around 35-40 per cent of the economy remains informal, outside the track and trail mechanism of the mainstream economy. There is hardly any serious policy step in this budget to make inroads into this huge shadow economy. Without mainstreaming this huge informal economy, Pakistan will continue to suffer on many counts, including limited fiscal space, market distortions, inaccurate economic estimates and projections, and illicit trade.

The budget could have been used as a policy instrument to gradually bring the black economy into the formal economy but nothing substantial enough has been included in the budget to harness the potential of the informal sector of the economy to reduce at least some sizeable part of the current economic hardships faced by the country, particularly on the fiscal side. The lion’s share of the budget continues to be consumed by two major heads – defence and debt servicing – that together constitute 57.59 per cent of the total expenditure for FY2022-23, showing an increase of 10.32 per cent compared to FY2021-22 when the two heads constituted 52.19 per cent of the total expenditure.

Two strategies could help not only generate more resources but also allocate more for the social sector and development needs of the country, with rich dividends for the welfare of the poor. One is broadening of the tax base, as currently less than one per cent of the people pay taxes, though the FBR’s ATL shows 2.2 million active taxpayers, and the country’s tax-to-GDP ratio has plummeted back to 9.4 per cent while that of peer economies keeps rising. Budget 2022-23 shows that the percentage share of direct taxes in the tax revenue is projected to further decline to 36.7 per cent from the 37.4 per cent in the budget for FY2021-22, while the share of indirect taxes is estimated to increase to 63.26 per cent of the total tax revenue from the 62.56 per cent during FY2021-22. Thus, the already skewed taxation structure will further aggravate in the year ahead, with adverse implications for the middle income and poor segments of society.

The second is reducing reliance on borrowing, rationalizing defence expenditure and restricting borrowings only for development purposes rather than for meeting current expenditure needs. Contrarily, the development budget has been slashed down by 16.18 per cent for FY2022-23. This anti-development bias is one reason why Pakistan has lagged behind other peer economies. In Bangladesh, for instance, the share of development expenditure for FY 2022-23 is 38.28 per cent of the total expenditure. Pakistan can ill-afford flawed policy options in view of their long-term debilitating impact on overall socio-economic national development.

The imposition of a super tax is not likely to bridge the lingering and yawning fiscal deficit. In addition to the genuine apprehensions that the ultimate burden of this tax will also be tactfully passed on to the end-consumers, the super tax is not a sustainable solution in the long run and will potentially harm the already staggering industry. That the KSE 100 index crashed on the first day of the imposition of super tax is just a tip of the iceberg, beaconing towards even more adverse impacts on the business community in the near future.

An economically more viable option would have been a gradual and systematic abolition of the exemption regime that has plagued the local industry with dependency syndrome without yielding the benefits of enabling the industry to develop the much-needed resilience and competitiveness in the global market. The effect of the exemptions is wasted, partly due to the flawed regulatory and compliance regime but chiefly due to no real monitoring and evaluation mechanism to ensure targeted and effective exemptions. Another option is to increase reliance on direct taxes and gradually reduce dependence on indirect taxes. This will help move towards a more equitable and sustainable taxation system. On the contrary, the government has resorted to burdening those who are already in the tax net with additional tax net. Policy measures to bridge CAD and improve the external sector’s performance also remain below par. This budget has exposed not only the government’s insensitivity to the woes of the people but also its sanity deficit.

The writer is a member of the Khyber Pakhtunkhwa Assembly.

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