Getting out of the debt-tax trap

Should the government borrow at any cost to protect its people or tax heavily those not in the tax net? Economists believe that a higher budget deficit means more taxes in the future to pay off government borrowing.

After all, the government pays back debt out of its revenue. In Pakistan, debt and taxes are increasing simultaneously, and their burden is becoming unsustainable. We are borrowing to repay our debt, while the social sector remains on the backseat. Perhaps, we need an innovative financing methodology to come out of this debt-tax trap.

Pakistan’s Human Development Index (HDI) is 0.54, indicating a low human development category. The country’s development deficit is growing daily, with people expecting access to education, healthcare, and clean drinking water. However, after paying interest on debt and subsidies, the federal government has limited funds to address social deficits.

This year’s budget (2024-25) sets a tax and non-tax revenue collection target of Rs17.8 trillion, a 46 per cent increase from last year. However, after paying Rs7.44 trillion to provinces, only enough is left to cover interest payments worth Rs9.76 trillion. Subsidies are another big-ticket item in the budget. The total amount earmarked for subsidies in the budget 2024-25 is Rs1.36 trillion.

Now, let’s examine the current expenditure on health, education, and social protection. In the 2023-24 budget, the current expenditures were Rs27.78 billion for health, Rs103.68 billion for education, and Rs480.27 billion for social protection. The total sum of current expenditure on health, education, and social protection is more than half of the subsidies (Rs1.07 trillion) paid by the federal government during FY2023-24. The size of the public sector development programme was Rs459 billion. Subsidies for 2024-25 total Rs1.36 trillion, exceeding the current expenditure on health, education, and social protection.

In this scenario, the government as a provider of social welfare cannot follow a golden principle: “Put the money where the priority is”. In other words, financing in the social sector has a low likelihood of being linked with constitutional provisions like the right to education and work and for shared, inclusive and sustainable development.

To address this deficit, countries at similar stages of development have engaged with the domestic private sector. Pakistan’s vibrant society has contributed to responding to catastrophes like wars, disasters, and earthquakes. In peacetime, community-sector organizations and philanthropic efforts have tried to enhance inclusivity, but their scalability and scope remain limited.

Community-sector organizations, such as rural income support programmes and microfinance schemes, are proven models for engaging with communities. We have seen commendable philanthropic efforts like the Edhi Foundation and Saylani Welfare. Numerous organizations are working to improve access to education, clean drinking water, and livelihoods in rural communities. However, there is a need to formalize these models. All such organizations and trusts must learn to engage in venture philanthropy to enhance social inclusion.

Social impact bonds that can be issued to provide social facilities are a common example. These bonds can also be used to build sustainable transportation and livelihood opportunities. The Pakistani diaspora attempted to build the dam project in the past; perhaps financing rather than funding is a more attractive option. This will also connect Pakistanis with the development of their homeland.

Many countries have set up sovereign wealth funds (SWFs) to accrue revenue from exports of non-renewable natural resources. While agricultural tax is within the provincial government’s domain, the federal government can collect revenue from exporters using non-renewable resources. Rice and sugarcane growers pay using excessive water resources. The extraction of minerals could be taxed for building a resilient and prosperous society.

Third, the financial sector receives almost Rs8 trillion in markup payments from the federal government. The banking and insurance industry’s income, such as interest and dividend income, can also be earmarked for universal education and health in Pakistan.

Microinsurance schemes for universal health and education can be a good starting point. These schemes can help bridge the social deficit and promote inclusive finance. This way, the financial sector can contribute to building health equity funds for the poor, disabled, and marginalized, realizing the dream of an equitable Pakistan.

Tax-financed social protection programmes are another dimension for improving social inclusion. Instead of imposing regulatory and excise duties, we could implement hypothecated taxes for financing social development. Taxes on tobacco, beverages, and confectionary items can be imposed to correct negative externalities and also discourage their consumption, generating additional revenue for health, including the prevention of non-communicable diseases (NCDs).

In a plural society, the social sector deficit appears in many types of conflict. We can create harmony by investing in social and human development. The government must prioritize social-sector financing with the help of an inclusive approach to financing.

The writer is director of economy at the Centre for Aerospace and Security Studies (CASS), Lahore. She can be reached at: infor@casslhr.com