EDITORIAL: It is a sad commentary on the state of our economy that within a brief span of three years we are faced with the same unpleasant but imperative task of putting the economy back in the stabilisation mode. Pursuant to the International Monetary Fund (IMF) programme that was signed in 2019, the federal budget for the year 2019-20 was framed to stabilise the economy.
It was designed to severely contract economic activity through tough fiscal consolidatory steps to arrest the growing mismatch in our current account and an unsustainable fiscal deficit that had brought our external account under pressure. Regrettably, we seem to have reverted to that very familiar situation now. The federal budget presented in the National Assembly yesterday is designed again to stabilise the economy by slowing demand-driven growth that has brought our external account to an unsustainable pass.
Time and again we have witnessed this vicious cycle and all our successive governments have displayed a remarkable neglect of the fault lines in our economic model, despite repeated cycles of boom and bust. Ironically, government after government remains obsessed with pushing for higher growth in the economy in utter disregard of evidence that shows that constraints in our external accounts due to lower exports make it an exercise to generate a self-inflicted crisis in the forex reserves situation of the country. The result is that the country, time and again, has to seek bailouts from the IMF.
The key priorities of the budget proposals are stated to be: rejuvenation of development programme, elimination of power outages that have wrecked the quality of life of the general public, a significant boost in agricultural output for food security, a meaningful reduction in fiscal deficit to sustainable level, a visible increase in industrial production particularly in export-oriented sectors, imposition of a ban on import of so-called luxury items to conserve foreign exchange, an appreciable reduction in the losses of State-Owned Enterprises (SOEs) and qualitative enhancement in taxes on wealthy persons.
To give effect to these priorities, the strategy employed underscores the need for stabilising economic growth, reining in the rising inflation within the economy, increasing the government’s revenue, increasing exports, protection to the poor, incentivizing tax collection agencies and controlling tax leakages.
The size of the GDP for fiscal 2022-23 is projected at 78,197 billion rupees with a budgetary outlay of rupees 9,505 billion. Tax revenue is estimated at rupees 7,004 billion and non-tax revenue at Rs 2,000 billion, yielding gross revenue receipts of Rs 9,004 billion. After adjustment of the share of the provinces under the National Finance Commission (NFC) award the net revenue receipts with the federal government would be Rs 4,904 billion. To meet its expenditure requirements resort to borrowings from banks (Treasury Bills, Pakistan Investment Bonds and Sukuk) would be made to raise Rs 1,172 billion and from the National Savings Schemes (NSS) Rs 1,996 billion. Net external receipts are estimated at Rs 533 billion and a figure of Rs 800 billion is estimated as provincial surplus that the federating units are supposed to generate to offset their increased share from the divisible pool and their lag in assuming full financial cost of the devolved subjects under the 18th Amendment to the constitution. A paltry sum of Rs 96 billion is shown as privatisation proceeds despite the claimed priority of reducing the losses of SOEs. It appears that there is no clear plan, as yet, to restructure/privatise SOEs. It is important to note that the incumbent government was country’s Opposition in parliament barely two months ago. Its approach to the SOE challenge gives birth to question whether it will tone down its fiery populism now that it has the authority to govern the state following removal of PTI- led coalition government.
On the expenditure side, the current expenditure remains the bane of the economy and there seems be no let-up in its increase despite shrinking resources with the increasing resort to borrowings that are ballooning the debt. The next fiscal year will be no different from previous years as the current expenditure is projected to rise to Rs 8,694 billion as against Rs 7,523 billion this year, reflecting an increase of over 1,100 billion rupees. Mark-up on domestic debt, therefore, is projected to rise from Rs 2,757 billion to Rs 3,950 billion and on foreign debt from Rs 303 billion to Rs 511 billion.
The guiding principles, according to finance minister Miftah Ismail, for taxation policy for next fiscal year are: emphasis on direct taxes (income and capital value tax), taxation of unproductive assets like real estate to which the prime minister had alluded in his address to the businessmen in a pre-budget conference, windfall tax on sectors that made exorbitant profits, protection to productive assets and bringing in equity in the tax regime through distribution of wealth by taxing the wealthy. These guiding principles are based on the premise that Pakistan’s investment climate, including its tax structure, does not encourage entrepreneurship; in fact, it discourages new businesses and encourages investment in real estate. This is indeed a multifaceted menace that is anti-growth that causes an artificial increase in real estate prices, rendering house ownership beyond the reach of the middle class. Furthermore, the money generated from this unproductive investment, which is also a parking lot of choice for tax evaded and illicitly acquired funds, is a major source of inflation. Such a situation undermines social equality and promotes disharmony.
Keeping in view the phenomenal inflation that is in the process of surfacing in the economy and is expected to touch 20 percent, according to some independent economists, primarily because of the prior actions that were demanded by the IMF to put the suspended programme back on rails, the government has offered a major relief to the salaried class by doubling the threshold of taxable income from 0.6 million to 1.2 million rupees. A 50 percent increase (from 0.4 million to 0.6 million rupees) is proposed in the taxable threshold for business individuals and Association of Persons (AoPs). The rate of tax on income from Behbood certificates has been halved from 10 to 5 percent. And fixed tax regime has been reintroduced for small retailers. A big relief to industry is proposed by allowing 100 percent adjustment of depreciation in the first year as against the present 50 percent.
In its declared objective to tax the wealthy and unproductive real estate sector a tax on deemed rental income has been proposed. This is in fact ‘wealth tax’ in the garb of ‘deemed income’ and is likely to be challenged in the court as under the constitution the federal government does not have the power to tax immovable property except for Capital gains on sale and purchase which the federal government is already doing and has proposed to increase the rate to 15 percent. This deemed tax on immovable property is a federal government’s major encroachment into the ‘exclusive’ domain of provinces and will not go unchallenged.
An additional tax of 2 percent is proposed to be levied on high earning persons with an annual income of Rs 300 million or more while tax rate on banks increased from 39 percent to 45 percent to capture a share of the ‘windfall gains’ earned by them due to high interest rates and risk-free investment in government securities. An important change has been made in the criteria for non-resident status for tax purposes. In addition to the requirement of 183 days stay outside Pakistan in a fiscal year, a further condition of being a tax resident of another country has been introduced. This would help stop the misuse by those wealthy individuals who are not tax residents of any country.
We recognise that in the present climate of deepening political polarisation and uncertainty within the country combined with monetary tightening in developed countries to check unprecedented inflation and supply chain disruptions triggered by the war in Europe, budget making is more than an arduous exercise. There are some questionable projections and targets that may not be possible to achieve under the present circumstance unless, of course, the obtaining environment changes dramatically. Although the objective of attaining 5 percent GDP growth in the next fiscal perhaps reflects a laudatory approach to economic governance, achieving it may not be possible because of the need to significantly curtail demand within the economy in order to bring the external account and the fiscal deficit to sustainable levels. It is hoped that the government would stay the course and steer the economy out of the morass that it is in at present. We must not lose sight of the fact that our deepening economic woes are dangerously threatening the realist construct of our national security. The government must work harder than it should. Prime minister Shehbaz Sharif and all of his Cabinet colleagues must therefore pull their socks up, given economic conditions are especially dire for the common man.
Copyright Business Recorder, 2022