Upcoming budget proposals

That time of the year when exercising economic prudence can bring untold benefits to many

Every year when summer arrives in Pakistan so does a lot of speculation and expectations about the economy, for June is the month of the national budget. The hope and despair stemming out from each budget normally gauges the public reception of the same.

This year we are again at pathways to either playing to foreign tunes or laying foundations for self-reliance by opting for a public-oriented budget. Recently, there have been positive developments in terms of the exchange rate stabilisation of the Pak rupee and increase in foreign exchange reserves.

It is easy to get carried away by these developments considering the horrible mess endured by the nation for last six years. However, these developments are not the result of meticulous economic rise or increase in national productivity, but rather cosmetic steps like raising eurobonds at exorbitantly high interest rates of upto 8.25 per cent vs 3.7 per cent yield on $ 1.7 billion bonds issued by Romania or one-offs like the $ 1.5 billion receipt from the KSA. The $1 billion plus generated from 3G/4G auction is however a pertinent step in the right direction.

Concrete and visionary steps are required to address the structural and trust deficit issues engulfing the economy as well as the plague of terrorism destroying it. The upcoming budget should as a minimum strive to achieve:

• Reduction in inflation
• Job creation
• Education and health
• Eradication of corruption
• Tax reforms
• Better use of national resources

Reduction in inflation:

Annual inflation in Pakistan reached 8.5 per cent last month (March 2014), up from 7.9 per cent in February 2014 and a 29 per cent rise from the level of 6.6 per cent in March last year. More alarming still is the fact that the prices of necessities like food, housing, water, electricity and gas all rose.

The one per cent increase in GST (General Sales Tax), a type of indirect taxation from 16 per cent to 17 per cent and downwards adjustments in subsidies as per the IMF requirements for the $6.5 loan facility, drove inflation up.

The problem with this is that not only the purchasing power of population is reduced but with the current economic climate the lives of ordinary people become much less manageable. It is therefore necessary that appropriate steps are taken in the upcoming budget to curtail and reduce inflationary pressures. Some of these steps including tax reforms will be proposed going forward.

Job creation:

Unemployment in Pakistan fell down slightly from 6.30 per cent to six per cent in the second quarter of 2013-14 as per official data and estimates. One important aspect is that the unemployed even though educated were mostly unskilled in any trade. This points out to an inadequate education system. By introducing skilled courses along-side traditional education, we can address the issue of unemployment due to lack of trade skills.

The one per cent increase in GST (General Sales Tax), a type of indirect taxation from 16 per cent to 17 per cent and downwards adjustments in subsidies as per the IMF requirements for the $6.5 loan facility, drove inflation up.

Another aspect of the high unemployment is that of the estimated two million youth the entering job market every year, only 1.2 million succeeds in getting jobs. This leaves a huge 40 per cent of the new aspiring workforce unemployed which contributes to brain drain and other social problems.

This issue can be addressed by better use of national resources, encouraging cottage and value-addition industries as well as an entrepreneurial culture. With the expected Chinese and Saudi infrastructure, agricultural and military investments in Pak, the government should focus on ensuring maximum local labour participation to turn these into employment opportunities.

ADB (Asian Development Bank) has estimated a growth of 3.4 per cent, slightly higher than the 3.1 per cent estimate of IMF for Pakistan’s economy for the FY14. With above mentioned factors, the grant of the GSP plus status and the steps described ahead, a 6-7 per cent growth rate should be targeted to generate adequate opportunities for employment.

Education and health:

While the government of Pakistan likes to claim a higher literacy rate of 57 per cent, according to UNESCO it stands placed at 180 amongst 221 countries. Most alarming is the fact that the most illiterate segment of the society is the youth where illiteracy reaches around 70 per cent.

The healthcare sector also faces issues of its own with health and sanitation infrastructure in dire situation particularly in rural areas. Although healthcare became a provincial subject following the 18^th amendment, the federal government still undertakes several national health programs.

Allocation to education in the last budget was less than two per cent of GDP while a mere Rs35.6 billion were allocated for federal healthcare programs. What is more unfortunate is that of the meager allocation to education, as much as 30-50 per cent has been left unused over the years.

In this regard the government should allocate at least 4-5 per cent of GDP to education and ensure that it is fully utilised. The spending on healthcare should also be increased to meet with the rising demands.

Eradication of corruption:

Transparency International had ranked Pakistan 127 out of 175 in 2013 in terms of corrupt countries. This was an improvement of 12 steps from a previous ranking of 139. Although this is a good sign but considering the era of unprecedented corruption between 2008 to 2013, it is still not adequate.

As per various studies, daily corruption in Pakistan results in a loss of billions of rupees to the national exchequer. This is in addition to the billions of dollars of black money stashed overseas. It is not surprising that Pakistan even beat India (a country several times its size) regarding such deposits in Switzerland alone.

Pakistan desperately requires effective tax reforms. A reduction in tax burden on ordinary people and reducing the average tax per person by increasing the tax net would lead to better filled coffers of the treasury.

Unfortunately, the National Accountability Bureau has not been allowed to function freely to eradicate the menace of corruption. Past precedents of political score-settling and abuse of power are cited as reasons by some quarters. It is important that proper checks and balances are introduced to address such fears and a drive ensured to penalise corruption, increasing the costs of indulging in it to such levels to make it a less attractive proposition. Perhaps a good place to start will be utilising Swiss laws to bring back black money stashed in Swiss banks back to the people of Pakistan.

Tax reforms

Pakistan desperately requires effective tax reforms. A reduction in tax burden on ordinary people and reducing the average tax per person by increasing the tax net would lead to better filled coffers of the treasury. In this regard we propose:

• Reduction in tax rates to reduce burden on individuals
• Increase in tax base by bringing millions of small and medium businesses into tax net which will increase the tax revenue manifold despite lower rates
• More weightage to direct taxation instead of indirect taxation, which is not only regressive but results in higher inflation
• Adoption of a more progressive tax regime, taxing the wealthiest segments more while providing for the down-trodden
• Introduction of tax incentives for value-added production and services to incentivise businesses towards them

Besides making the above structural and policy adjustments, the issue of lack of trust amongst the taxpayer and government needs to be addressed by government officials, setting an example and provision of due services ranging from security to sanitation to the population. Tax avoidance by top government ministers and functionaries by means of gifting millions to relatives may be legal but does little to induce confidence in an already shaken belief of the ordinary taxpayer.

Better use of national resources:

Better use of national resources can help generate extra revenue while creating industrial as well as service oriented jobs. At present Pakistan mostly exports basic raw materials or low value-added products like yarn, which are made into finished products by other countries earning profits which Pakistan itself can by completing the process itself.

In addition, the unattended reserves of natural resources ranging from coal in Thar, diamonds and precious metals in Balochistan and northern areas to wind-pressure-points and water in KPK (for cheap and green energy production) should be utilised.

The limited space prohibits further detailed deliberations but appropriate allocations to address poor law and order situation and lack of energy are essential. Besides reducing debt reliance which consumes 30-40 per cent of budget in debt servicing is also extremely important.

This was the keynote address by the writer at Hamdard Thinkers’ Forum on the topic of “Upcoming National Budget and Expectations of the Nation”.