Coming out of fiscal mess

The only conclusion that one can draw after listening to the President's speech in the joint session of the Parliament on March 17, 2012 - this was the first time in the history of the country that an elected President addressed the same parliament for the fifth time - is either that he is totally oblivious of the existing economic realities of Pakistan or hoodwinking the people is still his favourite pastime.
During his 35 minutes speech, half of which was overshadowed by the opposition's constant shouting, the President was mainly boastful of what the Pakistan People's Party-led coalition did in its four years, he spoke little about its agenda for economic reforms and strategy to overcome the present fiscal chaos in the last year of its term that is expiring in March 2013.
The persistent failure of successive governments - military and civilian alike - to overcome the budgetary deficit, remove fiscal imbalances and check ever-increasing wasteful expenditure has created a situation, where the very economic viability of the State is at stake. This year, the federal government is heading towards a massive shortfall in achieving its budgeted non-tax revenue target in addition to expected the shortfall of Rs 25-30 billion in tax revenues. But even if the Federal Board of Revenue succeeds in collecting the target of Rs 1952 billion, the capping of fiscal deficit at 4.7% percent of the GDP is not possible at all.
In the first seven months of the current fiscal year (July 2011-June 2012), the government collected only Rs 231 billion on account of non-tax revenues against the revised target of Rs 677 billion. The target of non-tax revenue was revised downwards from Rs 780 billion to Rs 677 billion. Against this revision on account of non tax revenues, the government had revised its budget deficit target upwards by 0.7 percent from 4 percent of GDP to 4.7 percent of GDP.
In the remaining period of the fiscal year, the collection of Rs 446 billion is a daunting task due to dependence on unpredictable inflows from the United States in the shape of the coalition support fund (CSF) and doubtful and controversial auction of 3G licences.
In the budget for 2011-12, the Ministry of Finance projected Rs 119 billion ($1.34 billion) by calculating Rs 84/85 against the US dollar on account of CSF in the current fiscal year, which was later on revised downwards to $800 million. Now the Ministry of Finance conceded that they expect only $400 million on account of CSF even after normalisation of relations with the USA and this money is likely to be received before end June 2012.
There is also a shortfall in the petroleum levy (PL) and snags in expected instalment of $800 million due from the Etisalat. All the indicators show that the existing worrisome situation on the fiscal front is going to deteriorate further. It will force the government to borrow more from the banks. The International Monetary Funds (IMF) in its recent report has accused the State Bank of Pakistan for directly and indirectly financing the government's budget deficit. It termed the monetary policy "too accommodative".
According to Press reports quoting official documents, "domestic debt ballooned to around Rs 7 trillion by end-January, a net increase of Rs 953 billion since July 2011. Of the total figure, the share of treasury bills stood at Rs 2.4 trillion, a third of total debt. Similarly, the share of market treasury bills was slightly over a fifth, standing at Rs 1.4 trillion. Investment bonds made up 12% of total debt as the government borrowed Rs 882 billion through auctions. National savings schemes are the second biggest source of government borrowing. Their share was around Rs 2 trillion, 29% of total domestic debt".
In the first nine months of the current fiscal year, the gap between national income and expenditure widened to 5.5 percent of the total national output or Rs 1,153 billion, according to provisional estimates. Rates of return on treasury bills also rose in March 2012: on three-month bills, the yield increased to 11.83%, up 23 basis points than the January 2012 rate and on six-month papers, the rate went up to 11.9%, 27 basis points higher than the previous auction.
Heavy and high government borrowing, especially from banks, is causing not only inflation but has destroyed the entire growth and expansion of the economy. Since the government's appetite for borrowing is increasing every day, the commercial banks are least pushed to market their credit products to the private sector as they consider government borrowing risk-free. It is disastrous for the national economy. A near-bankrupt government wrought with corruption and devoid of governance is playing havoc with people's money lying in banks.
It is a pity that total gap between current expenditure and tax collection is over Rs 600 billion. We cannot overcome our budgetary gap unless rulers drastically cut non-developmental wasteful expenditure and increase tax collection. They will have to show political will in collecting taxes wherever due by abandoning the policy of appeasement towards the rich and mighty.
An unshakable determination with consistency is required to curb the 64-year-old habit of defying tax laws along with a complete purge in the tax machinery. Do fiscal managers really know why our total revenues have fallen from 18% of the GDP to 10% of the GDP during the last twenty years? The answer is NO.
Presently, the collection of taxes by the FBR is mainly based on imports and exports as well as extraordinary profits by banks (who claim they have profit sharing accounts yet deny due share to deposit-holders!). Importers, contractors, retailers and even service providers are, in fact, passing on their tax burden to consumers and clients, courtesy the presumptive tax regime introduced in income tax in 1991-92 and widened manifold since then. This erratic taxation is at the expense of equity and poor people are the real victims of this fiscal highhandedness.
It is an established fact that despite resorting to all kinds of highhandedness, illogical policies and unjust withholding taxes, the FBR has failed to improve the tax-GDP ratio, which is below 10% for the last many years. The burden of a number of presumptive taxes levied under the income tax law (which are nothing but crude forms of indirect taxes) has been shifted from income earners to consumers and clients.
These presumptive taxes have not only distorted the whole tax system, destroyed economic growth and made the consumer/client the ultimate sufferers but these despotic, short-term, myopic and figure-oriented measures have even failed to bridge the fiscal deficit, which is estimated to soar to Rs 1800 billion this year.
The men in power say that 64 years of problems cannot be resolved in a few months or even during the 5 years' term for which they have been elected. Their main problem is how to deal with the powerful tax machinery, which is inefficient and corrupt. On the recommendation of the tax bureaucracy, successive governments have been announcing unprecedented concessions for the corrupt in the form of tax amnesty and money-whitening schemes and latest one is for investors (sic) in stock markets which is the worst of all.
The rulers admit massive tax evasion through these schemes and no further proof is required of the criminal culpability of tax officials in the entire episode. It is an unholy alliance between corrupt politicians and tax bureaucrats. Through these schemes, tax bureaucrats please their masters, who are the plunderers of national wealth. If elected representatives are sincere in mending the situation, they should pass asset-seizure legislation and confiscate all ill-gotten and untaxed assets for the benefit of the have-nots.
In the wake of such a bold step, resource mobilisation will not be a problem any more. Once the political elite starts paying tax and control wasteful expenditure on personal perquisites, the rest of the nation will follow in their footsteps. The rich and mighty, which do not pay taxes, should be taken to task. If the present government brings big absentee feudal landlords into the tax net, manages to get taxes from the influential ones and succeeds in imposing sales tax across-the-board (preferably with a low rate of 5% at one single point), there would be no budget deficit.
This goal can only be achieved if the government simultaneously tackles issues related to tax evasion and rampant corruption in the tax machinery (by not just throwing them out of jobs but rather, making the system workable and just). Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit within few years provided that a comprehensive programme, well-designed work plan, scientific approach and multi-dimensional strategy is adopted for rapid economic growth, tax reforms and resource mobilisation.
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Tax and Pakistan), are Adjunct Professors at Lahore University of Management Sciences)