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Government claims to reduce the Fiscal Deficit by 2.1%

An economic guru answers what fiscal efforts will be required to increase revenues or reduce expenditure by the current government to stay economically afloat.

Fiscal

The new Finance Minister, Asad Umar, while presenting the mini financial bill clearly stated that the previous government had understated the Fiscal Deficit as 4.9% of the GDP, while in actuality it was 7.2%. The PTI government is stating they will bring it down to a 5.1%. However, the finance minister is yet to submit a detailed financial bill, and the one-page initial summary has not been openly distributed yet.

The FM should have clearly shown that the 4.9% of the previous Fiscal Deficit was actually 7.2%, as substantial proofs support his statement. The new government fiscal efforts should be clearly laid out, indicating how will the Fiscal Deficit come down to 5.1% this time.

In the financial sector, the massive borrowings from the State Bank need to be reduced.

The tax effort of Rs.183 billion includes Rs.92 billion from so-called administrative measures, cannot be termed as credible tax effort. The actual tax effort is only half of that, standing at Rs.91 billion. In terms of expenditure, my assessment is that only Rs. 75 billion has been cut, while the new government claims to have cut Rs.225 billion.

The severity of the economic situation requires extraordinary measures to be taken, while the current measures are not impressive so far. The previous government gave concessions that nobody ever argued about. The tax rates for individual taxpayers was reduced from 35% to 15% and the taxable income was increased from 0.4 million to 1.2 million.

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In the name of broadening the tax, you are giving away the tax base. The new government has consequently, increased the tax rates back from 15% to 29%, however, the taxable income still stands at 1.2 million. This has been done to prevent the taxpayers from becoming non-filers, at the cost of losing a lot of revenue.

However, this total of Rs. 135 Billion to Rs.150 Billion has been given away from the pockets of the government, further contributing to the deficit by not retrieving the revenue that was already accruing to the treasury. In the first quarter, there is hardly a 9% increase in tax revenues.

The tax effort of Rs.183 billion includes Rs.92 billion from so-called administrative measures, cannot be termed as credible tax effort.

The actual need is for tax receipts to grow by 20%, but this will be the third year of a constant 8% of tax growth, which is an alarming number. Currently, the fundamental thing for the new government is to control the deficit. After the deficits, the next challenges to address are problems with power and gas sector.

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Moreover, privatization policies need to be revised. These are some short to medium term challenges the government has to overcome. In the financial sector, the massive borrowings from the State Bank need to be reduced.

This will enable other banks to participate, and make way for the general public to contribute in financing government needs. There is indeed a lot that needs to be done, and the upcoming financial bill 2018-19 must cover a maximum number of financial challenges.

Dr. Waqar is an eminent economist and former Finance Secretary, with wide-ranging experience of both public and private sectors. He has done Ph.D in Economics and M.A. in Political Economy from Boston University Massachusetts, USA and has done M.A. in Economics and L.L.B. from University of Karachi.

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