The ultimate choice

The budgetary deficit stood at 6.7 percent of the GDP during the FY 2009-2010 owing to foreign debt liability of US $59 billion and internal debt hovering around Rs 5000 billion. This huge debt accumulated over the last six decades due to the reckless economic polices pursued by the successive regimes that were tinged more with an aura of populism than based on internal ground realities and the global economic trends.
The rising budgetary deficit is considered as the mother of all economic ailments. The most devastating recession that hit the western countries with a negative fallout for the entire world during 2008, was triggered by this menace. Most of the European countries and even the US are still reeling under the impact of that recession and some European countries like Greece, Ireland had to be provided huge bail out packages to survive and resurrect their economies.
Pakistan was lucky that even during that bleak global economic environment it could obtain a growth rate of 2.4 percent and bring down the budgetary deficit from 6.7 percent of the GDP to 5.3 percent of the GDP during the FR 2010-2011, despite the fact that the US failed to provide US $381 million under the Coalition Support Fund as per commitment, though that was adequately compensated and offset by US $200 million received from the Asian Development Bank (ADB) under the second-generation reform project for the SECP and the Rs 120 billion surplus generated by the provinces due to the non-utilisation of the World Bank loan of US $162 million. Thanks also to the 26 percent increase in exports that touched the US $24 billion mark, remittances of US $12 billion, spiking of foreign exchange reserves to a record figure of US $17 billion and last but not the least, the tax collection of Rs 1590.462 billion as against Rs 1329 billion during FY 2009-10. The government can rightly claim credit for these redeeming factors.
Now the question agitating the minds of the economists and other stakeholders is, will this trend continue during the FY 2011-12 and will the government be able to reduce the budgetary deficit to 4 percent of the GDP as envisaged in the budget? The answer to this lies in evaluating the government's ability to raise more revenue, cutting expenditure and attracting increased capital receipts. The government has set a tax collection target of Rs 1950 billion for the FY 2011-12. The achieving of this target and raising the tax-to-GDP ratio will to a great extent, depend on the co-operation of the provinces who have been given extensive fiscal powers through the Eighteenth Amendment that include sales tax on services, taxes on property and taxing the agricultural incomes.
The provinces, however, have not shown any inclination so far to raise taxes by using their new-found fiscal powers. The reasons for this indifference seem more political than other factors. With the elections to take place sooner or later, the ruling parties do not want to spoil their chances by introducing unpopular taxation measures. There is also a possibility that despite their commitment to keep their current expenditure as low as possible, they might be tempted to spend more on prestige projects. We have already seen the return of the yellow cab scheme in Punjab. Other provinces might also follow suit. Under the circumstances, mustering a combined surplus of Rs 125 billion budgeted by the federal government for FY 2011-12 does not seem likely to be achieved.
The scenario about the inflow of capital receipts is also not very encouraging. Though the government expects the revival of the US $11.3 billion IMF programme of Stand-By Arrangement (SBA) - which has been suspended for the last ten months - on the basis of the economic performance during the outgoing financial year, yet there has been no progress on that front so far. The decision by the US to withhold US $800 million assistance for Pakistan Army is another blow to the prospects of increased capital inflow. One can only hope that the IMF will agree to the revival of the Stand-By Arrangement and the US will also revisit its decision at the earliest possible.
So in an ambience of a myriad of 'ifs' and 'buts', the only reliable and long-term solution is to extend the tax net, possibly universalising the income tax at the earliest possible. What a shame that in a country of 180 million people, only 1.9 million people filed income tax returns, which is only one percent of the population. In the majority of countries, every individual who earns something pays income tax according to his ability. We will have to adopt the same course without any further loss of time if we want to achieve self-sustained growth, free of sporadic hiccups triggered by extraneous factors. Self- reliance is the ultimate choice. The sooner we make it, the better, without bothering for the political fall-out. The government has shown some spine by imposing GST and taking measures to bring 2.3 more people into the tax net. It is however imperative to accelerate the process.
The decision by the FBR to convert the CNIC numbers into tax numbers for individuals, is a very imaginative initiative and the first tangible step towards universalising income tax. Presently, about 37 government agencies are engaged in collecting 70 different taxes. There is an imperative need to reduce the number of these taxes and shift our focus and reliance on direct taxes, so that the poor strata of society is saved from the additional burden. There is also an urgent requirement to reform the system of the collection of excise and customs duties with a view to eliminating corruption that deprives the government of billions of rupees annually. Similarly, a review of the rebate regimes is also desirable to prevent the misuse of incentives. Reforms in these can bring additional revenue of billions of rupees without imposing new taxes. That is the best recipe to bringing down the budgetary deficit, getting rid of the strings-attached foreign assistance and ensuring sustainable growth in the country.