Budget FY21: prepare for flexibility

Budget season has begun, and the Q-block has started taking suggestions from the business community and civil society on how budget FY21 should look like. The business community’s response so far is quite obvious: if before Covid-19 they were desirous of getting tax cut of X percent; in post-Covid scenario, they want it to be 2X or 3X. No marks for the proverbial out of the box thinking!

Such thinking should entail solutions to peg state endowments to various businesses to their performance or other outcomes, as discussed and agreed upon with the relevant chamber or association prior to the allocation of various endowments.

For instance, if businesses are being given soft loans for employee salaries then it must be ensured that those funds are indeed being used for that purpose, and not for punting in the stock market. Or if special incentives are given to certain export-oriented sectors, and if exports don’t grow, then given the paucity of resources those incentives should be reallocated to another sector.

This in-built mechanism for flexibility and reprioritization of scarce resource should ideally be in place regardless of the pandemic. The pandemic has only strengthened the need for reprioritization, and flexibility given tighter-than-usual budget constraints in an environment where competition for endowments is also fiercer-than-usual. However, flexibility should not come at the cost of accountability.

On that note though, mini-budgets – not just one mini-budget – can be expected in FY21, both if Covid and its impact on economy turns out to be worse-than-expected or better-than-expected. The government would do well to give that signal in the assembly at the time of budget speech and create buy-in to avoid any kind of political stand-offs later.

Achieving this flexibility, however, will require a number of changes. Top in the order is to expand the tax net to be able to at least partially mitigate lower tax revenue that will feel like a tighter straitjacket in FY21.

To that end, one solution the government should explore is to change the Director General Trade Organization (DGTO) rules, whereby every business must become a part of at least one relevant business chamber and association, ala Turkey; and no business shall be a part of chamber or association unless they are tax filers.

As per current DGTO rules, businesses need only have NTN/sales tax number to be part of chamber or association. Leading business chambers such as Karachi’s or Rawalpindi’s have their own regulations that demand its members to be active tax filers. Most associations, however, don’t follow such practices. Changing the DGTO rules can help drive growth in tax filers.

Another way to facilitate flexibility to be able to respond quickly to the possibly volatile change in needs, is to create a contingency fund up front, and start contributing to it every month from July 1. This will be a hard measure, but these are hard times.

Third, now is the time to step up on the efforts toward treasury single account so that at any given point in time, the government has its finger on overall cash position to manage liquidity for varying needs stemming from Covid’s impact on health and economy.