Mini budget, a mini stunt

Nawaz Sharif and the PML-N are indifferent, if not happy, about the mini-budget presented by the Caretaker Government. On the other hand, the PPP and President Asif Zardari are questioning the very legitimacy of it. Why is that so?
First things first, there is a dire need to put reins on the fiscal deficit and it’s going to be the foremost challenge for the incoming government at the Centre. So whether or not the mini budget is passed, it is going to be a win-win situation for the upcoming government.
If the mini budget presented by caretaker set-up is accepted, it will help contain this year’s fiscal deficit to less than eight percent of the GDP. That would make Ishaq Dar’s life easier in terms of curtailing the deficit in the next fiscal.
In case the mini budget is rejected by the courts, the likelihood of the deficit slipping over nine percent will be high, and that would give a good excuse for the new government to justify higher deficit next year. Plus, it sets the tone for Dar and team to levy new taxes and continue with the proposed increase in indirect taxes.
The caretaker set-up has proposed to the President that the Rs152 billion mini budget be introduced through a Presidential Ordinance. The highlight of the proposed budget is to increase sales tax from 16 percent to 17 percent.
Policymakers are perplexed about the efficacy of such a move. Recall that in the previous regime, sales tax was initially increased from 15 to 17 percent, under the guidance of the IMF, before being slashed to 16 percent.
The justification behind raising this tax rate is to increase revenues. But on the flip side, higher tax incentivizes evasion. So higher rates may not fulfil the purpose in the medium to long-run, albeit, it may raise revenues in the shortrun.
But the then Nawaz Sharif’s government has set precedents of lowering tax rates and increasing tax revenue. One such example is the introduction of withholding tax in the 1990s.
So even if the mini budget doesn’t get the legal cover, the PML-N may figure out a way to keep sales tax at 16 percent, in the upcoming budget, or lower it. It may also introduce a few measures to enhance the tax base. Such measures are conceptually close the objective of VAT, i.e. enhance the base by bringing more people/sectors into the tax net.
Similarly, virtually all the measures proposed in the mini budget are to increase burden on existing tax base and on indirect taxes, which is going to hurt consumers the most. While consumer protection societies have not raised major hue and cry over the mini budget so far, the business community has not welcomed it by any means.
Given the differing stances of the caretaker government, the government in-waiting and the Presidency over the legitimacy of this mini budget; its implementation will likely be dragged out. But taking the issue to court may prove to be an exercise in futility since the new government is going to present a full year budget within the next two weeks anyway.