At his post-budget press conference last Saturday, Adviser to Finance Hafeez Shaikh made a Donald Trump statement. Responding to a question on the ambitious nature of tax targets, which affects provincial budgeting exercise, Hafeez simply said that while making their budgets, provinces should incorporate the reality of FBR’s actual tax collection always falling short of its budgeted targets. In other words, he accepted the unreliability of FBR and federal government’s historical ambitions.
As far as tax targets are concerned, PML-N’s finance minister Ishaq Dar was probably most fond of setting ambitious targets in recent memory. And justifying it as well. “Nothing wrong with having high ambition”, Dar would say. The same line was towed by team PTI last year, when they set that lofty target of 45 percent in tax collection over FY19 collection, which translated into 31 percent growth target over and above the then nominal GDP growth forecast for FY20.
As it turns out, the higher the growth target over and above nominal GDP growth forecast for the respective year, the higher is the FBR’s shortfall. Obviously, FBR is perfectly able to record a shortfall even when targets are not as ambitious. But generally speaking, the more ambitious is FBR’s target, the bigger the shortfall.
It just so happens that in the last two budgets (FY20 and FY21), the ambition has soared beyond proportions. For the years FY10-FY19 budgeted growth in tax collection (net off nominal GDP growth forecast) over preceding year’s actual collection ranged between 10-13 percent on average for various tax heads: direct taxes, sales tax, and total FBR taxes (which includes all other taxes). But for FY20-FY21, it is more than twice of those averages.
Ambition is a good thing. The streets of Karachi have one too many decorated rickshaws that boast the ambitious saying which loosely translates into “I will grow up to be a truck.” But ambition without a plan, a goal, a clearly marked out implementable strategy, and so forth is of no use.
Year after year, successive governments have failed to fix tax administration. To expect change in year one of PTI’s rule was foolish. But they will soon enter their third fiscal year. Granted FY21’s budget was expected to be flexible and subject to mini-budget, given pandemic-led uncertainties. But that should not mean that the Finance Minister doesn’t share its plans, sensitivity analyses, and spell-out details so others can plan better accordingly. (See BR Research’s ‘Budget FY21: prepare for flexibility’, May 15, 2020)
Instead of accepting their failure to address the fundamental problems at FBR, make reliable budgets, and back up their ambition with concrete numbers, arguments, the Finance Advisor finds it wise (or perhaps funny) to ask provinces to shave their budgets as per their respective expectations of FBR shortfall.
The corollary is that like provinces; banks, businesses and high net worth individuals must also lose their trust on federal government tax targets a little more, because eventually Islamabad’s failure to meet its ambitious targets will come to haunt private sector business plans.