Tarin’s litmus test

LAHORE: Presenting a growth-oriented budget is the biggest challenge the new finance minister faces; his predecessor was focused on stabilisation that after huge tax measures still looks shaky.

The basic problem is how to generate enough resources to sharply reduce the ever increasing fiscal deficit. The deficit could be reduced mainly by increasing revenues. Revenues can be increased in two ways. The easier one is to increase the existing tax rates. This would burden only the tax compliant sector of the economy. It would also further slowdown the economy.

The other option is to bring tax evaders into the tax net. This is a hard nut to crack. In the last two budgets the government announced measures to document the economy but these measures were never implemented because of the strong resistance put up by tax evaders. The revenue targets were not achieved. Revenue targets are missed by billions of rupee every year which disturbs the economic planning of federal government departments and the provinces.

The incumbent finance minister must for once fix realistic budgetary targets keeping in view the capacity and the capability of the resource generation and the present state of economy. The reported size of the next budget is very high and the finance minister has admitted that a realistic revenue target should be renegotiated with the IMF. He is operating with a handicap as the governor central bank along with the former finance minister is one of the signatories that agreed to this revenue target. The suspended IMF program was resumed after Pakistan agreed to increase the revenue target massively (about Rs1 trillion higher than expected revenues this fiscal).

Unless the tax machinery is reasonably reformed there is no way the government could increase tax revenue in the current depressed economic scenario. Industrial production has still not reached its peak of past years and to increase revenues industrial production would have to increase much above the peak in each sector.

The service sector has been growing at a fast pace without corresponding increase in taxes from this sector. The development of the services sector is beneficial to the economy only if it pays fair taxes. Otherwise this sector creates few jobs and has little impact on the lives of common man.

Unrealistic federal targets also adversely impact the performance of the provinces that mainly depend on federal transfers to run their affairs. It is the federal government that takes measures to increase revenues. However it has to distribute 60 percent of the federal tax revenues to the provinces. This is the reason the provinces announce their budgets after the presentation of the federal budget.

Their budget is mainly based on the amount the federal budget allocates for each province on the basis of expected total federal tax revenues. If the federal government fails to achieve the tax revenue target the share of provinces in the federal share is also reduced. So the budget allocations of the entire country including provinces are disturbed. It is therefore imperative the federal budget is based on realistic realisation of revenues.

There is another issue. The federal government needs more revenues than the provinces. It has to bear the cost of defence and debt servicing both domestic and foreign. All the provinces mostly operate on surplus budget. It is for this reason the federal government tries to increase revenues. Even if the government imposes new taxes worth Rs1,000 billion, its share would only be Rs400 billion while provinces would get Rs600 billion without making any effort. The federal government would earn a bad name for imposing new taxes.

The federal government remains starved of resources. It plugs the fiscal deficit through loans. When the revenue targets are missed the first cut that the government makes is in public sector development expenditure.

Vested interests are well aware of expected revenue shortfalls and they utilise maximum funds in earlier part of the year in schemes where opportunities for graft are more. This way the schemes where the chances of corruption are low face higher cuts when the government decides to reduce the development expenditure in the last half or quarter of the fiscal year.

Businessmen want concessions, the IMF wants higher revenues, and the ruling party wants a chunk of funds for the development schemes of their parliamentarians. Let us hope that Shaukat Tareen is able to surmount difficulties but for this he would need a freehand from the present regime.