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2019: Pakistan’s fiscal challenges

Dr. Ikramul Haq

An unusual decline in revenue collection and steep rise in current expenditures caused a deterioration in all major fiscal indicators during FY19. The overall budget deficit during the year stood at a historic high of 8.9 percent of GDP, which was also in excess of the 4.9 percent target set in the Budget 2018- 19. Meanwhile, the primary and revenue balances worsened substantially, highlighting growing debt stress for the government and a shrinking space for the needed development expenditures”—State Bank of Pakistan, Annual Report 2018-19—The State of Pakistan’s Economy

A tax gap analysis recently completed by the World Bank indicates that Pakistan’s tax revenue would reach 26 percent of GDP if tax compliance were raised to 75 percent—World Bank $400 million Pakistan Raises Revenue Project

The historic high fiscal deficit of 8.9% of GDP, as pointed out by the State Bank of Pakistan in its Annual Report for Fiscal Year 2018-19, posed enormous challenge for the Government of Pakistan Tehreek-i-Insaf (PTI) that also inherited record public debt, trade deficit and current account deficit. The callous economic policies of Pakistan Muslim League (Nawaz) from 2013 to 2018 left the PTI Government with no choice but to seek yet another bailout from the International Monetary Fund (IMF) and resort to massive rupee devaluation along with austerity measures leading to stagflation. The result of IMF-imposed policies is: Trade deficit fell from $11.7 billion from July-October of FY18-19 to $7.8bn during the same period this year and current account deficit dropped to $1 billion a month (in FY19) compared to $2 billion a month last year. However, public debt rose to Rs. 36 trillion and inflation to 10.08 percent in October 2019.    

The two most troublesome areas of our fiscal management are debt servicing and high government expenditure. In 2018 and 2019, expenditure amounted to over 21 percent of GDP. On account of debt servicing in FY 2018, actual expenditure was Rs. 1987 billion against the budgeted figure of Rs. 1620 billion. Allocation for the current fiscal year is 2891 billion, 78 % higher than last year! If Federal Board of Revenue (FBR) collects even Rs. 5000 billion against originally fixed target of Rs. 5503 billion, after share of provinces under 7thNational Finance Commission (NFC) Award, net tax collection available to the federal government will be around Rs. 2400 billion, that would be short by Rs. 491 billion for debt servicing of Rs. 2891 billion alone!! This shows the gravity of the fiscal crisis faced by the federal government—aptly highlighted by Prime Minister in his address to top officials of FBR on November 13, 2019.

Successive governments, military and civilian alike, have failed to end harmful tax policies and reduce wasteful/unproductive expenses. No serious effort has been made by any government to broaden the tax base, lowering of rates and effective enforcement of tax obligations.  

Perpetual failure of FBR to meet assigned targets is not something new. In 2018-19, it was assigned the target of Rs. 4435 billion that was later reduced to Rs. 4013 billion and then to Rs. 3935 billion. FBR collected only FBR collected Rs. 3828.5 billion which was 0.4% lesser than the collection of 2017-18. This year target of Rs. 5503 billion is an uphill task. Every year FBR fails to collect downward revised target what to speak of originally assigned figure in the budget estimates. This widens fiscal deficit resulting in more borrowing and cutting away large part of the budget for debt servicing.

It is an undisputed fact that FBR has not only miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes, it  has been single handedly destroying Pakistan’s growth by anti-business actions especially during 2013-18. The then Finance Minister gave free hand to tax officials to block bona fide refunds, take undue advances from large business houses, use negative taxes like raising unjust demands and freeze bank accounts for recovery. Exporters and other taxpayers, still waiting for refunds, have been denied lawful right of payments/compensation within stipulated time. Had we concentrated on growth above 6%, as done by China, India and even Bangladesh in the region, we could have avoided the present fiscal and economic mess. Higher growth yields higher taxes and harsh taxation only hampers business expansion.     

SBP in its ‘Annual Report 2018-19—The State of Pakistan’s Economy’ has rightly criticised the provinces for what it called “lack of institutional capacity” giving rise to “lower revenue collection that contributed less to tax-to-GDP ratio and fiscal consolidation efforts”. The report further noted that “an important agenda on fiscal reforms should be the capacity building of the provincial authorities, which are responsible for mobilising revenue via the agriculture income tax, sales tax on services and property taxes, and carrying out crucial spending on important sectors like education, health, social spending and regional infrastructure”. It is observed in the report that even after nine years of the passage of the 18th Constitutional Amendment, “the provinces still seem to lack capacity to adequately assume these responsibilities”.

The SBP in its report has failed to mention that in Pakistan the privileged classes pay no or meagre taxes on their collossal incomes and wealth but the poor are subjected to all kinds of oppressive taxes. Adding insult to injury, they get nothing in return—even deprived of protection to their lives and property, what to speak of basic facilities of health, education, transport and housing.  

For fiscal year 2018-19, the SBP appreciated the provinces for adhering to a better fiscal discipline as they cumulatively posted a surplus of Rs 190 billion, compared to a deficit of Rs. 17.5 billion in fiscal year 2017-18. However, this surplus fell short of the target of Rs. 285.6 billion. It is a bitter reality that after the 7th NFC Award, both the federal government and provinces failed to observe strict financial discipline. Monstrous size of governmental departments is causing colossal wastage of resources. The governments are spending recklessly, a tendency that continues under civilian and military regimes alike since the last many decades.

It also needs to be highlighted that the performance of provinces in collecting agricultural income tax is extremely appalling. After 18th Amendment, right to levy wealth tax,  capital gain tax on immovable property, gift tax, inheritance tax etc is with provinces but they are not ready to levy such taxes on the rich and mighty. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich classes—the meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and the Centre in fiscal year 2018-19—is lamentable.

For achieving fiscal stabilization/consolidation in Pakistan, it is imperative that right to levy tax on income, including agricultural income, should be given to the Centre. In return, the Centre should hand over sales tax on goods to the provinces. There should be single tax agency to collect all taxes—it alone can generate sufficient funds for the federation and federating units. We need to formulate a rational tax policy aimed at incentivising investment, encouraging savings and facilitating capital formation in the private sector for job creations, innovations and rapid economic development. Our policymakers have miserably failed to achieve these goals—for them taxation means raising more money and nothing else. Overemphasis on regressive taxation by the successive governments could not avert record fiscal, trade and current account deficits. The failed policy of austerity of IMF and continuation of regressive taxation led the country to stagflation in 2019. One hope this trend will be reversed in 2020 as positive signs on all fronts are now emerging.

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The writer, Advocate Supreme Court, is visiting faculty at Lahore University of Management Sciences (LUMS).

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