by Fawad Kaiser 2 July 2019
With an ambitious new Prime Minister Imran Khan in power and in absolute control of the machinery of government, there has been a lot of talk in this budget session about revenue and how Pakistan Tehreek Insaf government can raise more of it. There is, of course, a proposal to enact an amendment to the Constitution that would enable the state to switch from a flat income tax to a graduated income tax. There also is a proposal gathering steam in a number of quarters to further increase the government tax on gas and electricity. Let’s see.
It is hard to say what effects this will have on masses, but we assume that at least some of them will. And that is not going to be easy. Pakistan has big financial problems, and the reality is they are probably not all going to be solved with just borrowing loans from other countries. Or they are not all going to get solved with more taxes either.
The current government has presented its first budget last month. While this will not be a well-liked budget, it is unlikely to be a mere formality of placing accounts on the floor of the parliament. After all, it is the big stage for the government to make big announcements after the 2018 elections. There is speculation about the budget containing a high taxes on vehicle road tax and vehicle transfer charges and on buying luxury cars and even income tax on the property income bracket tax payers. Not to forget, the Goods and Services Tax (GST) Council has already been increased for small businesses in its previous mini budget meeting. There is no point in joining the speculative game on what the budget will or will not do. But there is some merit in dwelling on the possible policy directions, as indicated by the political economy strategy of the government.
On the surface the budget announces policies such as direct income transfers to farmers and abolition of income taxes for those in the lowest tax bracket. These are moves which might not bring major, tangible benefits to the intended beneficiaries before the next elections, but make for strong optics vis-à-vis the long term policy direction of the Pakistan Tehreek Insaf (PTI) Party). But such policies also carry a risk. Any significant direct income transfer scheme in agriculture, at the given level of fiscal legroom, will signal the beginning of winding down of existing producer-subsidy government support in the farm sector. Any significant concession in direct taxes has the potential of encouraging fragmentation of firms and businesses which can be counterproductive to both tax collection and productivity enhancement. Once implemented, these policies will be difficult to withdraw. Ideally, such policies should not be implemented without a comprehensive analysis of all related factors.
When PTI were pitching a massive tax rise for corporations and wealthy families before the elections, they promised voters many benefits: increased investment, higher wages and a tax cut that pays for itself. The tax plan, PTI leader Imran Khan said, would turbocharge the Pakistan economy and provide a much-needed helping hand to working-class families. Most people, half the people in this country, live pay check to pay check, so there is a lot of economic anxiety hence just one of the key solutions is faster economic growth, more jobs and the best thing Imran Khan could do to deliver that is tax reform.
So, it is almost a year since PTI came into power and is it delivering on the promises Imran Khan and other PTI leaders made? Imran Khan had said “Not only will this tax plan pay for itself, but it will pay down debt”. This statement was absurd when Prime Minister Imran Khan made it, but it looks even more ridiculous now. The deficit and the federal debt are growing — and at a stunning pace. In the current fiscal year, the federal government will spend thousands of billion more than it collects in revenue, a reality that is becoming a nightmare with constant devaluation in Pakistani rupee. Over the coming decades, the federal debt could nearly triple as a share of the gross domestic product if PTI government does not stop spending increase permanent.
The PTI administration is hoping that the cut in the massive spending package will ensure that the economy will show an improved performance in fiscal 2019 than in the previous year. But the administration’s plan to offset the negative economic effects of the tax increase raises numerous questions. How does the government intend to finance the spending spree, for instance? Are the measures fair, clear and easy to implement? How rigorously has the administration assessed the cost effectiveness of the proposals?
Today, many politicians including Imran Khan seem to realize that the increasing taxes and tax collection has become a political liability, which is why they are worried and even they realize that it is far worst to what they had expected. Instead of finding a new steady revenue source to finance the measure, the administration has simply taken advantage of the benefits of past experts and their previous efforts. Some government policymakers suggested increasing the tax on income from financial investments such as stock dividends. But the idea was not even seriously considered as it was unlikely to be approved by the prime minister’s office, which was reluctant to take any step that could hurt the stock market.
Prime Minister Imran Khan is bent on ensuring that the tax rise will not deliver a blow to the economy, while the Finance Ministry at the behest of International Monetary Fund (IMF) desperately wants to raise the tax rates. The package is a product of awkward and messy political compromises among parties with conflicting agendas and interests–the prime minister’s office, the Finance Ministry, IMF and other government organizations. The loser is consumers whose interests have been put on the back burner.