The PTI’s second mini-budget

Shortly after coming into power, Imran Khan’s government presented a ‘mini-budget’, which was essentially a bill that raised income tax rates, imposed additional indirect taxes in the shape of higher custom duties and cut some development expenditures.

They also wanted to make it easier for non-taxpayers to buy cars and homes but after objections by opposition leaders, especially Mian Shehbaz Sharif, and criticism from the media, the PTI backed down from that step.

Now just three months later, the Khan regime is set to introduce another mini-budget, this time reportedly raising taxes by about another Rs200 billion. Why is the government raising taxes yet again? Is it due to pressure from the IMF or due to the failure of the FBR to collect enough taxes in the first half of this fiscal year?

According to newspaper reports, nominal revenue growth in the first half of this fiscal year was only two percent over the last fiscal year. Given inflation of 8.5 percent and economic growth of 4.5 percent, the nominal number should have grown by at least 13 percent just to keep pace with the last fiscal year. A two percent nominal growth in revenue means that in real terms tax revenue has declined by 11 percent.

This despite the fact that our currency has depreciated by about 30 percent since last year, meaning that customs duty and other taxes collected from the port should have risen at a high pace. Since more than half of all taxes in Pakistan are collected at the port, this means that income tax and sales tax not coming from the ports must have declined substantially. This should give the government pause, and it should look at where it is making mistakes.

The problem is that, as the economy has slowed down considerably in the last few months, tax collection will become increasingly difficult. But if the government imposes yet more taxes, it will mostly result in further slowing down the economy and not much of an increase in revenues. What the economy needs now is not further tax increases but some tax cuts and incentives to spur economic growth.

Of course, the IMF and others must have asked the government to reduce its budget deficit. But there are two ways to reduce the deficit: by raising taxes or by reducing expenses. So why just rely on raising taxes? Surely the “inept and profligate” PML-N financial team must have left a lot of fat in the last fiscal year’s budget that should be easy enough for the PTI to cut.

Where is the famed PTI austerity? As I have written in these pages before, despite all the song and dance about austerity, the PTI government hasn’t cut any money from the running of the civilian government. The expense of running the President House for instance is Rs28 lakh every day. Surely before they ask the Pakistani people to sacrifice and pay yet more taxes, they can look for some expenses to cut.

Then there are subsidies and grants going to various sectors such as the power sector. Given that they have raised power tariffs and given that the PTI government has been claiming that the power ministry has been trying to cut line losses and reduce circular debt, perhaps the subsidy going to the power sector should be reduced.

It really makes no economic sense to raise further taxes in these recessionary times. It will only add to our economic woes. What we need is a policy that takes us out of the recession rather than pushes us deeper into the pit. The PTI government has already done enough to push us into a recession. They really must avoid making more mistakes.

As noted by eminent political economist and IBA and Columbia University Professor Akbar Zaidi recently, the PTI government inherited a healthy economy running at 5.8 percent growth and expected to grow at 6.2 percent this year.

After the PML-N departed in May last year on an optimistic note, the caretakers came and the economy was still looking healthy. Both the caretakers and the outgoing PML-N government understood that some devaluation and tightening of imports was necessary. But then came this government and all hell broke loose. The government led by PM Khan (whose last paid job was as a cricket captain and who, while having been in politics for long, has had no experience in governing) spent days and nights talking down the economy.

They exaggerated the country’s debt and foreign debt numbers to our people and foreign investors; yet, the numbers they privately shared with the IMF and other institutions showed that the debt was much lower. For instance, the government has shared with the IMF that public debt and foreign debt at end June 2018 was Rs25 trillion and $70 billion respectively, and not Rs30 trillion and $95 billion as they have been wrongly claiming.

The PTI also claimed supposed money laundering ($10 billion a year) and corruption of a scale that scared foreign and local investors. In the calendar year 2018, for instance, foreigners have pulled out more than $537 million from our stock market. What was worse, the PTI government talked the currency down. This is inexcusable. Ministers are supposed to be quiet and certainly not speculate about devaluation of the currency. Here federal ministers pontificate on how much depreciation is going to happen. Think about it. If ministers say devaluation is imminent, won’t everyone just go and buy dollars – thus pushing the rupee further down immediately. Even if they wish to let the rupee float freely at some point in the future, must they announce it when they don’t have the reserve position to defend it?

The PTI government also gave – and is still giving – different impressions about going to the IMF. This of course is causing huge uncertainty in the market. The result: on May 31, 2018 when the PML-N government departed the total value of our stock market was $66.2 billion. On Dec 31, 2108 it was 47.75 billion, a loss of $18.45 billion or 28 percent. It is mind boggling that in less than five months in government, the PTI has reduced the market capitalisation by more than a quarter.

The government has made and reneged from promises made to industry. For instance, it told the export industry in Punjab that it will get gas for $6.5 per mmbtu. But when the bill came it was for $12.5 mmbtu. To this day, there are court cases going on. But in the meantime, the industry doesn’t know its actual cost of production. The result: even after a 30 percent devaluation, exports in November 2018 were less than exports in November 2017.

The PTI government did all the things a government would do if it wanted to bring in a sudden recession. And it has succeeded. Our growth projection has decreased from 6.25 percent to around 3 percent. Just look at the IMF projection for Pakistan’s economy in March of 2018 and now. Surely, the IMF knew the situation well, including our current account deficit. Why was it optimistic about Pakistan in March and not now? What’s changed?

The writer has served as federal minister for finance, revenue and economic affairs.

Twitter: @MiftahIsmail