A WEEK ago, Finance Minister Ishaq Dar presented the federal budget. A day earlier, the Pakistan Tehreek-i-Insaf had unveiled its ‘shadow budget’, the first for the party, while the Muttahida Qaumi Movement also announced an alternate budget in the run-up to the finance minister’s speech. The presentation of shadow budgets by both PTI and MQM was in keeping with the parliamentary tradition of well-established democracies, a practice which has been a relatively recent innovation in Pakistan.

So how does the PML-N government’s budget stack up against the others? I will focus on PTI’s shadow budget for two reasons. First, I helped PTI prepare their shadow budget and hence know more about it.

Second, perhaps for self-serving and obvious reasons, I find it more credible than other formulations on the table, which, however, do have many positive elements and suggestions that can and should be considered.

One of the main purposes of having shadow budgets presented by political parties on the sidelines of the government document is to present an alternate set of proposals showcasing the different approach and thinking on how best to manage the economy. The exercise is not just about politics — it is also about presenting recommendations and suggestions to the government to incorporate in the final finance bill. In that spirit, the finance minister’s statements about the two shadow budgets is generally positive.

One of the main purposes of having shadow budgets is to present an alternate set of proposals.

The federal budget, official or ‘shadow’, should be evaluated against the following parameters: does it meaningfully address the main socio-economic challenges facing the country? Does it distribute the burden of taxation measures, or the benefits of spending, fairly and equitably? Are its assumptions realistic? What will it have achieved at the end of the fiscal year?

Judged in this light, the PML-N government’s third budget of its present tenure is overly conservative, and does not go far enough in addressing the main challenges facing Pakistan’s economy. Not without reason it has been dubbed as a ‘traditional’ budget, or one based on a ‘calculator approach’. (Without being facetious or cynical, the combination of an accounting approach on one side, and two bureaucracies on the other — one local and the other at the International Monetary Fund — in formulating the budget, is hardly expected to produce a paradigm shift in budgetary thinking or conjure even the vaguest contours of a broader vision.)

Despite its positives, including an attempt to provide incentives to certain sectors of the economy and to KP, the budget suffers from quite a few major omissions.

First and foremost, like the past two budgets of PML-N, it fails to recognise, let alone address, the taxation crisis the country has been pushed into under the IMF programme, whereby the formal documented sector is being made to bear the burden of taxation — as well as the burden of failure to broaden the tax net. This is leading to an increasingly dysfunctional and unsustainable tax system that is failing to throw up the revenues the state needs.

Another glaring omission in the government’s approach to fiscal management is the lack of a serious attempt to plug the leakages at FBR and on the expenditure side. While these objectives can be termed as ‘administrative’, a meaningful effort by the government can, and should, be reflected as part of the budgetary targets.

The PTI’s shadow budget, on the other hand, is a complete departure from the PML-N’s status quo thinking.

Recognising that private investment has declined precipitously in the past few years, that the economy has settled in a low-growth trap, that formal documented businesses have been put under tremendous stress by government policies and actions, and that the entire country’s tax collection falls either on a handful of direct income tax payers or on the shoulders of the less affluent through indirect taxes, the PTI budget proposes:

• A reduction in the standard sales tax rate to 12.5pc

• A reduction of 5pc each year in the headline corporate tax rate till it reaches 20pc (the lowest in the region)

• The removal of the Gas Infrastructure Development Cess

This huge tax relief, amounting to Rs242 billion in the first year, is meant to stimulate economic activity by increasing disposable incomes, reducing the tax burden of documented businesses, and encouraging new investment. Equally important, the less penal tax rates will be helpful in encouraging greater tax compliance.

To pay for this, the PTI shadow budget proposes a far greater emphasis on visible measures to promote equity and fairness in the tax system. These include introduction of an adjustable minimum assets tax, imposition of capital gains tax on properties, treating all sources of income in a non-discriminatory manner for tax purposes, introduction of a windfall profits tax for certain sectors, and using Nadra and allied official databases to widen the pool of taxpayers.

In addition, the party’s shadow budget places emphasis on plugging the leakages at FBR, and in controlling corruption and waste in public-sector expenditures. An egregious example of the latter is the ratio of 4 to 1 in the cost of a project undertaken in the public versus private sector.

The finance minister has shown reluctance to go down this path, and in fact has gone as far as saying that the Nadra list of 3.2 million affluent Pakistanis not on the tax register is not practical. (This position is a big improvement over the official stance till a few months ago which was that the list was a ‘figment’ of my imagination!)

However, Mr Dar was keen to use this list when in opposition, and is also implicitly acknowledging its existence and utility by converting all CNICs into NTNs.

Pakistan’s economic predicament cannot be tackled by status quo formulations. Without bolder thinking, and a degree of risk, the economy will remain mired in the rut.

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

Published in Dawn, June 12th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play