Mo­bi­liz­ing pro­vin­cial re­sources

Enterprise - - Contents -

The Pak­istani govern­ment, like many of its in­ter­na­tional coun­ter­parts, suf­fers from a predica­ment of fis­cal flex­i­bil­ity.

Fis­cal flex­i­bil­ity means that a govern­ment may al­ter its spend­ing choices by tak­ing into ac­count boom and re­ces­sion cy­cles. If an econ­omy is in re­ces­sion, it can in­crease its ex­pen­di­ture.

On the con­trary, if an econ­omy is in boom, it may re­duce its ex­pen­di­ture since pri­vate sec­tor is al­ready play­ing a sig­nif­i­cant role. In other words, a ‘counter cycli­cal fis­cal pol­icy’ is the key to pro­mot­ing struc­tural trans­for­ma­tion and eco­nomic de­vel­op­ment.

Any con­sid­er­a­tion of fis­cal pol­icy should make a dis­tinc­tion be­tween rev­enue and ex­pen­di­ture. A rev­enue break­down of con­sol­i­dated fis­cal op­er­a­tion of Pak­istan in FY15 shows that di­rect taxes con­sti­tute around 35% of the tax rev­enues, while the rest is at­trib­uted to in­di­rect taxes.

How to in­crease rev­enue

Though di­rect taxes are pro­gres­sive in na­ture, they are dif­fi­cult to col­lect since the tax base is quite nar­row due to low num­ber of in­come tax fil­ers and is­sues of non­com­pli­ance.

The stale­mate be­tween the govern­ment and traders on the with­hold­ing tax (WHT) is­sue tes­ti­fied this. There­fore, it has be­come dif­fi­cult for the govern­ment to in­crease rev­enue through di­rect taxes.

The other op­tion left is through in­di­rect mea­sures such as gen­eral sales tax, cus­toms, gas in­fra­struc­ture de­vel­op­ment cess (GIDC), nat­u­ral gas de­vel­op­ment sur­charge (NGDS) and pe­tro­leum de­vel­op­ment levy (PDL) which are re­gres­sive in na­ture.

The re­cent in­crease in reg­u­la­tory duty on im­ported items is an ex­am­ple of a quick fix so­lu­tion to raise rev­enue.

The govern­ment can in­crease rev­enues from in­di­rect sources up to an ex­tent ow­ing to lower out­put growth and political com­pul­sions.

The growth in to­tal ex­pen­di­ture re­mained around 7% in FY15 as the govern­ment adopted a strict fis­cal dis­ci­pline. Af­ter the 18th Amend­ment of the con­sti­tu­tion, the pro­vin­cial share of to­tal ex­pen­di­ture is the largest due to fis­cal de­cen­tral­i­sa­tion. The pro­vin­cial share is around 25% of to­tal ex­pen­di­ture fol­lowed by debt with 24%, while the share of de­vel­op­ment and de­fence ex­pen­di­ture re­mained 21% and 13%, re­spec­tively.

In­ter­est­ingly, the govern­ment’s con­sump­tion ex­pen­di­ture was around 14% of to­tal ex­pen­di­ture which shows that the govern­ment is walk­ing on a tight rope.

Pro­vin­cial share

Af­ter the 18th Amend­ment, the share of provinces has in­creased, but con­sol­i­dated pro­vin­cial taxes were Rs205 bil­lion in FY15 that be­came around 11% of to­tal rev­enues of the provinces.

The pro­vin­cial gov­ern­ments

heav­ily de­pend on the fed­eral govern­ment for rev­enues since it pro­vides around 85% of re­sources. This re­flects that pro­vin­cial re­source mo­bil­i­sa­tion is in its in­fancy at the mo­ment.

In or­der to ma­te­ri­alise the goal of pro­vin­cial au­ton­omy, pro­vin­cial re­source mo­bil­i­sa­tion is the need of the hour which paves the way for fis­cal au­ton­omy.

In short, there is an el­e­ment of in­er­tia in to­tal ex­pen­di­ture of a govern­ment. If it re­duces pub­lic in­vest­ment on in­fra­struc­ture, it will bring out­put loss since pri­vate sec­tor does not do in­fra­struc­ture in­vest­ment. Sim­i­larly, if a govern­ment scales down ex­pen­di­ture on education, health, san­i­ta­tion and so­cial se­cu­rity, it will de­lay hu­man cap­i­tal de­vel­op­ment. The con­sump­tion ex­pen­di­ture is usu­ally con­sid­ered waste­ful which are al­ready in a lower range.

This is a man­i­fes­ta­tion of lack of fis­cal flex­i­bil­ity which is not al­low­ing suc­ces­sive gov­ern­ments to steer the econ­omy out of its cur­rent stag­na­tion. There­fore, any de­bate on char­ter of econ­omy should take into ac­count the role of ‘counter cycli­cal fis­cal pol­icy.’ Oth­er­wise, the only op­tion is to re­turn to the In­ter­na­tional Mon­e­tary Fund at fre­quent in­ter­vals.

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