WHILE the federal budget for 2014-15 is technically the second budget presented by the PML-N government, for all practical purposes it is the first. Last year, the government had only a few short days to give fiscal shape to its economic plans. As such, this year’s budget exercise could not have been better timed — affording ample opportunity to policymakers to think through the issues and craft the first-best policy response, while giving the government a cushion of four years to implement the measures, and recoup any political capital expended.

At the same time, substantial capital inflows over the past few months have increased the available resources and eased the budget constraint. On the political side, the temperature may have begun to inch up, but the government is comfortable. The resultant ‘policy space’ would be the envy of any government anywhere.

Rather than use the available policy space for a path-breaking, reform-oriented budget — as in the PML-N government’s first tenure in 1992 — the government has presented a raft of proposals that may be well-intentioned, but do not go far enough. Barring a few good proposed measures, the budget doesn’t make a big move on meeting some of the economy’s biggest challenges and constraints.

A big disappointment is that the near-existential issue for Pakistan’s industry has not been addressed — the rising tax incidence on the formal sector, and the regulatory-cum-compliance burden. If anything, by not making a meaningful move on tax broadening, this burden will be reinforced. Largely as a result, the economy is ‘informalising’ at a fast pace, with serious long term consequences — not just for new investment and job-creation, but also for the volume of tax collection.

The budget doesn’t make a big move on meeting some of the economy’s biggest challenges.

The starting point for any meaningful analysis of a presented budget should be to evaluate its alignment with macroeconomic realities. There are two major areas where the budget is not aligned with the broader economic context:

Size of the budget and spending priorities

Given that total public debt has touched Rs16.8 trillion (66pc of GDP, including the ‘off-balance sheet’ items such as commodity financing and debt of PSEs), and the tax-to-GDP ratio remains mired below 9pc, any further expansion in the size of the budgeted outlay cannot be supported by the fiscal framework.

The size of the budget has surged nearly 20pc in the last one year — with debt servicing accounting for a large part of the increase, in addition to supplementary expenditures which include ‘special’ projects. How untenable and unrealistic the size of budgeted expenditure for 2014-15 is, can be gauged by the fact that, apart from its demerit from an equity or constitutional perspective, one of the largest ‘financing’ items is a combined provincial surplus of Rs289 billion, or 1pc of GDP.

Net government revenue, after transfer to the provinces, is financing only 52pc of the budget, with the rest either being borrowed, provided via provincial surpluses, or coming from grants and capital receipts. (Total budgeted borrowing — adjusted for projected revenue shortfall — is expected to amount to over Rs 1,300bn, or nearly 10pc of the outstanding public debt).

On the broader issue of infrastructure spending and its purported benefits to the economy, it is relevant to consider here Brazil’s lavish outlay of $30bn on the World Cup. Despite its proclaimed economic benefits, it is clear that this venture reflects skewed — and vain — priorities, and will not deliver ordinary Brazilians from poverty, hunger, crime and squalid living conditions. Bottom-line: vanity-driven national projects, or populist vote-grabbing ones, are not going to deliver the goods in the long run.

If, under the circumstances, massive infrastructure spending is not a truly viable option to lift the economy out of the doldrums, then what should the plan of action be?

Tax reform

By any conceivable measure, the tax regime in Pakistan is both unfair and inequitable in the extreme. While this is true across the board for all genuine taxpayers — individuals, association of persons, or corporates — the tax burden on formal businesses (especially manufacturing concerns) is punishingly high.

In broad terms, this is reflected by the fact that industry accounts for over 70pc of total tax collection by the Federal Board of Revenue, with agriculture’s contribution at less than 1pc. (In fact, despite all the ruckus about indirect taxation of agri-inputs, this avenue provided Rs20.9bn, or only 0.3pc of the sector’s value added, to the exchequer in 2012-13).

Similarly, investors on the stock market continue to be handled with kid gloves — and have escaped scot free once again. On a capital gain of Rs2,828bn ($29bn) in the past 18 months, most of it accruing to a narrow circle of large investors, their contribution to the national exchequer was an abysmal Rs588 million (around $6m) in 2012-13 — for a tax incidence of 0.02pc.

On the other end of the scale, according to data compiled by the World Bank, a formal business in Pakistan makes 47 different payments of tax and government levies a year, while, on average, it spends 577 hours a year in dealing with tax matters. On both counts, Pakistan is ranked amongst the highest-burden countries in the world.

And yet, the documentation measures in the budget that would have broadened the base are generally weak — and have been diluted further by special interests.

A case in point is the increase in the income tax filing threshold to Rs100,000 and above a month of electricity usage by domestic consumers, from the FBR-proposed Rs50,000.

The increase in the ambit of the withholding tax regime and the reliance on a regime of punitive withholding tax rates for non-compliant taxpayers is also a non-starter — it has been tried since the 1990s, and has failed dramatically. Under these circumstances, the only saving grace for Pakistan’s public finances would be that the government fails to meet its expenditure targets by the end of 2014-15.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, June 13th, 2014