Revenue at the expense of growth

Hassan Baig
Tuesday, Jun 25, 2024

There is a perception among people that the IMF guidelines provided for the preparation of the FY25 budget are more prone to enhancing revenues through heavy taxation than to GDP growth.

An annual budget is a balance sheet of income and expenditure, which helps the government devise its future strategy for the next financial year – focusing on how to improve the economy through GDP growth.

GDP growth takes care of revenues through enhanced earnings, which are subject to taxes by further expanding the tax base. In the current situation, high taxes are proposed to ensure enhanced revenues by compromising growth, which is a flawed strategy – at least in the short term.

The government has presented a Rs18.9 trillion budget with a revenue target of almost Rs13 trillion to be collected through the Federal Board of Revenue (FBR). This target has significantly increased from the previous Rs9.4 trillion, which means that the government is eyeing collecting an additional Rs3.6 trillion in revenue.

This will be done by withdrawing exemptions and levying more taxes and duties – a step that will directly affect the poorest of the poor. The imposition of 18 per cent sales tax across the board is a move to discourage economic growth. Prices of electricity, gas and other inputs for industrial growth keep increasing almost monthly on IMF demand, which again affects our large-scale manufacturing directly, impacting our exports, as goods are no more competitive in the global market.

Ad-hocism has become the order of the day. The petroleum levy is one example of this, which has been increased from Rs60 to a whopping Rs80/90 per litre as non-tax revenue. This is going to increase the cost of living, resulting in slow economic growth. The imposition of sales tax on petroleum products is another option for the government.

Non-tax revenue has been projected at Rs3,587 billion, which is a huge amount to be collected under this head. As oil and gas are mostly imported, they have a direct impact on inflation. That is cost-push inflation directly imported from abroad. It has nothing to do with demand-push inflation at the domestic level. The IMF’s demand to keep high interest rates to arrest inflation is inconsistent with market operations. The flexible exchange rate relying on open market operations is another anomaly contributing to cost-push inflation. It is important to inform the IMF that such policies are directly affecting our poor segments of society.

Federal excise duty (FED) is another area of increasing revenues for the federal government. It is also a cause for concern. FED on sugar, cement, commercial and non-commercial residential properties will definitely impact our economic growth. This will further disrupt investment in the real-estate sector. While taxes will increase revenue with a small base, this will be at the cost of economic growth. But the question remains: how can we expand the tax base without economic growth? This needs the immediate attention of policymakers.

The tax and non-tax revenue targets are high and ambitious and are set to increase revenue at the cost of economic growth that is already marred by our policy shifts and political instability. A 40 per cent increase in taxes will impact our growth model, as we have already set a meagre GDP growth target of 3.6 per cent, which in no way can cater to our huge population living below the poverty line.

The imposition of an 18 per cent sales tax on textile, leather products, and mobile phones is definitely going to depress our manufacturing sector. And further increase in capital gains tax imposed on the real-estate sector – 15 per cent for filers and 45 per cent for non-filers – is also set to affect almost 40 industries connected with the construction and real-estate sectors.

A better approach would have been to reduce federal expenses instead of increasing taxation by privatizing state-owned enterprises (SOEs), opting for public-private partnerships (PPPs) and rightsizing the federal government by dissolving about 13 ministries and divisions. The government can save a lot more through this rightsizing exercise and can spend more on the welfare of people suffering from poverty. The money so saved by the government could also be spent on industry by incentivizing the productive sector of the economy to support growth.

Further, the local government system is all the more important and should have been made functional by devolving power to the grassroots level through local representatives. They may be given financial and taxation powers as envisaged by the Musharraf government, which was the best model to be adopted with some modifications as part of a consistent policy framework for the overall development of the country.

Pakistan needs a pro-growth strategy to improve its economy, which is suffering from stagflation with continuous inflationary pressures and shocks. A strong argument against high economic growth is that demand will increase to support economic growth, resulting in the further need for foreign exchange reserves, which are low in deposit.

But the counterargument is equally strong: to go all-out for economic growth to reach increased productivity, enhance exports and earn more foreign exchange to meet the demand created by a heated economy. It is also said that the normal income of people will increase to support market demand, further increasing employment for the good of people. This is how the economy will grow to share the burden of debt and help avoid getting loans to repay the existing loans and interest accrued on them.

The IMF programme may be crucial to bailing out our economy, but the real question is: why are we eager to apply for such a huge loan facility, amounting to $8 billion as an extended fund facility (EFF) along with a resilient and sustainable facility (RSF) as climate financing? If we are serious about helping our economy improve, we must avoid getting huge loans.

Instead, we may resort to a small amount of loans within the range of $2-3 billion to support our economy, putting it on a high trajectory of economic growth to get out of the debt trap. The approach of getting loans to support the economy is not only flawed but also detrimental to the very essence of our economic goals. That should be discouraged. Structural reforms are needed and restructuring our loans is paramount.

Pakistan needs to get rid of the vicious debt trap it is in, and this will only be possible if the economy grows. An economic slowdown means low economic growth, which will further push us towards a crisis situation. This is typically an historic egg and hen story. The economy is already under the stress of heavy taxation. Tax holidays are being done away with, resulting in less industrial growth and leading to no industrial clusters propping up as there is no facilitation at any level.

Given this, how we will grow and pay back the loans is the critical question that must be asked from policymakers. The sorry state of affairs is that probably no one is bothered to ask this crucial question from those who are in charge of governance. But time has come to ask this question from decision-makers, compelling them to give us a roadmap on how to proceed further.

Economic growth is a solution to all ills, and it should not be compromised on the diktats of anyone. It is time we took decisions that were in the best interest of the nation to help improve the economy.

A billion dollar question is: who will consider these suggestions and proposals? It is perhaps safe to assume that we lack the capacity and capability to take bold decisions for the good of the nation. But we are compelled by circumstances to make decisions immediately. It is now or never.

The writer is a formeradditional secretary and canbe reached at: