For a fiscal social contract
Weak fiscal structure is one of the major policy areas Pakistan seriously needs to concentrate on to strengthen public finances through revenue mobilization and cuts in wasteful and lowpriority expenditures. This was recommended by the IMF Country Report released in February, 2012 in pursuance of Article IV consultation and post-programme monitoring with Pakistan. The IMF’s advice is not misplaced especially in the context of yawning fiscal deficit and low tax-to-GDP ratio. The fiscal deficit of Pakistan has widened to the unsustainable limit of 6.6 percent of the GDP, whereas the tax revenues constitute only 9-10 percent of the GDP, one of the lowest in the world.
Tax evasion is widespread. You will hardly come across a person in Pakistan who believes that tax collection is fair, or that he should pay due taxes for a larger purpose of state building, or that he can associate himself with the benefits dished out by the state in return of taxes paid by him.
Due to low revenue collections, large fiscal deficits are hard to finance and the hammer of austerity always falls on the development budget. As pointed out by the IMF report, the budgetary management simply means containment of investment spending and borrowing from the banks. It is almost impossible to reinvigorate the weak fiscal structure unless a consensus
is reached through renegotiation of the fiscal social contract among all the stakeholders for domestic revenue generation and its spending. Currently, the social fiscal contract, if at all it exists, is very weak due to a palpable absence of any relation between the revenue raising and spending preferences. This model serves the interests of the powerful groups where revenue collection and public spending are separate domains to the detriment of the citizenry at large. The present fiscal model can best be described as what is called ‘the state capture paradigm.’
In such a paradigm, the state becomes an instrument for furthering the interests of the elite and the powerful who use the state apparatus to enrich themselves. The revenue collection and public spending patterns are clearly determined by the vested interests of such groups and not the collective benefit of the citizenry at large. Consequently, the powerful and the rich do not pay due taxes. The tax machinery remains weak, and horizontal and vertical ini inequitiesiti get th sharp. TaxT evasioni be becomes rampant and compliance co cost rises. In such a model, the ta taxation system does not work as an instrument of state building and re redistribution of resources. What n need redefine the fiscal social co contract – an agreement between the st state and the citizenry to the effect that the people will pay their taxes honestly and in return the state will provide good governance and public goods like education and health etc.
In order to reconstruct such a contract, we need to answer three basic questions. First, what will be the major sources of revenue to reduce fiscal deficit (aid, borrowing or domestic revenue mobilisation)? Second, what will be the priority areas of spending (butter versus guns tradeoff)? Third, how will it be ensured that the allocated budget is properly spent on priority areas and value of money is returned to the tax payers (ie control of corruption and good governance)?
Traditionally, Pakistan has remained heavily reliant on borrowing, foreign as well as domestic and aid to bridge the fiscal deficits. The efficacy of aid as development strategy is questionable