road priorities of the federal government, to be outlined in the in the forthcoming budget, should include revenue mobilisation, debt management, inflation control and relief measures and investment and industrial growth as well as energy and social sector reforms.

This will not be easy. The national GDP growth is still below the population growth rate. High growth trajectories achieved in the past had triggered runaway inflation. Over the past three years, the economy has been stabilised through reforms and prudent monetary policy of the central bank. However, this has resulted in widespread unemployment.

The government will risk stability if it tries to dilute the recent reforms or fails to introduce similar reforms recommended by the IMF as well Pakistani economists. Financial transparency is still low.

The government is in a weak fiscal position. It has to deal with a large budget deficit and interest payments on debt. Business associations may demand tax breaks and more concessions. However, the government cannot afford major tax relaxations unless those are offset by revenue gains elsewhere. Incentives will likely be sector-specific (e.g., exports, IT, SMEs) rather than broad-based concessions.

The government will be hard pressed to expand the tax base to increase direct tax collection and reduce reliance on indirect taxes. Debt management is a very serious issue, too. There is a dire need to reduce fiscal deficits and ensure sustainable debt servicing.

The lowering of policy rate by the central bank has provided great relief to the government in lowering its debt servicing burden on domestic debt. The relative stability of exchange rate has also stopped the perpetual increase in foreign debt servicing.

Inflation is finally under control. However, the low inflation has curtailed growth as consumers are still struggling with the aftermath of high inflation of yester years. Many do not have money even to buy essential commodities. Low inflation has also reduced the tax collection potential.

The government will have to find a way to cope with current low inflation by devising policies that target luxury consumption and keep food prices stable. Addressing high inflation while providing targeted relief to vulnerable groups will be a challenge.

Investment for industrial growth is another challenge that the government needs to address in this budget. It must devise policies to attract direct investment and support SMEs and export-oriented industries. The SMEs should spearhead the growth from now on and provide employment.

The energy sector has been badly mismanaged. We are now forced to buy high-cost power from fossil-fuel plants under sovereign guarantee provided to the private power producers. There is a need for low-cost alternative energy solutions but the compulsion to buy power from fossil fuel-based generators has slowed down the transition to alternative energy solutions.

The policy of leniency towards tax evaders must be abolished; strict action must be initiated against non-filers. The state should link business registration, utility connections and property transactions to tax compliance.

Recent negotiation with some private power producers has slightly reduced the need for guaranteed capacity charges. More important than renegotiating these agreements is the need to revamp the power distribution companies and make them operationally efficient. The IMF has in fact asked the government to replace their boards with competent professionals from the private sector. This has yet to be accomplished.

There is an urgent need to overhaul the power transmission sector and enhance the capacity of transmission lines. The issue of rampant corruption in the power sector remains largely unaddressed. Halfhearted efforts in this regard have not proved an effective deterrent.

Social sector development has long been neglected. The next budget must substantially increase spending on education, healthcare and social safety nets. Since resources are scarce, this could require cutting non-productive expenses.

The government is facing numerous challenges in preparing the budget. The biggest issue is bridging the fiscal deficit while meeting the IMF conditions and ensuring sufficient tax revenues for government expenditures. The government will also face pressure from inflation, external debt repayments and maintaining political stability in a tough economic environment.

Traders’ contribution to the tax revenue remains dismally low. The fixed monthly tax scheme remains a non-starter. The collection under this head has remained below Rs 20 billion. This pales in comparison with the Rs 340 billion paid by the salaried class in the first nine months of this fiscal year.

A retailer operating from a tiny shop pays a minimum of Rs 3,000 in rent. There are 22 million shops. If each of these shops pays Rs 1,000 per month, the potential revenue will be Rs 22 billion per month or Rs 264 billion per year. This could be game-changing for Pakistan’s tax revenue. However, it requires strict enforcement and political will to ensure compliance.

Less than 5 percent traders currently pay more than the fixed monthly tax. They should be exempted from this scheme on account of the taxes they already pay. Pakistan will continue to remain revenue starved if it does not bring the traders into the tax net.

The government must ensure that traders start making a reasonable contribution to tax revenues through a simple, enforceable system.

It must continue with withholding tax on business transactions ensuring that all traders with a bank account or business transactions are documented and taxed. Point-of-sale integration and sales tax have proved an effective tool that has increased tax revenues. Expanding electronic POS systems will help reduce under-reporting. The traders’ associations that make tall claims about tax compliance by their members must be encouraged to self-regulate tax collection.

The policy of leniency towards tax evaders must be abolished. Strict action must be initiated against non-filers. The state should link business registration, utility connections and property transactions to tax compliance.

The salaried class is already overburdened with taxes. While tax relief can provide some economic relief, it seems unlikely unless the government successfully expands its tax base by including retailers and the informal sector. The least the government can do is reduce the tax burden on low-salary employees (up to Rs 100,000) and recover the amount by increasing the tax on luxury items by 2 percent.

The writer is a senior economic reporter.