Corrective Budget 2023

The Setting: The idea of writing this piece is to debate the possibilities of strengthening Pakistan’s budgeting process. This debate helps us create policy space, which appears highly constrained.

Today, Pakistan is in the throes of an external sector solvency challenge coupled with fiscal and quasi-fiscal imbalances. These are unprecedented times. Rising inflationary pressures due to global commodity price hikes and an expected global slow-down exacerbate the domestic economic threats. The risks to Pakistan’s economy remain elevated.

Restoration of market confidence is paramount. This requires an aggressive policy framework. To push the debate further, let us structure a Corrective Budget 2023 (CB23). The contours of CB23 are framed at recognizing the severity of abnormal conditions. Each line of CB23 below expresses strong empathy for those being crushed under pricing pressures. It simultaneously displays a futuristic vision for a nation looking for hope.

The Strategy: Let us articulate our position. The strategy of CB23 is not one of growth. It is simply a strategy of correcting policy omissions. CB23 aims to return the country to macroeconomic stability, demonstrate its anti-inflationary bias, protect the vulnerable and restore the confidence of the domestic and external markets to set the country beyond an episodic growth path.

The Objectives: CB23 frames clear objectives to meet aspirations of Pakistan’s 230 million citizens: i) CB23 ensures that in the immediate, challenges of external solvency are met; ii) CB23 ensures that it forms the basis of an agreement with the IMF and opens Pakistan’s global funding access; iii) CB23 ensures that the burden of price adjustments is staggered and falls squarely on the well-off; and iv) CB23 manages a credible deficit of 5.6 per cent of GDP through: managing tax avoidance and tax evasion and extending taxation to all sectors of the economy; and expenditure reforms that limit benefits to the elite and focus targeted subsidies on the deserving.

Guiding Principles: CB23’s guiding principles revolve around big bang reform. On the revenue side, focus is shifted to compliance, harmonisation of tax policies with provinces including an integrated sales tax regime and modernisation. The tax effort helps consolidate progressive income taxation by bringing all incomes under one head and taxed at marginal rates, rationalisation of personal income tax slabs to shift the burden to high-income earners and taxation of capital gains on all sectors irrespective of the holding period. The retail sector is brought into the normal tax regime. CB23 focuses on under-taxed sectors including real-estate, wholesalers and retailers and moves away from fixed tax regimes.

CB23 recognizes Pakistan’s true potential of around Rs7 trillion in sales tax, based on a consumption of Rs50 trillion in the economy. Estimated collection under this head is only one-third, at about Rs2.506 trillion in FY22.

CB23 recognizes the true potential of Rs5 trillion from Rs55 trillion of national income. Collection is estimated at Rs2.17 trillion in FY22, which is less than half of our potential. These are substantive compliance gaps. CB23 relies on compliance risk management and integrating data from all sources to collect revenues by addressing tax avoidance and evasion.

Tax expenditures or the total tax revenue foregone due to specific provisions in the tax laws amounts to a staggering Rs1482 billion in FY22. The corporate sector is the biggest beneficiary of these privileges, followed by high net-worth individuals, large traders and the feudal elite. CB23 proposes collection from these heads by reducing these privileges by at least 25 per cent.

A serious reconsideration of non-tax revenues is suggested in CB23 given the prevalent context. No new anticipated taxation from petroleum and gas is proposed. CB23 reduces indirect taxation and contributes to being anti- inflationary.

Expenditures have been least addressed in the last few budgets. CB23 deals with providing targeted subsides for the vulnerable, a pension reform moving towards pay-as-you-go and only a mildly higher development budget compared to FY22 focused on finishing of the schemes which are near completion.

Budget Outlay in Brief: The above principles help us ensure credibility of the budgetary numbers. CB23 estimates FBR taxes at Rs7,800 billion from estimated collection of Rs6,000 billion in FY22. An estimated nominal GDP growth of 16.5 per cent (13 per cent inflation + 3.5 per cent growth) adds Rs990 billion. However, keeping sales tax on oil as zero in FY23, nominal growth is taken to add only Rs800 billion. Settlement of 12.5 per cent of the Rs4,000 billion stuck in tax disputes is estimated to bring in another Rs500 billion. Policy measures, reducing tax expenditures and compliance efforts are estimated to raise at least Rs500 billion.

Non-tax revenues for CB23 are estimated to fall to Rs1,250 billion, provisioning for Petroleum Development Levy and Gas Infrastructure Development Cess, assuming all other areas as ceteris paribus. A fair amount of new money is possible from new spectrum licensing auctions, which are not included.

Gross revenue receipts amount to Rs9,050 billion. Provincial share is estimated at Rs4,121 billion and net revenue receipts at Rs4,929 billion. CB23 makes an effort to be realistic with a provincial surplus at Rs400 billion and promises the 8th NFC award with a workable fiscal model, while reducing the federal government footprint.

CB23 recognizes the need for a more than modest resource generation from privatization of Rs600 billion. Trillions have been spent on bailout of failing state-owned enterprises. Non-bank borrowing, net external receipts and bank borrowing are estimated at Rs3,798 billion taking the total outlay of the budget to Rs9,724 billion. The above resource mobilization is far more direct in nature and does not lay any extra burden on the cost-push inflationary factors – a much-needed effort.

Pakistan needs a deeper expenditure side reform. The initial thought is to recognize Rs400 billion as required to maintain a cost of living allowance. However, it is proposed to conduct transfer pricing audits to control tax avoidance of $5 billion. As monies are available through this, direct subsidy support may be enhanced. CB23 estimates development spending from the current year at Rs700 billion. In light of the above, the total expenditures would be Rs9,724 billion.

Addressing Price Pressures: Pakistan cannot be behind the curve on inflation. CB23 suggests practical measures that make a difference. Relief to urban middle-income families is necessary. Personal income tax exemption limit is proposed to be raised to those earning Rs75,000 a month. Reduced rates of income tax are proposed for a monthly salary of Rs200,000. Higher income earners will have an increase in rates.

Managing inflation beyond monetary tightening is a key challenge for the government. CB23 proposes for the government to take all steps to ensure supply of cheaper fuels, ensure that there is no undervaluation of the rupee, and limit the rate of monetary expansion to low double-digits. Low productivity of agriculture has constrained supply. Special measures of connectivity of farmers with universities has to be framed along with financial easing.

The futuristic tone of the budget is based on increasing efficiency and productivity of the economy. For example, an asset recycling model to be formulated along with divestment to unlock Rs6 trillion of assets with the government. SMEs to be supported for increasing productivity through access to finance. Promotion of digital economy and fintech, technology enabled-development, energy transition, and climate action. Energy sector redesign to be undertaken. City Planning Support to be given to provinces. A move to a value-added tax regime. Incentivization of corporatization of businesses. A move to unlock land supply to reduce the cost of residential and industrial land use. Reduction of government divisions. Move to channel more household savings to capital markets.

Conclusion: CB23 moves to direct taxation in a big way. It gives cost of living relief now. CB23 is framed in a way where it is less expansionary and plays its role in managing the current account deficit. This futuristic path highlights an economic plan creating new jobs and sends the right signal: Pakistan in the immediate has a clear handle on its economy. Some may feel that some of the measures are aggressive in nature. One is glad that they feel so. The more aggressive the measures, the more markets will view that the country is serious.

The writer is former adviser, Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at:

khaqanhnajeeb@gmail.com