Budget with a mental health deficit
At a time when Pakistan is going through some of the worst economic challenges in its turbulent history, the federal government has presented a budget that speaks volumes about its lack of commitment to austerity, its insensitivity to the misery of the people, its total abandonment to the IMF and the distribution of rents among elites in what Dr. Ishrat Husain rightly calls an “elitist state”.
More than the budget deficit, the budget clearly betrays a serious lack of common sense and sensitivity on the part of those in the corridors of power. According to the economic survey for the financial year 2021-22, Pakistan faced a current account deficit of $13.8 billion in the first nine months of the financial year 2021-22, a fiscal deficit of 3 .8% of GDP is expected to rise to 7.0% by the end of June, inflation at 11.3 percent, a trade deficit of $32.9 billion in fiscal year 20021-22 from July to April, a fall in the Pakistani rupee against the US dollar, rising unemployment, skyrocketing public debt of 44.366 trillion rupees and depletion of foreign exchange reserves. In such a depressed situation, the government was expected to take thoughtful short, medium and long-term measures to address the structural and systemic issues plaguing Pakistan’s economic landscape and compounding the hardships of people on the streets. Yet once again the elites managed to grab most of the pie.
The government’s assertion of making hard decisions seems really strange because no such decisions were made except to impose a burden on the poor while generously distributing rent, benefits and privileges among the elite by increasing institutional budgets, increasing the salaries of bureaucrats and continuing unchecked concessions and exemptions. to industrialists. A difficult decision would be one that ensures an equitable distribution of resources, taking more from the rich and giving more to the poor. On the contrary, the budget drafters have further overburdened ordinary people and left the wealthy better off than before. It is true that Pakistan could ill afford the persistent and growing burden of subsidies, and it is true that it was necessary to reduce them to deal with the country’s budget deficit, but instead of cutting subsidies so massively on the fuel, gas and electricity all at once go, a more rational, focused and fair approach was warranted. There is much to learn from the successful model of the targeted subsidy regime maintained by Iran.
A look at the budget forecast reveals several important facts that reveal the serious systemic political and institutional flaws that are hampering the country’s economic progress and compounding the woes of the people. The saddest thing is that the government has done little to remedy these political and institutional problems. Estimates vary, but around 35-40% of the economy remains informal, outside the track-and-trail mechanism of the mainstream economy. There is virtually no serious policy action in this budget to make inroads into this huge underground economy. Without integrating this huge informal economy, Pakistan will continue to suffer from many factors including limited fiscal space, market distortions, inaccurate economic estimates and projections, and illicit trade.
The budget could have been used as a policy instrument to gradually integrate the shadow economy into the formal economy, but nothing substantial enough was included in the budget to harness the potential of the informal sector of the economy to reduce at least a significant part of the current economic difficulties facing the country, especially on the fiscal side. The lion’s share of the budget continues to be consumed by two large items – defense and debt service – which together constitute 57.59% of total expenditure for the 2022-23 financial year, an increase of 10.32 % compared to FY 2021-22 when the two constituted 52.19% of total expenditure.
Two strategies could help not only to generate more resources, but also to allocate more of them for the social sector and the development needs of the country, with rich dividends for the well-being of the poor. One is broadening the tax base, as currently less than one percent of the population pays taxes, although the FBR’s ATL shows 2.2 million active taxpayers, and the tax-to-GDP ratio of the country has fallen to 9.4 percent while that of comparable economies continues to rise. The 2022-23 budget shows that the percentage share of direct taxes in tax revenue is expected to decline further to 36.7%, from 37.4% in the budget for FY 2021-22, while the share of indirect taxes is expected to increase to 63.26 percent of total tax revenue from 62.56 percent in fiscal year 2021-22. Thus, the already skewed tax structure will further worsen in the coming year, with negative implications for the middle and poor sections of society.
The second is to reduce reliance on borrowing, rationalize defense spending, and restrict borrowing solely for development purposes rather than to meet current spending needs. On the contrary, the development budget has been reduced by 16.18% for the financial year 2022-23. This anti-development bias is one of the reasons why Pakistan lags behind other comparable economies. In Bangladesh, for example, the share of development expenditure for the financial year 2022-23 is 38.28% of total expenditure. Pakistan can ill afford flawed policy options given their long-term debilitating impact on overall national socio-economic development.
Imposing a super tax is not likely to close the persistent and gaping budget deficit. Aside from genuine fears that the ultimate burden of this tax will also be tactfully passed on to end consumers, the super tax is not a sustainable long-term solution and risks damaging an already faltering industry. That the KSE 100 index crashed on the first day of the imposition of the super tax is just the tip of the iceberg, signaling even more negative impacts on the business world in the near future.
A more economically viable option would have been a gradual and systematic abolition of the exemption scheme which has plagued local industry with the dependency syndrome without delivering the benefits of allowing industry to develop the resilience and competitiveness it so sorely needs. need in the global market. The effect of exemptions is lost, partly due to the flawed regulatory and compliance regime, but mainly due to the lack of a proper monitoring and evaluation mechanism to ensure targeted and effective exemptions. Another option is to increase reliance on direct taxes and gradually reduce reliance on indirect taxes. This will help move towards a fairer and more sustainable tax system. Rather, the government has resorted to burdening those already in the tax net with an additional tax net. Policy measures aimed at filling the DAC and improving the performance of the external sector also remain below average. This budget revealed not only the government’s insensitivity to the plight of the people, but also its mental health deficit.
The writer is a member of the Khyber Pakhtunkhwa Assembly.
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