Squeeze on economic development

Published Jun 17, 2012 09:25pm

PUNJAB’s budget for the next financial year represents the entrenchment of two important trends in public finance: rise in spending on populist schemes and stubborn resistance to tax the exempted and under-taxed sectors of the provincial economy.

The liberal election-related expenditure booked in its next budget without expanding the provincial tax base is feared to hamper the government’s capacity to spare required resources for social and economic infrastructure development.

The government has set aside a hefty Rs34 billion for food, transport and other subsidies and Rs15 billion for schemes like distribution of interest-free loans, subsidised tractors and yellow cabs and free laptops to voters, especially youth. Other initiatives that aim to win votes in coming elections include free distribution of state land for housing and internship programme for graduates.

The allocations for subsidies and youth initiatives form 20 per cent of the proposed development outlay of Rs250 billion and 6.4 per cent of the total budget. The development budget, which carries a deficit of Rs30 billion for which no financing is available, shows 13.6 per cent increase in its size over the original outlay for the current fiscal. The current expenditure has grown by 22 per cent, on the other hand.

The tax revenue target has been raised by a paltry seven per cent to Rs95 billion, including sales tax (GST provincial) on services of Rs40.50 billion. The target for tax collection on agriculture income remains abysmally low at Rs720 million.

“The government’s reluctance to effectively tax the under-taxed sectors like agriculture and real estate has transformed these highly elastic taxes into inelastic taxes,” a professor of Lahore School of Economics commented on condition of anonymity.

“The government desperately needs to restructure the existing taxes and mobilise new taxes in order to finance its development, remove infrastructure gaps for boosting economic growth and create jobs,” he said.

A similar advice was given by the Institute of Public Policy (IPP) in its annual report — The State of the Economy: The Punjab Story — to pursue an “aggressive policy of resource mobilisation involving development of provincial taxes on services, agriculture income and real estate.”

“The populist, election-related initiatives announced in the budget represent continuation of the Shahbaz Sharif government’s focus on the populist fiscal policies at the expense of growth, jobs and economic infrastructure,” one of the contributors to the IPP report, who refused to give his name, commented. He, however, said it was foolish to expect any government to take unpopular measures like imposition of taxes in an election year.

“No government will want to risk losing votes and political support of the powerful lobbies by taking such unpopular steps in its last year in power. Other provinces and the federal government too have dithered on tough fiscal reforms in their budgets for the next year for similar reasons,” he argued.

The projected shortfall of Rs15-20 billion in its share from the federal taxes and non-realisation of foreign project assistance of just above Rs7 billion during the current fiscal year has forced the provincial government to cut its spending on social and economic infrastructure development by a hefty 29 per cent to below Rs157 billion from the original programme of Rs220 billion.

The revised estimates for the current year for different sectors show that development funds for education were cut by a whopping 57 per cent, health by 30 per cent, livestock by 60 per cent and agriculture by 42 per cent. Not a single paisa was released for the provincial Millennium Development Goals (MDGs) from Rs8.5 billion set aside for the same in the budget. Only 22 per cent of the total allocation of Rs9 billion for energy was released.

The lack of any effort to raise provincial tax revenues reinforces Punjab’s dependence on federal transfers under the National Finance Commission (NFC) award. Over 83 per cent of the Rs783 billion Punjab budget will be financed by federal transfers (of Rs650.74 billion), 12 per cent by provincial tax revenue and the remaining five per cent by other sources like provincial non-tax receipts (of Rs35 billion).

“Historically, over 80 per cent funding for budgets of all the provinces comes from the federal taxes or straight transfers. The budgets of other provinces will prove my contention. So it is not fair to single out Punjab for its reliance on federal transfers,” argued a Punjab planning and development department official.

He, nevertheless, agreed that the possible shortfall in federal tax collection would hurt the provincial development spending just as it had done this year and the previous years.

But he claimed that the government was trying to improve provincial revenue collection through administrative reforms and changes, citing the decision to set up the Punjab Revenue Authority for collecting sales tax on services from next fiscal. “Later on other provincial taxes will also be reformed and transferred to the new authority,” he said.

“The tax on agriculture income will not generate the kind of revenues some experts say it can. On the contrary, it may prove counterproductive and affect our agriculture sector,” he insisted.

He was hopeful that the provincial sales tax on services had the potential to generate substantial revenues in the coming years with the growth in services sector. But can that be used as an excuse to leave incomes of powerful lobbies outside the tax net? Not really.


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