Policies for growth & employment

Dr. Ikramul Haq

The main focus of a rational tax policy should be on incentivising investment and productivity, 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 money and nothing else. Overemphasis on regressive taxation by the last government of Pakistan Muslim League (Nawaz) could not avert record fiscal and current account deficits. The adoption of failed policy of austerity and continuation of regressive taxation by the Government of Pakistan Tehreek-i-Insaf (PTI) has led the country to stagflation. The rising inflation and decline in GDP growth, coupled with oppressive and inconsistent tax policies, are forcing the business community to search for safer havens abroad, depriving the country of invaluable capital. Similarly, foreign investors are reluctant to avail the tremendous Pakistani talent that goes to waste for lack of proper funding and training.

Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But thanks to donors’ agenda of overemphasis on taxation and incompetence of our economic wizards (sic), Pakistan’s dependence on imported products has increased manifold, whereas value-added exports have not been given any attention, let alone promoting high-tech industries capable of technological innovations—modern economies are knowledge-based and future is for those who can develop them as quickly as possible.

For technological transfers, rapid industrial growth and employment generation, Foreign Direct Investment (FDI) is desirable. In Pakistan, when local investment is dying, expecting FDI is like living in a Fool’s Paradise. Tax incentives play an important role in attracting FDI—which has nose-dived in Pakistan during the last decade. Tax policy constitutes an important, if not a determinant factor, for favourable investment behaviour. Unfortunately, our budget makers have always been preoccupied with revenue targets and have never bothered to provide some long-term investment-oriented tax incentives for infrastructure development, investments and employment generation, without which sustainable growth is not possible.

Economic challenges faced by Pakistan are multiple and grim—we are ensnared in a deadly debt trap, but there is no plan or strategy on the part of the rulers to come out of it by exploiting the untapped assets, revolutionizing agriculture and stopping wasteful and unproductive expenses. Pakistan faces the herculean task of providing jobs to at least two million young people every year. For achieving this task we will have to ensure that economy grows at the rate of at least 7% per annum over a long period of time—for this we need investment of 20% of GDP. This challenge is also our great opportunity for economic progress. Majority of job seekers are young people, who are our greatest asset—imparting education and skills to them and creating matching jobs is the real challenge. This can be met successfully by assignment of taxes for productive investment and employment generation—our real engine of growth. The prevalent pessimism is due to the attitude of rulers and financial managers, who cannot think beyond what they are “commanded” or “trained” to think. They keep on telling us about the symptoms of an ailing economy but never try to cure the real causes of illness.

Huge unproductive workforce in various governments (federal, provincial, local and corporations) nearly four million people, who waste time and money, creating mostly hurdles for citizens and businesses rather than serving them. A major transformation is required to cut off this burden on the economy.

Pakistan has been facing increasing fiscal and current account deficits, burgeoning debt,   an ever-worsening unemployment crisis and a perpetual challenge of rapid industrial growth. But no government has ever thought of earmarking of revenue for ‘employment zones’. Such employment zones can cater for:

• Creation of employment
• Technological renovations
• Export promotions
• Town renovations; and/or
• Experimentation with new economic management systems.

Pakistan is in dire need of establishing country-wide “Employment Zones’, which should be low-tax or tax-free for companies establishing vocational institutes and creating new jobs, especially for women. It will be an effective tool to reduce the mounting unemployment burden and to help boost industrial/business growth. The government should identify areas where structural employment is particularly high and then earmark revenue for establishing Employment Zones in those areas. Out of total collection of taxes at least 25% should be transferred directly to an independent fund for establishment of ‘Employment Zones’.

Devising an efficient tax model for attracting local investment and FDI, rapid economic growth in Pakistan requires an analytical study of all the irritants prevailing in various laws and regulations, procedures and implementation processes. The main irritants are inconsistent policies, inefficiency, red-tapism, lack of coordination, highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses—both at federal and provincial levels. We need public debate for suggesting solutions to remedy the situation and promote business growth attracting domestic and foreign investment aimed at promoting exports and ensuring much-needed employment generation.

Empowerment of people through local governments should be our top priority as envisaged under Article 140A of the Constitution. Political, administrative and fiscal decentralisation is the key to democratisation of institutions. This is the most neglected area in Pakistan. Local governments must enjoy the right to levy municipal taxes. Municipalities should be given wide-ranging powers. Extensive functions that fall within the specific sphere of authority must include education, health care and social welfare services. The municipalities should also be responsible for matters related to the residents’ free-time, recreation, housing, and the management and maintenance of their living environment (i.e. roads, streets, water supply and sewerage), as well as land-use planning and functional municipal structures.

In all successful democratic models, taxes at grass root level play a critical role in municipal self-governance. The power to levy and collect taxes is one of the cornerstones of municipal self-governance as it ensures that the municipalities can manage the functions that they have undertaken to execute or those for which they are responsible for under the law. In social democratic countries e.g. Sweden, Norway, Denmark and Finland, the most important feature of fiscal management and delivery of social services is municipal tax. In 2018, Finland collected US$ 44 billion as municipal tax—total tax collection of US$ 180 billion (44.1% of GDP). In Pakistan, total tax collection—both at federal and provincial level—in fiscal year 2017-18 was US$ 35 billion (just 11.5% of GDP)!

Monstrous size of government and collossal wastage of public money, non-taxation of luxury and commercial properties e.g. clubs and golf courses, unprecedented exemptions given to generals, judges and high-ranking civil officials cause huge losses to the national kitty. We can make Pakistan a self-reliant and prosperous country through fiscal decentralisation and fair taxation. Solutions are available. The only thing we require is to debate these publically and convince our political parties to make them part of their common agenda. 

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The writer, Advocate Supreme Court, is Adjunct Faculty Members at Lahore University of Management Sciences (LUMS)