Regarding the budget

Some points to consider

One never expected Mr. Dar to announce a very innovative budget, but as details emerge and the more one studies them the more disappointed one gets. Every budge has a specific aim & strategy, but this one instead is vague, contradictory and even counterproductive in many of its measures. We are being told that it is a pro growth, pro job creation budget, but is it? Mere clichés being the hallmark of this government, the first glaring contradiction emerged within days of its announcement: 10 Hours per day load shedding in industry during Ramadan, in a month when both productivity and the very need to stay employed become critical? Now anyone who thinks that curtailing manufacturing to a 50% level does not result in loss of jobs must be living in a fool’s paradise. Politics and management never mix and in most economic decision making cases – especially the difficult ones – democratic processes need to be avoided. Imagine if a CEO has to make decisions on the basis of show of hands or department heads are to be appointed based on their peer popularity and not competence, where would that organization go? Back to the budget, the thing is that if indeed the authors had growth and jobs on mind then why the following decisions:

Negatively targeting the sectors performing well:

While one can understand the natural temptation to tax businesses that are performing well, but then every good policy-maker knows that such a temptation has to be resisted. The idea is to expand economic activity and make more sectors profitable and not take the good ones down. Milk is one such sector where Pakistan has developed well and presence of leading multinationals has not only helped tremendously in providing milk (more or less a food essential) to general public at competitive prices but by also working all the way back with the dairy farmers/milk-producers to reduce their costs and make their operations more competitive. At a time when we are keen to make our farmer at least regionally competitive and are seeking foreign direct investment in industry, can any one explain the abolishing of zero rating for this industry? Likewise, Pakistan’s fast moving consumer goods (FMCG) sector has been performing well, but then again these are driven by distribution companies, which in-turn are low-margin, extremely competitive and high-on-employment businesses. The average gross margin of distributors ranges from 3% to 8% and the industry had been asking for a rationalization (on regional benchmarks) in the unrealistically high withholding tax (WHT) being charged to it. The current rate of 3.5% comes to nearly 50% of this industry’s average gross margin and in-turn a high multiple of its net margin, yet despite such a glaring anomaly the request has been denied.

Counterproductive new taxes:

Much has been made of the 60% increase in tax collected over three years. It would be interesting to see how much of this came from broadening the tax base. And it is in this vein that the following new measures seem quite absurd:

1. a) Tax on services and construction contracts executed abroad has been increased from 1% to 4% for companies and to 5% for individuals, which is inconsistent with the need to encourage broad basing of exports; b) The finance bill aims to abolish the exemption for inter-corporate dividends in a group structure. This would mean that companies first pay tax on their profits which are taxed again at the stage of inter-group dividends and yet again at the time of distribution to the shareholders of the parent company – double or triple taxation; c) The new levy of super tax and its computation makes no sense. Not only is this (one time) tax unjustifiable by its very nature, but also violates the standards of global accounting practices, raising serious doubts over even the intention to promote a fair corporate culture; d) Similarly the introduction of the alternate corporate tax that taxes accounting profit of businesses that incur a net loss (post allowable depreciation), in essence conveys the same fears; and last but not least, e) The doubling of taxes on transactions instead of adjusting the real-estate valuations to realistic values comes as a big surprise. It’s almost as if with a deliberate aim to keep real estate business as a money-whitening channel. The much touted move of distinguishing between tax filers and non-filers when transacting a property is also conveniently missing from the final draft. It means that capital will continue to be diverted from productive and employment generating sectors to being parked in real estate and incidentally will also make property further out of reach of the common man!

Competitiveness:

To drive growth and jobs there is a need to shore up competitiveness. However, missing are any meaningful reforms in the power sector, perhaps the biggest hurdle in Pakistan’s competitiveness and any real efforts to improve ease of doing business. Also, a rather callous call on minimum wage without explaining the merits of the decision in an environment where India despite its stronger currency and higher per capita productivity measures at the same level, Sri Lanka about 5% less and Bangladesh at around Rs7,000/month. Further, no efforts on harmonization of levies and standards across the country to cut production costs and allow economies of scale to firms, and again no allocation made to support manufacturing in areas of social & environment compliances which these days constitute a significant part of a firm’s operational cost, especially in exports. Competing nations we know are actively subsidising such costs for their domestic industries and one such interesting example is of under wraps trade deal between USA and European Union that entails subsidy and concessions to US & EU firms in both these areas.

Public Sector Enterprises (PSE):

Globally the roll of using PSE to lead growth and job creation in an economy is making a comeback. The shift in thinking is to return PSE to their commanding heights of yesteryears by ringing the right management and corporate governance reforms. For example, Indian government in its recent budget chalked out a comprehensive policy and fund-allocation mechanism to revive the Indian PSE and announced a complete turn around strategy through which, going forward, the Indian public sector (redefined and recast) will tend to be an integral part of the business lexicon of India for some time to come. Over here, our state run companies continue to be a story of inefficiency, corruption, under-performance and neglect, and all we can think about is how to either let them die a slow death or to sell them at throw away prices.

Cutting expenses:

To build effectiveness in current expenditure, government must begin to review recurrent expenses, which tend to be about 80% of the budget. Sadly, any such efforts remained absent. For example, ‘zero based budgets’ especially for over 100 autonomous organizations and departments in the government, will help ascertain their contribution and subsequently their retain ability. Other areas to cut expenses include: merging or devolving some federal ministries, trimming prime minister and president house budgets, rationalising foreign missions, etc.