IMF must learn from past mistakes: taxes kill growth

Taxes kill growth. Yes, there is an empirical relationship between taxes and economic growth. There is also a correlation between high taxation and lower GDP growth. In simpler terms, taxes have a negative impact on economic growth.

Argentina has had 22 IMF arrangements since joining in 1956. In the past decade, the Argentine government raised taxes in 2013, 2015, 2017, 2019, 2020, and 2021, coinciding with IMF programmes. Yes, correlation doesn't equal causation, and other factors must have played a role, but the most striking fact is that Argentina's GDP actually declined in seven out of thirteen years between 2009 and 2022. In 2020, GDP had plummeted by a sharp 9.9 per cent.

In May 2010 Greece received the first tranche of the IMF bailout of €20bn. In 2010, VAT rate was increased from 19 per cent to 23 per cent. In 2011, GDP went down by a sharp 10 per cent. Between 2010 and 2017, Greece introduced five new indirect taxes on goods and services. Property taxes were increased in 2014. In 2016, another increase raised the standard VAT rate from 23 per cent to 24 per cent. GDP actually declined in five out of eight years between 2012 and 2020. In 2020, GDP shrank by 9.9 per cent. Yes, these VAT increases were part of IMF bailout programmes.

Tunisia has had 11 IMF arrangements since joining in 1958. In May 2016, the IMF approved a four-year Extended Fund Facility (EFF) with the aim of boosting economic growth and creating jobs. In 2020, GDP contracted by 1.1 per cent. For the record, unemployment went up from 15 per cent in 2016 to 19.8 per cent in 2021.

Jamaica has had 11 IMF arrangements since joining in 1963. In 2016, the IMF approved a three-year Precautionary Stand-By Arrangement (PSBA). In 2020, GDP fell by 9.9 per cent although there was a rebound the following year with GDP returning to positive territory.

Over the past week, Pakistan and the IMF have been in negotiations for a new loan program. As per media reports, one of the key demands from the IMF is the imposition of an 18 per cent GST on petroleum products. Here’s the most likely scenario if additional taxes are levied on petroleum products: as the price of fuel increases, consumers will have less disposable income, leading them to cut back on spending in other areas, thereby reducing overall demand for goods and services.

Consequently, Pakistani businesses will produce less, hire fewer workers, and avoid investing in expansion, all contributing to lower GDP growth. Yes, higher transportation costs will reduce profitability, and business activity will most likely slow down.

Economic history has shown a clear correlation between higher taxes and slowed growth. In Pakistan, the sequencing of reforms should focus on rationalising the federal budget and aligning provincial budgets with the federal budget. Pakistan’s foremost priorities should be investment promotion and job creation.