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Fiscal reforms agenda

Persistent failure in implementing a prudent fiscal policy and poor management of economic affairs are root causes of financial mess

Fiscal reforms agenda
Pakistan’s tax policies measure poorly against the well-accepted principles of sound tax policy.

Taxation, a potent instrument to shape and influence the socio-economic policies of a country, has not received due attention for the last many decades in Pakistan. The foremost objective of a rational tax policy is raising resources for administration and development, transferring of resources from private to public use.

In social democracy, the most important objective of taxation is to provide economic justice, which relates to distribution of tax burden and benefits of public expenditure. It encompasses, besides redistribution of wealth, such questions as treatment of weaker sections of society e.g. women and children, minorities, the disabled and unemployed. All these elements are missing in our tax policy, in addition to lack of fiscal decentralisation to address the issues faced by the less-privileged people of all the provinces and areas lagging behind economically.

Pakistan is trapped in a deadly debt trap—total debt is now over 70 per cent of GDP. Besides precarious position of balance of payment and monstrous current account coupled with record trade gap, the burgeoning fiscal deficit of 6.6 per cent of GDP constraints the governments, both federal and provincial, to undertake infrastructure development and provide social amenities to all.

Effective fiscal management alone can help Pakistan to overcome the prevalent crisis. The new government needs to expand the size of the pie through broadening of tax base by lowering tax rates. This was not reflected in the Finance Supplementary (Amendment) Bill 2018 presented by Asad Umar, Federal Finance Minister, on September 18, 2018, which was cast in the old bureaucratic mould of balancing the books by few adjustments here and there.

Unless fiscal space is created with the help of good governance, the governments cannot provide funds for development and basic amenities like safe drinking water, health and education, transport and housing to the people. This perspective was missing in the first fiscal Bill of PTI, not conforming to its promises made in manifesto and First 100-Day Agenda!

In an op-ed, Pakistan’s Ambassador to WTO observed that: “Our taxes are neither broad-based nor low. Whether it is sales tax, corporate income tax or customs duty, we have one of the highest rates in the world. For example, our standard rate of sales tax is 17 per cent as compared to 12 per cent in India and Sri Lanka, our corporate tax rate is 34 per cent as compared to 30 per cent in India and average customs duty rate is 20.67 per cent as compared to 11.9 per cent in India.

To summarise, Pakistan’s tax policies measure poorly against the well-accepted principles of sound tax policy. It is partially due to the fact that mostly taxation policy makers at the Federal Board of Revenue do not have a broader picture of the economy. While imposing a tax measure, it is very rare that any analysis is done as to how it would impact exports or competitiveness or overall growth. There is a need to have more frequent consultations with the Competition Commission of Pakistan to avoid having undue influence of cartels. It is also important that all measures be benchmarked against successful economies.”

Resource mobilisation, elimination of wasteful expenditure and structural reforms in all state institutions should be given top priority. Money for infrastructure, growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process can be ensured through good tax policies. At the same time, large corporations with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to the elites only.

The track record of Federal Board of Revenue (FBR) shows remote possibility of collecting taxes to the tune of Rs8 trillion—though this is the real potential—in the next three years to give enough fiscal space both to the centre and the provinces to come out of the present mess, and providing relief to the poor as well as trade and industry.

Unfortunately, the PTI as party in waiting did not prepare any plan for maximising and tapping the real tax potential. It became apparent in the Finance Supplementary (Amendment) Bill 2018 that reduced the target of Federal Board of Revenue by Rs169 billion to Rs4.72 trillion–a reduction of 3.5 per cent over this year’s original budget! It is clear that PTI’s stalwarts even did not bother to study the paper, Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2016) that gives a detailed roadmap and step-wise action plan for raising revenues of Rs8 trillion at federal level alone.

Under the given scenario, federation-provinces fiscal chaos will continue. Provinces complain that they get meagre share from tax pool due to inefficiency of FBR. The federal government accuses them of not generating sufficient resources of their own in the wake of 18th Constitutional Amendment despite getting wide powers of taxation. If this continues, Pakistan will remain in debt enslavement and more and more people will be pushed below the poverty line.

The only way to come out of the crisis is that the Parliament reconsiders the prevailing social contract between federation and the provinces. Provincial autonomy and local self-governance without equitable distribution of income and wealth is meaningless. Pakistan cannot overcome perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenue and exclusive right to utilise it for the welfare of their denizens.

Fiscal decentralisation and municipal self-rule should essentially be linked with a social policy based on the principle of universal entitlements for all residents in terms of access to social benefits and social services. Taxation without representation also means denial of spending for the essential entitlements guaranteed in the Constitution. The principle of universal entitlements seeks to prevent the formation of inequalities and the foundation of the poor as a separate social group, whereas residualism and marginalism take the form assisting the poor and the needy, and thus implicitly defining them as certain types of social groups.

The provincial assemblies should give fiscal powers to local governments as ordained in Article 140A of the Constitution on the basis of social policy. They present laws that are just copied from the previous outdated codes with patchwork here and there and do not ensure devolution of administrative, political and fiscal powers to local governments. The political masters and bureaucracy do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own, of which they may dispose freely within the framework of their powers and for public welfare.

For fiscal decentralisation as per Article 140A, local governments’ financial resources must be commensurate with the responsibilities provided for by the Constitution and the law(s) to ensure welfare of the people and ensure sustainable growth at grass root level. Part of the financial resources of local authorities should be derived from local taxes and spent for providing universal entitlements and development. Pakistan must follow the model of welfare states where resources available to local governments are based on a sufficiently diversified and buoyant nature to enable them to keep pace with the real evolution of the cost of carrying out their tasks.

Unfortunately as of today, there is no political will to implementing fiscal reform agenda, though general consensus about it exists. Addiction to borrowed money and lust for wasteful spending are the main stumbling blocks in achieving the cherished goal of self-reliance that can pave way for rapid growth, employment generation and substantial spending for social sectors.

The ever-widening fiscal deficit amongst many other reasons has its roots in wasteful funding of a monstrous government machinery, especially corruption-ridden inefficient public sector enterprises (PSEs), and extending of unprecedented perks and perquisites to militro-judicial-civil-complex from taxpayers’ money. These profusely bleed the already scarce resources—both tax and non-tax. The story of persistent failure in implementing a prudent fiscal policy in Pakistan and poor management of economic affairs is thus, not unknown or untold—it is even candidly admitted in all official documents, released from time to time, relating to taxation, public expenditures and public borrowing.

Dr Ikramul Haq

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