The stake and its hold­ers

The Pak Banker - - 4EDITORIAL - Dr Muham­mad Yaqub

EV­ERY gov­ern­ment gets lost in its own game of self-en­rich­ment and po­lit­i­cal sur­vival, and be­gins to en­gage in tem­po­rary fire-fight­ing in eco­nomic pol­icy mat­ters lead­ing to wors­en­ing the un­der­ly­ing eco­nomic con­di­tions. In an ar­ti­cle in this news­pa­per ('A fun­da­men­tally flawed fis­cal pol­icy', Jan­uary 6) I had high­lighted some deep-rooted bud­getary prob­lems to which each gov­ern­ment, in­clud­ing the present one, con­trib­uted.

In re­sponse, the fi­nance min­istry came out with a state­ment car­ried by this news­pa­per ('From the Fi­nance Di­vi­sion', Jan­uary 16) in which it seems to agree with the anal­y­sis in the ar­ti­cle but com­plains that it "ig­nores the ef­forts the present gov­ern­ment has been putting in the process of bud­get-mak­ing and al­lo­ca­tion of re­sources" tak­ing into con­sid­er­a­tion "the point of view of the stake­hold­ers", and also claims that the gov­ern­ment was "open to any sug­ges­tions for fur­ther im­prove­ments".

This follow-up ar­ti­cle is de­voted to a brief re­view of the ' ef­forts' of the present gov­ern­ment in the fis­cal area and sug­ges­tions for a ma­jor shift from tem­po­rary patch­work to fun­da­men­tal fis­cal re­forms. It is hoped that due con­sid­er­a­tion will be given to th­ese pro­pos­als by the gov­ern­ment, which is "open to any sug­ges­tions" and claims to be com­mit­ted to "a com­pre­hen­sive agenda of re­forms to rein­vig­o­rate the econ­omy".

First, the eco­nomic man­age­ment team should over­come its ego­is­tic im­pulses and ac­cept that, in re­spond­ing to the threat of ex­ter­nal debt de­fault and to fi­nance the fis­cal op­er­a­tions, the PML-N gov­ern­ment has so far taken the easy route of ex­ter­nal bor­row­ing and beg­ging, use of pri­vati­sa­tion pro­ceeds and re­liance on do­mes­tic bank bor­row­ing rather than the dif­fi­cult road of real re­source mo­bil­i­sa­tion through tax re­forms.

Bud­get mis­man­age­ment is of course the mother of all eco­nomic ills and re­duc­tion in the bud­get deficit is es­sen­tial to move the econ­omy back to a path of sus­tained high rate of eco­nomic growth, mod­er­a­tion in the rate of in­fla­tion and bal­ance of pay­ments vi­a­bil­ity. The IMF made it a fo­cal point of its present EFF ar­range­ment, and the PML-N gov­ern­ment com­mit­ted to bring down the bud­get deficit. The prob­lem is that the gov­ern­ment has tried to meet the IMF con­di­tion­al­ity by hook or by crook in or­der to have ac­cess to for­eign loans rather than through fun­da­men­tal fis­cal re­forms that could im­prove the long-term vi­a­bil­ity of the fis­cal sit­u­a­tion.

In­stead of un­der­tak­ing dif­fi­cult struc­tural fis­cal pol­icy re­forms, the PML-N gov­ern­ment en­gaged in an ex­er­cise of fis­cal data ma­nip­u­la­tion, in­clud­ing dress­ing up rev­enue re­ceipts, lim­it­ing re­leases of de­vel­op­ment ex­pen­di­ture and keep­ing sev­eral kinds of ex­pen­di­ture out of the recorded bud­get. That sat­is­fied the IMF but the bud­get deficit will bal­loon up to higher lev­els once the IMF pro­gramme is over and data fudg­ing comes to an end. A durable so­lu­tion of bud­getary prob­lems lies in fun­da­men­tal fis­cal re­forms on the fol­low­ing lines:

First, at present, the bulk of in­come orig­i­nat­ing from the agri­cul­tural, realestate and ser­vice sec­tors is not cov­ered by in­come tax, and a large un­der­ground econ­omy does not even show up in GDP num­bers. Our tax-to-GDP ra­tio is one of the low­est in the world and will be­come even worse if in­come earned in the un­der­ground econ­omy is clubbed with recorded GDP. Sim­i­larly, about 65 per­cent of what­ever rev­enue is col­lected comes from in­di­rect taxes. This ra­tio will go up if ac­count is taken of re­ceipts that are in­cluded un­der in­come tax but are more in the na­ture of ex­cise du­ties.

Sec­ond, in­come tax re­forms would ba­si­cally in­volve ex­pand­ing and con­sol­i­dat­ing the tax base, re­duc­ing statu­tory tax rates and col­lect­ing in­come tax from the front door rather than from the back door of ar­bi­trary with­hold­ing tech­niques. It is ob­vi­ous that the ser­vices, real-es­tate and agri­cul­ture sec­tors should be brought into the di­rect tax net in one way or the other. The pre­ferred course of ac­tion is to pass laws or amend the con­sti­tu­tion to bring all in­come, in­clud­ing that from agri­cul­ture, into the net of the fed­eral in­come tax. If that is not pos­si­ble, then the prov­inces should agree to in­tro­duce an agri­cul­tural in­come tax hav­ing sim­i­lar fea­tures as the fed­eral in­come tax. Sim­i­larly, steps need to be taken to dis­man­tle the un­der­ground econ­omy and bring its op­er­a­tions in the open and in the di­rect tax net.

Third, all in­come tax con­ces­sions, ex­emp­tions and ex­clu­sions given to vested in­ter­est groups un­der one pre­text or the other should be re­moved im­me­di­ately and all av­enues for es­cape from in­come tax­a­tion should be closed. Fourth, tax ad­min­is­tra­tion should be freed from po­lit­i­cal con­trol, made pro­fes­sional and au­ton­o­mous; steps should also be taken to re­duce cor­rup­tion and tax eva­sion.

Fifth, the business com­mu­nity's re­sis­tance to doc­u­men­ta­tion of the econ­omy should be chal­lenged so that the un­der­ground econ­omy be­gins to shrink and all eco­nomic trans­ac­tions are prop­erly recorded and taxed. Sixth, ex­cept es­sen­tial con­sumer goods, all goods and trans­ac­tions should be sub­jected to a low rate VAT type con­sump­tion tax. Sev­enth, all loss-mak­ing pub­lic sec­tor en­ter­prises should be in­cluded in the bud­get till such time as th­ese en­ter­prises are ei­ther sold to the pri­vate sec­tor or re­formed so as to run them on com­mer­cial ba­sis to gen­er­ate prof­its. Sim­i­larly, pri­vati­sa­tion pro­ceeds and ru­pee coun­ter­parts of for­eign grants should be treated as fi­nanc­ing items ap­pear­ing be­low the line rather than 'rev­enue' items above the line.

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