May 22, 2006	Monday	Rabi-us-Sani 23, 1427

THIS is the ideal time for the policymakers in a developing country like Pakistan to formulate the next year’s budget. The fiscal environment is so helpful.

A high economic growth rate of 8.4 per cent achieved last year has been followed by expected between 6-7 per cent this year. The substantial increase in investment and production makes the tax target easy and tax paying in moderation less painful.

When the industry is expanding fast, exports are soaring and the service sector flourishing with new products and services for the well-to-do, that is the time for larger tax collection.

And when tax payment is being made less vexatious and smoother through the ‘universal self-assessment’ that is the time to expect larger revenue. When the stock exchange is booming and real estate price is hitting the skies along with the vastly expanding services, that is the environment for higher tax collection.

But there is one snag in the rosy tax revenue scenario. The next year is an election year and president Musharraf does not want to displease the voters. In fact, he wants to make as many concessions to the voters as possible through his promise of water, power and gas for all by 2008 and if possible by the end of next year.

So, it is said, there are to be no new taxes and instead there will be moderate tax relief, particularly for the salaried class who have not been enjoying any tax reduction at the lower level for some years.

Simultaneously, there are reports saying that the tax collectors have been directed to explore avenues for new taxes and how to collect them to finance the development plans. That may mean the tax sources identified like the capital gains tax and a tax on real estate profits may not be enforced next year.

The taxpaying is to be made easy through the working of the ‘universal self-assessment’ scheme and by setting up 12 more taxation offices.

The issue is not of identifying large and new sources for mobilising revenues, but a decision to tax the obvious sources, for example, agriculture whose support prices are raised constantly. It is a political decision to be taken on a political level, says the chairman of the Central Board of Revenue Abdullah Yousaf.

He has been silent at various seminars on having a substantial share of very large profits in the stock exchange or profiting by the capital gains on the stock exchange as the law giving exemption from the tax is valid until 2007. When it comes to the large fortunes made through the real estate, all he is doing is to document the transactions and make a proper database.

The CBR chief is confident of adding 20 per cent more to the number of taxpayers and collecting at least 20 per cent more revenues. In fact, the figure of 22 per cent is now being mentioned. He wants to make the tax-GDP ratio respectable instead of at 10.1 per cent of the GDP, the lowest in the region.

But when it comes to giving tax relief to the salaried class, the revenue loss will be low, and there can be a large loss in the number of taxpayers, which is now about 1.3 million. That has stood in the way of tax concessions for the salaried at the base level.

One of the objectives of the government is lowering the cost of business, something that the World Bank, Asian Development Bank and foreign investors have been urging. This is imperative to encourage foreign and domestic investment.

The new budget has to provide for two or three large increases in spending. The defence expenditure may rise to 10 to 15 per cent over the current years to Rs223.5 billion, primarily to acquire more sophisticated equipment like F-16‘S from the US and JF-17 from China. The second increase is to be to provide for higher pensions including military pension.

The allocation for education is to be raised to four per cent of the GDP from over two per cent.

There has been speculation in regard to pay increases along with reduction in the taxes on salaries and a flat tax on salaries. What will ultimately come through the budget remains to be seen.

Mr Abdullah Yousaf is confident the current year’s budgeted target of Rs690 billion tax revenues would be met which encourages him to set the next year’s target at a around Rs840 billion.

All that has encouraged the government to fix Rs342 billion as the target for the public sector development programme. Of course, without adequate infrastructure, the progress of other development schemes will be slow.

The enhanced PSDP allocation will take the public sector development expenditure to four per cent of the GDP from 3.8 per cent, which is still low for a country of 160 million people.

Meanwhile, we are given some optimistic projections. Inflation, which was 11.2 per cent last year, is stated to be at eight per cent now and will be 6.5 per cent next year and six per cent thereafter. Normally, inflation projections do not reflect ground realities or the figure is under-stated.

The unemployment is stated to be 6.5 per cent compared to 7.7 percent. Official claims that the total number of unemployed in the country now is 3.3 million, which makes us far better than many European countries.

But the biggest challenge is from having to mobilise $25 billion for the five dams, which have been approved. The money has to be found long before 2015 when they are expected to be ready and are able to produce power as well.

While the poor are promised better times after the budget and relief for the low income groups, and flat tax for the salaried, they are immediately hit hard by the 100 per cent rise in sugar and the soaring price of lentil.

And they are afflicted in cities like Karachi with endless breakdown of electricity supply and frequent load shedding. They find it difficult to believe that the budget would change all that.

Even if the government’s policies change and fiscal levies become liberal, the primitive distribution system will neutralise the benefits of the change in official policies and procedures. Imagine that in spite of all the vegetable supplies supposed to have come from India, a kilo of green lemons cost Rs30. And a medium size candle costs Rs10 each. The whole system has to be reorganised if the common man has to have any relief through the budget. The budget would not be a magic wand despite the alluring promises made for political reasons.

Inflation is sought be contained through a rather tight monetary policy. Commercial banks have given loans of Rs366 billion to the private sector in the first 10 months of this financial year against Rs363.7 billion in the same period last year.

Simultaneously, the home remittances of overseas Pakistanis increased by five per cent in the first 10 months of the year and reached $3.6 billion. And during the recent Pakistan Development Forum meeting in Islamabad, foreign delegates voiced their unhappiness over the manner the large remittances were spent on large non-productive items.

Clearly, too much money is afloat and the consumption is increasing and people with surplus money are pushing up the consumption. And home remittances are not taxable either so the government has to think of other ways of combating the inflation.

While it is easy to frame a budget in such economic conditions, politically the task is made more complex with too many claimants wanting too much of a share of the modest resources.