No time for a raise

It is a tough budget to make this year. The FBR revenues have been stagnant for the last two years. Debt servicing has almost doubled during the same period. Low interest rates may ease the pressure on debt servicing, but with growing debt, there is little wiggle room. Nothing significant can be done in curtailing defense spending, pensions, and government’s running expenditures. The area to explore is subsidies and grants, where there are some marginal savings.

The Q-Block must do something different this budget. The business as usual will not work. The imposition of new taxes last year and other stabilization measures have choked the economy. Covid-19 pandemic has pushed the country further back. It is time to think radical measures to take the economy out of the rut. The fiscal deficit is going to be north of above nine percent this year while a similar number is expected for the next.

The need is to redo the model. Rather than looking from revenue lens to stabilize the economy and subsequently hope to attain growth, the budget planners must focus on growth and accelerate economic activity in the formal sector to generate much-needed revenues. Such bold approach is difficult to adopt in normal days. These extraordinary times need out-of-the-box thinking.

The first step is to work on ease of doing business. Beyond optics, cost of doing business can be reduced by removing low-yielding but troublesome taxes. The government needs to rethink the whole presumptive tax regime. Over-reliance on taxes at import stage has to be revisited. On average, 25-26 percent of import value (barring petroleum) is collected as tax. This seriously undermines the economic potential by creating friction on goods coming in and going out of the country. Moreover, this opens up an avenue for corruption. Customs department is notorious in the whole bureaucracy.

The finance minister is keen on exploring options through which hurdles for doing business can be removed. Revenue loss is not much; but FBR resists any such move. Some say these cumbersome procedures keep FBR folks’ pockets heavy. The alternate approach is to simplify the tax-filing process and reduce the human interaction. Harassment by FBR is known to all.

The revenue loss from abolishing low-yielding taxes could well be over-compensated by the impact of Rs700 billion worth of new taxes imposed last year. The FM is confident that last year’s additional taxes were about to exhibit results just before Covid-19 hit. Hence, the government is betting on those measures for next year’s revenues growth. Fortunately, the economic team is resolute that any new taxes would be counterproductive for the already struggling economy.

Then there is a tussle going on with the IMF on revenue targets. The Fund is insisting on a figure of Rs5.1 trillion while FBR is committing to Rs4.8 trillion. Both targets seem overly optimistic. That is why the focus should be on curbing expenditure and letting the economy grow by relaxing cumbersome, low-yielding taxes, without imposing any new taxes.

The IMF is correct in not showing support for proposal of salary and pension increase of federal employees. It’s not the time for a raise. The whole country is going through a turmoil. Share in the hard times. Get your performance better and then reward yourself. Earlier, a proposal was made for 20 percent increase from the twin cities of power; but the government has now brought its recommendation down to 10 percent.

Some fiscal space could be generated from reducing unnecessary subsidies and grants. Smart management can also help, such as enhancing the Petroleum Levy limit from existing Rs30/liter on petrol and diesel. Do not lower PL and reduce GST if required. Since PL is not part of the divisible pool, it can be used to finance energy-sector subsidies.

On development, government needs to be innovative. For example, the National Highway Authority has a good asset base and decent stream of earnings. It can self-finance road development and other infrastructure projects. Similar is the case of Wapda on the construction of Diamer-Bhasha dam (mainly water reservoir).

The bottom-line is that budget should focus on how to revive growth while managing the deficit without levying new taxes. Once economy gains momentum, everything else will fall in place.