Fo­cus

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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

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