When the Mughals handed over the revenue collection power in Bengal to the East India Company, the influence of the foreigners expanded which later translated into two centuries of subjugation of the entire Indian subcontinent. It's been tested and proven time and again that the fundamental power of rulers is the power to implement taxes and collect them. if you cannot do that, you are not much of a ruler.
Pakistan's tax net has remained narrow since its independence; thinning further in recent years regardless of whether the ruling government was run by a military regime or a democratically elected parliament.
The mismatch between revenues and expenditures is the root cause of many socio-economic issues faced by the country today, resulting in persistently high inflation and rising unemployment. The energy deficit is making industries, especially labour-intensive industries, anaemic day by day. It is not only making investors shy away from new projects, but also making the existing industries work at sub optimal levels.
The primary revenue balance - fiscal deficit minus debt servicing - is consistently in deficit, making it increasingly difficult to reduce the debt over time. Across the board, the 'subsidies culture' is not only limiting fiscal space further, but also creating market distortions that shun out competition and hinder entrepreneurial growth.
The current government is the first since the Bhutto era of the 1970s to be announcing its fourth budget without being toppled. But just like the first three budgets announced by the present government, the upcoming budget will likely be miles apart from the PPP's promised political and economic manifesto.
However, the government is going to implement, at least, some steps to enhance revenues by a combination of legislative and administrative measures for reaching the revenue target. It will partially do away with blanket subsidies and attempt to induce the provinces to take on more responsibilities after getting their increased shares from the revenue pie.
Poor economic indicators and the ensuing bashing of policies by economic experts, civil society and foreign partners alike, are forcing legislators to withdraw some exemptions in the GST to make it close to the objective of RGST or VAT, whatever one chooses to call it.
The intent is to slowly do away with power sector subsidies, which are planned to be phased out completely by 2012-13 (the election year), and to replace them with targeted subsidies in the form of BISP and other poverty eradication programmes.
To tackle the core economic issues of high inflation, rising unemployment, possible budgetary measures dealing with these issues should incorporate incentivising labour-intensive industries to grow.
Firstly, we need to allocate more gas towards textiles and other export-oriented and labour-intensive industries. Steps can be taken in this regard by raising CNG prices to at least 75 percent of petrol and diesel prices; exempting import duties on solar-generated geysers, and offering tax breaks for manufacturing them. Increased tariffs on use of natural gas for residential purposes will encourage consumers to use it prudently.
With higher international agri-product prices, the rural economy is growing at the cost of the urban economy. There is a need to phase out cross subsidised feed stock gas to the fertiliser sector. In addition, tax breaks need to be given to have new plants in key industries, including automobiles, textiles and other export-oriented sectors.
There is also a need to rationalise PSDP with greater spending on cost-efficient energy projects, including dams and coal-based energy projects, as well as on corporatisation and privatisation of discos to fill the energy gap and arrest the circular debt problem.
Further, there is a need for provinces to assume responsibility towards spending more on social sectors, including education, health and infrastructure in neglected districts from their increased share of revenues. They should also build their capacities to generate taxes on agriculture, real-estate and property. This will help move towards a knowledge-based economy in line with the new growth framework envisaged by the Planning Commission.
As far as controlling inflation is concerned, in the absence of foreign financing, the deficit ought to be low to limit note printing. For that to happen, the tax gap - potential minus actual collection - has to be kept under control. This will also help make debt sustainable and create room for development spending which kick starts the economic growth and generates much-needed employment as well.
Moreover, issues of increasing the currency in circulation is required to be watched carefully - removing the withholding tax of 0.3 percent on banking transactions over Rs25000 will help deposits grow (higher savings) and that will resultantly provide some room for lending to the crowded-out private sector.
The FBR has to be more efficient and as said earlier, its prime responsibility is to collect taxes. Nonetheless, it is a painstakingly slow process and by the time the reforms start paying dividends, the privatisation programme has to be up and running. Higher revenue collection will also depend on better performance of the capital markets, both equity and debt.
There is a debate amongst policy makers regarding the capital gain tax which is hindering price discovery at the stock exchange and posing hurdles to secondary offerings and bond issues of SOEs.
Plus, the CGT generated is a fraction of what used to be collected from turnover tax. But the proponents of abolishing CGT have to ponder over their reasoning for low volumes at the KSE and lack of appetite of debt market - ie is it economic and political uncertainty and the bleak law and order situation which are behind the lacklustre performance of capital markets or CGT? Mind you, CGT encourages filling tax returns, which are imperative for plugging tax gap.
MONEY AGGREGATES:
The currency in circulation continued its gradual uphill journey - increasing by Rs11 billion to reach Rs255 billion for the week ending May 14. During the same period, demand and time liabilities surged by Rs22 billion to make the overall money supply increase by Rs33 billion to reach Rs669 billion (11.58%) compared to the year-to-date increase of Rs447 billion (8.69%). (Feedback at ali.khizar@br-mail.com).
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KEY MONETARY AGGREGATES AS ON MAY 14
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Rs (mn)
14-May 7-May Change
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Currency in Circulation 255,455 244,585 10,870
Total Demand & Time Deposits 409,792 387,618 22,174
Broad Money (M2) 668,943 635,884 33,059
NFA 172,756 165,717 7,039
NDA 496,186 470,166 26,020
Net Government Borrowing 512,531 491,251 21,280
Borrowing for budgetary support 608,883 614,106 (5,223)
from SBP 217,687 217,411 276
from scheduled banks 391,196 396,695 (5,499)
Commodity operation (100,573) (127,079) 26,506
Credit to non-govt sector 118,446 120,290 (1,844)
to private sector 107,494 112,815 (5,321)
to PSEs 10,575 7,110 3,465
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Source: SBP
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