The Pakistan Tehreek-e-Insaf (PTI) government is expecting 3.94% annual growth in the coming year (2021-2022). The expectation fairly raises an eyebrow because of a huge Rs30 trillion public debt and some serious structural issues in Pakistan’s economy.
The post-budget scenario has led me to address two important questions for the students of Finance, Politics, and International Relations. One, how will the government fulfill the international commitments if it grants subsidies to the business sector? Two, is it a pro-people budget?
Last Friday, the recently-appointed Minister of Finance and Revenue Shaukat Tarin, who replaced Dr. Hafeez Shiekh, presented the annual (2021-2022) budget in the National Assembly. Economists have been interpreting the current government’s economic policies but chiefly through a political lens. In this piece, I intend to remain a rigid economist with no political consideration whatsoever.
The PTI government’s third full-year budget proposed multiple developmental initiatives for almost all sectors. The government’s utmost focus remained on structural reforms in multiple sectors to develop business environment, growth opportunities, and effective recoveries.
However, some experts are of the view that some of the policies appear to be in contradiction with the terms and conditions signed by Pakistan with the International Monetary Fund (IMF). For example, taxes imposed on the business sector are far lesser than what the IMF would have expected. Similarly, automobiles got considerable relief in the face of the tattering economy.
Increasing tax collection
The apprehensions seem to be politically motivated as the government has enlarged tax collections to 18pc, a maximum rise in tax collection from last five fiscal years, and registered 312000 new taxpayers who have risen tax return with 51billion rupees. The government is aiming to uplift tax collections more by implementing the latest tax compliance system in the forthcoming year.
To understand simply, the government intends to uplift and sustain eight main economic units, including agriculture, construction, power, PSDP, food, water resources, CPEC, and industries, by promising with 22pc rise in non-tax revenue and 17pc sustained rate of General Sales Tax (GST) in the current fiscal year despite strong opposition from IMF.
Such measures categorically aim to boost business activities as well as encourage tax collection on sales volume with a consistent rate.
Read more: Govt decides to set up a Tax Policy Unit
In the first media conference, Shaukat Tarin addressed taxation that the scope of tax collection would be extended more using “innovative methods” tax-to-GDP ratio would rise by one to two percent each year. He maintained that “the sudden increases on the orders of the IMF, as had been done in 2019, would not happen. This is the wrong way of doing it.”
The production sector will enjoy extensive exemptions from raw materials for textile exporters, paper and board, steel, medicines, paints, chemicals, leather, electronics, cables, and fiber optics to vehicles. If you examine all the tax cuts, no sector is left unrepresented. In return, this budget is expected to see a random walk of almost 25pc from FY2020-21 in external loan requirements.
A pro-people budget?
The government has been criticized by some economists who, in my view, selectively took the numbers and offered their views. In my humble view, it is at a pro-people budget and there are some grounds for it.
First, the government has announced 33 billion for the housing and construction sector, 118 billion for the power sector, 260 billion for the Ehsaas program, 12 billion for the agricultural sector, 900 billion for the Public sector development program (PSDP), 100 billion for water resources and construction of dams. A suggestion of 100 billion for COVID-19 mitigation has also been proposed.
This amount seems to be a well-thought-out move in order to counter any expected public health crisis in the country. The government seems to be proactive in its fight against COVID-19.
Second, a comprehensive agricultural transformational plan has been developed to preserve the commodities. Also, investment is made in special economic zones in order to expand the economic activities under CPEC to increase exports.
Third, from an economic standpoint, it is important to focus on these economic units because they will ultimately promote the core economic activities, strengthen economic indicators, and will give depth to the local economy in the forthcoming fiscal year.
The government is also expecting a huge amount of foreign direct investment (FDI) under CEPC. According to budget statistics, 9.3 billion dollars were invested in the ML-1 project under package 1 during March-2020, and in July-2021 the package 2 (phase two) will start.
Fourth, the budget committed 10pc relief in ad-hoc allowance, 10pc rise in pension of federal government employees. The integrated allowance of grade 1 to 5 employees has been increased up to 900 from 450 rupees. The minimum wage has been promised as 20,000 rupees.
A word of caution for the government
The PTI government has to break down its obligations and economic targets to achieve effective sustainability, especially through the revenue collection plan. For example, products that are eligible for a lower sales tax are to be simplified and their rates are to be cut. Most of the income increase is likely to come from enterprises and imports, even if both have been subject to rate decreases.
Increasing the economic activities by activating all key economic sectors with an expanded tax base is a worthy indication, but relying on revenue measures with less proper external debt repayment plan in the current fiscal year is unlikely to succeed. The government needs to work on it!
The writer is a Lecturer in Finance at the University of Management and Technology, Sialkot Campus. The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.