The health of an economy is reflected in a multitude of statistics, not all of which move in the same direction. This is why a government can always muster a few encouraging statistics and its critics can muster disappointing statistics to reinforce their respective narratives about how the economy is doing.
But if we take a holistic and historical look at the measures economists use to assess the health of Pakistan’s economy, two conclusions become inescapable. First, Pakistan has been in economic decline for about two decades compared to regional and peer countries. And second, it becomes increasingly difficult to stop our downward slide as time goes on.
It is debatable why this is so. Is it because of our extremely high national debt, low and declining exports, high and unfair taxes, high utility rates, poorly educated children, population growth too fast, a large and extractive government supported by too few, elite interest-seeking, endemic corruption, terrorism, etc.?
Let’s ignore why any of us think the decline is happening. Since the decline is obvious, the government needs a theory of why we are falling and a vision of what needs to be done to change our trajectory. This budget did not show that vision.
The context in which this budget should be analyzed is whether it will just tinker around the edges as we continue to lose ground to our neighbours, or whether it will try to halt this downward trajectory of high inflation, low growth, annual increases in the percentage of the unemployed (now at a two-decade high) and those living in deep poverty (now the highest in a decade).
This is Prime Minister Shehbaz Sharif’s record fifth budget in a row. Given that our population is growing at a 2.5% clip, GDP per capita or income growth in his first four years has been: -2.7%, -0.1%, +0.5% and +1.2%, for a four-year total of -1.2%. Pakistanis today are poorer than when the Prime Minister took over. During his four years, cumulative inflation has been 78%. Exports are lower than last year and investments (both local and foreign) remain disappointing. Let’s look at some relief measures in the budget. Salaries tax has gone from less than Rs 200 billion to over Rs 600 billion in three years. Some relief was warranted and I’m glad it came. I appreciate the abolition of the Surcharge on Earned Income and the reduction in tax rates across different brackets. However, while the removal of surcharges is a relief, the changes in tax rates, keeping inflation in mind, are not necessarily a relief. For example, a person earning Rs.250,000 paid Rs. per month, 23% marginal tax, but that rate has now been reduced to 20%. But if due to inflation his salary rises to Rs 275,000. per month, he/she will be bumped up to the next step and his marginal tax rate will be 25%.
Another positive is the abolition of super taxes on companies with a turnover below Rs50 crore. Removing the super tax on exports is also positive as it basically meant that the more you exported, the more you were taxed. Fixing exporters’ working capital loans at a low interest rate will be welcomed by the industry, but historically it has not shown any impact on exports. A more useful measure is subsidized long-term loans for the purchase of export machinery.
As usual, there are other mushrooms for the rich. The government has removed the tax on first- and business-class airline tickets and reduced the tax on credit card purchases in foreign currency. This will not help a large majority of Pakistanis, but will greatly help the top 1%.
The government has also rightly removed the 1% capital gains tax on foreign assets owned by Pakistanis. It was a tax I imposed, and I had admitted at the time that it was a mistake I wanted to correct, but before I could do so, I was removed. Again, this is not important to most Pakistanis, but it ensures that very rich Pakistanis do not move their legal residence out of Pakistan.
Finance ministers’ speeches are long on relief measures and platitudes and short on all the new taxes the new budget imposes. In a day or two, these things will become clearer, but under an understanding with the IMF, we will see Rs800 billion in new taxes and administrative measures imposed by the federation and the provinces.
There is a comprehensive expansion of the sales tax scheme, where companies pay tax not only on the sales price, but on the maximum retail price. This would mean an increase of around 1% in the retail prices of these goods, but, more importantly, a greater benefit to tax-evading companies.
Finally, there is also a fixed tax on traders, albeit at a low amount and with partial amnesty. I tried this years ago but it didn’t work out so well for me. I wish the current team the best of luck.
Last year, the government allocated a budget of Rs 971 billion. to run the civil government. With all the savings that the Prime Minister has announced, there was some hope that the total expenditure would come in below the budgeted amount. In the event, the amount came to be Rs1021 billion, which is Rs50 billion more than the budgeted amount. What austerity for the government?
The four provincial and federal governments together will spend about Rs 3700 billion on so-called development programmes. Even if we assume that there is no corruption in these programs and all these projects are necessary, isn’t it time to seriously reduce them and give significant tax breaks and reduce the deficit? After all, is our problem that our government is too small, or that it is too big and running big deficits?
The government has also announced that tariff subsidies for low-income consumers (those using less than 200 units) will be eliminated from bills but provided through BISP. But the target for increased BISP beneficiaries is 12 million whereas there are 26 million homes getting subsidized power. I think it’s safe to say that many of the current recipients of the subsidy will be left out.
Overall, the budget provides some relief for the salaried class and businesses. But you could not see in this budget an effort to significantly increase exports, achieve economic growth or reduce poverty. For a healthy economy that requires tinkering, this was a reasonable budget. But for a struggling economy in desperate need of jobs and growth, this was an uninspired budget.
The author is former Finance Minister and Secretary of Awaam Pakistan.
Disclaimer: The views expressed in this piece are the author’s own and do not necessarily reflect Pakinomist.tv’s editorial policy.
Originally published in The News
