The health of an economy is reflected in a multitude of statistics, and not all of them go in the same direction. That’s why a government can always put together a couple of encouraging statistics and its critics can put together disappointing statistics to amplify their respective narratives about how the economy is doing.
However, 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, compared to regional and peer countries, Pakistan has been in economic decline for about two decades. And second, it is increasingly difficult to stop our fall as time goes by.
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 growing too fast, a large and extractive government supported by too few, rentier elite, endemic corruption, terrorism, etc.?
Let’s leave aside why any of us think the decline is occurring. Since the decline is obvious, the government must have a theory of why we are declining and a vision of what must be done to change our trajectory. This budget did not show that vision.
The context in which this budget should be looked at is whether it will simply make small adjustments as we continue to lose ground to our neighbors or attempt to stop this downward trajectory of high inflation, low growth, annual increases in the percentage of unemployed (now at its highest level in two decades) and those living in extreme poverty (now the highest in a decade).
This is Prime Minister Shehbaz Sharif’s fifth consecutive budget, a record. Given that our population is growing at a rate of 2.5%, the GDP per capita or income growth in its 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 came to power. During its four years, accumulated inflation has been 78%. Exports are lower than last year and investment (both local and foreign) remains disappointing. Let’s look at some relief measures in the budget. Taxes on wage earners have gone from less than 200 billion rupees to more than 600 billion rupees in three years. Some relief was warranted and I’m glad it’s come. I appreciate the elimination of the surcharge on salary income and the reduction of tax rates in the different brackets. But while eliminating the surcharge is a relief, changes in tax rates, taking inflation into account, are not necessarily a relief. For example, a person who earned Rs 250,000 a month paid a marginal tax of 23%, but that rate has now been reduced to 20%. But if, due to inflation, your salary increases to Rs 275,000 per month, you will move to the next bracket and your marginal tax rate will be 25%.
Another positive aspect is the elimination of super taxes on companies with income less than Rs 50 million. The removal of the export supertax is also positive, as it basically meant that the more you exported, the more taxes you were charged. The industry will welcome fixing exporters’ working capital loans at a low rate, but it has historically shown no impact on exports. A more useful measure is long-term subsidized loans for the purchase of export machinery.
As always, there are other concessions for the rich. The government eliminated the tax on first-class and business-class air tickets and reduced the tax on credit card purchases in foreign currency. This will not help the vast majority of Pakistanis, but it will greatly help the richest 1%.
The government has also rightly removed the 1% capital value tax on foreign assets held by Pakistanis. This was a tax I imposed, and at the time I admitted it was a mistake I would correct, but before I could do so, I was removed. Again, this is not important to most Pakistanis, but it ensures that very wealthy Pakistanis do not move their legal residences out of Pakistan.
The speeches of the finance ministers are long on relief measures and platitudes and short on all the new taxes imposed by the new budget. In a day or two, those things will become clearer, but under an agreement with the IMF, we will see 800 billion rupees in new taxes and administrative measures imposed by the federation and the provinces.
There is a broad expansion of the sales tax regime, whereby businesses will pay taxes not only on the sales price but also on the maximum retail price. This would mean an increase of around 1% in the retail prices of those products, but, more importantly, a greater advantage for companies that avoid taxes.
Finally, there is also a fixed tax for merchants, although at a reduced amount and with partial amnesty. I tried it years ago, but it didn’t turn out so well. I wish the current team better luck.
Last year, the government allocated a budget of Rs 971 billion to run the civil government. With all the austerity measures announced by the Prime Minister, there was some hope that the total expenditure would be below the budgeted amount. In the end, the amount amounted to Rs 1,021,000 crore, which is Rs 50,000 crore more than the budgeted amount. Where is austerity going for the government?
The four provincial and federal governments together are going to spend around Rs 3,700 billion on so-called development programmes. Even if we assume that there is no corruption in these programs and that all of these projects are necessary, wasn’t it time to seriously scale back and provide substantial fiscal relief and reduce the deficit? After all, is our problem that our government is too small or too big and creating huge deficits?
The government has also announced that tariff subsidies for low-income consumers (those using fewer than 200 units) will be removed from bills but will be provided through the BISP. But the target of increasing BISP beneficiaries is 12 million, while there are 26 million households that receive subsidized energy. I think it’s safe to say that many of the current subsidy recipients will be left out.
Overall, the budget provides some relief to the salaried class and businesses. But there was no effort in this budget to substantially increase exports, achieve economic growth or reduce poverty. For a healthy economy that requires adjustments at the margins, this was a fair budget. But for a struggling economy that desperately needed 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 article are those of the writer and do not necessarily reflect the editorial policy of PakGazette.tv.
Originally published in The News
