The health of an economy is reflected in a multitude of statistics, which do not all move in the same direction. This is why a government can always gather some encouraging statistics and its detractors can gather disappointing statistics to amplify their respective discourses on the evolution of the economy.
However, looking broadly and historically at the metrics used by economists to assess the health of Pakistan’s economy, two conclusions stand out. First, compared to regional and peer countries, Pakistan has been in economic decline for about two decades. Second, it becomes increasingly difficult to stop our downward trend as time goes on.
One might wonder why this is so. Is it because of our extremely high national debt, low and declining exports, high and unfair taxes, high utility rates, poorly educated children, a population growing too quickly, a large and extractive government supported by too few people, a rent-seeking elite, endemic corruption, terrorism, etc.?
Let’s put aside the reasons why any of us think the decline is happening. Since the decline is evident, the government must have a theory of why we are declining and a vision of what needs to be done to change our trajectory. This budget does not reflect this vision.
The context in which this budget must be analyzed is whether it will be limited to tinkering as we continue to lose ground to our neighbors or whether it will attempt to arrest this downward trajectory of high inflation, low growth, annual increases in the percentage of unemployed (now at its highest level in two decades) and those living in abject poverty (now the highest in a decade).
This is Prime Minister Shehbaz Sharif’s record fifth consecutive budget. Given that our population is growing at a rate of 2.5%, GDP per capita or income growth over the first four years was: -2.7%, -0.1%, +0.5% and +1.2%, for a four-year total of -1.2%. Pakistanis are poorer today than when the Prime Minister took power. During his four years, cumulative inflation was 78%. Exports are lower than last year and investments (both local and foreign) remain disappointing. Let’s look at some relief measures included in the budget. Employee taxes increased from less than 200 billion rupees to more than 600 billion rupees in three years. Some relief was warranted, and I’m glad it came. I appreciate the removal of the surtax on salary income and the reduction in tax rates in different brackets. But while the removal of the surtax is a relief, changes in tax rates, taking into account inflation, are not necessarily a relief. For example, a person earning Rs 250,000 per month used to pay a marginal tax of 23%, but this rate has now been reduced to 20%. But if, because of inflation, his salary increases to Rs 275,000 per month, he will move to the higher bracket and his marginal tax rate will increase to 25%.
Another positive point is the elimination of super taxes on companies with revenues below Rs50 crore. The removal of the super tax on exports is also positive, as it essentially meant that the more you exported, the more you were taxed. Setting a low rate on exporters’ working capital loans will be welcomed by the industry, but it has historically shown no impact on exports. A more useful measure is to provide subsidized long-term loans for the purchase of export machinery.
There are, as usual, other tricks for the rich. The government removed the tax on first and business class airline tickets and reduced the tax on foreign currency purchases using credit cards. This will not help a large majority of Pakistanis, but will greatly help the richest 1%.
The government has also rightly removed the 1% capital value tax on foreign assets owned by Pakistanis. It was a tax that I imposed and I admitted at the time that it was a mistake that I would correct, but before I could do so, I was deported. Again, this is not important to most Pakistanis, but it ensures that very wealthy Pakistanis do not move their legal residence out of Pakistan.
The speeches of finance ministers are long on relief measures and platitudes and little on all the new taxes imposed by the new budget. In a day or two these things will become clearer, but according to an agreement with the IMF we will see 800 billion rupees of new taxes and administrative measures imposed by the federation and the provinces.
The sales tax regime has expanded significantly, whereby businesses will pay taxes not only on the sales price, but also on the maximum retail price. That would mean about a 1% increase in retail prices for these products, but, more importantly, a bigger benefit for companies that avoid the tax.
Finally, there is a fixed tax on traders, although of a low amount and benefiting from a partial amnesty. I tried this years ago, but it didn’t work out very well for me. I wish the current team good luck.
Last year, the government allocated a budget of Rs 971 billion for the functioning of the civil government. With all the austerity measures announced by the Prime Minister, one could hope that the total expenditure would be lower than the budgeted amount. In fact, the amount amounted to Rs 1,021 billion, or Rs 50 billion more than the budgeted amount. Where is austerity heading for the government?
The four provincial and federal governments combined will spend around Rs 3,700 billion on so-called development programs. Even if we assume that there is no corruption in these programs and that all of these projects are necessary, wasn’t it time to seriously cut them, provide substantial tax relief, and reduce the deficit? After all, is our problem that our government is too small or is it too big and creating huge deficits?
The government also announced that tariff subsidies for low-income consumers (those using less than 200 units) will be removed from bills but will be provided through the BISP. But the objective of increasing the number of BISP beneficiaries is 12 million, while 26 million households benefit from subsidized electricity. I think it’s safe to say that many of the current grant recipients will be excluded.
Overall, the budget provides some relief to employees and businesses. But we did not see in this budget an effort aimed at substantially increasing exports, promoting economic growth or reducing poverty. For a healthy economy that needs tinkering, this budget was fair. But for a struggling economy that desperately needs jobs and growth, this budget lacks inspiration.
The writer is a former finance minister and secretary of Awaam Pakistan.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the editorial policies of PK Press Club.tv.
Originally published in The News
