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Focus on growth to boost tax revenue

Updated June 10, 2013
- File Photo
- File Photo

With the budget for the next fiscal year just a few days away, everybody is wondering what the new government of Prime Minister Nawaz Sharif will do to revive the ‘sinking’ economy.

The key question being asked is how far he is willing to go to implement, in his first budget, PML-N’s election manifesto that outlines an inclusive growth strategy focused on large infrastructure development. After all, it has to be his maiden budget that should set the direction in which he wants the economy to move in the next five years.

“The market is keenly waiting for more details on the plan the Nawaz Sharif government has to grow the economy by six per cent, increase investment to 20 per cent of GDP, add 10,000 megawatts to cut power shortages and prices, reform the loss-making state-owned enterprises (SOEs), cut budget deficit to four per cent of the size of the economy, raise the tax-to-GDP ratio to 15 per cent, and so on and so forth,” says Sayem Ali, economist at Standard Chartered Bank.

Post-poll PML-N statements aimed at lowering public expectations of immediate economic revival and elimination of power shortages have created an opposite impact on the market. Signals from the government show that it doesn’t have much appetite for tough, politically unpopular reforms,” contends an analyst working for a major brokerage house who refused to give his name because of professional reasons.

Still, he says, the hopes are high and the market is ready to give benefit of doubt to Nawaz Sharif and his party at this point in time. “This situation will not last long if the new government failed to make progress on its promises of wide-ranging economic and financial reforms in the budget. If the business confidence is hurt now, it will not be easy for the government to revive it during its tenure.”

Analysts agree that the economic challenges facing the third Nawaz Sharif government are enormous. The government’s finances are in ruins, balance of payments is not so comfortable, tax revenues are lowest in the region, investment has plunged to 12.5 per cent of GDP and unemployment has soared.

“Delivering on its promises will be a challenge for the PML-N government given the weak fiscal position and large debt payments (over $5bn debt repayments to IMF are due in next fiscal year). Turning the economy around will require significant fiscal and structural reforms,” argues Sayem.

His first address to the national assembly after his election as prime minister indicates that Nawaz Sharif realises the enormity of the task for him ahead.

“The new government has a good chance of following through its promises as it has a strong mandate,” argues Raza Jafry, an analyst at the AKD Securities. Nevertheless, he warns it against setting ‘unrealistic’ budget targets. “The new government will not have much time to make the budget according to its wishes and it will have to rely more on the proposals of the bureaucracy. Even if it cuts expenditure, broadens tax net, increase development spending, start privatisation and take steps to ease energy crisis, it will set a direction for the next five years and restore investor confidence.”

Sartaj Aziz declined to share the details of the economic strategy to be pursued by his party’s government in the budget. “You will know the details in a few days when the budget is announced. So far I can only say that the budget will be a reflection of our election manifesto,” he told Dawn.

Zubair Umar, another important member of Nawaz Sharif’s economic advisory team, says the next budget will spell out a “combination of effective policies to grow and stabilise the economy at the same time”. While some issues will be dealt with in the budget, according to him, the others like energy shortages will be tackled outside of it to kick-start the economy

. “You must appreciate that we did not get sufficient time to prepare the budget” he argued. “Still our election manifesto will be reflected in our first budget,” he claims, admitting that the government cannot wait another year to implement policies to fix the economy as the challenges are daunting and time to address them is short.

Background interviews with some PML-N people, who claim that they have participated in a few meetings held to formulate strategy to fix the economy, reveal that the government plans to cut its expenditure by 30 per cent across the board, increase public investment, overhaul the SOEs, reform the power sector, initiate privatisation, and increase/decrease rates of existing taxes and improve collection in the next budget. They, however, ruled out any major change in the taxation system to boost government revenues. The plan to raise the share of direct taxes and reduce indirect taxes and implement agriculture tax has been postponed for the time being if not shelved altogether.

“Our economic strategy will revolve around policies and measures to substantially cut the government’s expenditure and reduce energy shortages to grow the economy to boost tax revenues. If we ease the energy crisis, we will solve a lot of problems,” one PML-N leader, who asked not to be named, says. He insists the increase in the revenues and decrease in expenditure will create space for higher public investment in the economy for generating new jobs.

PML-N leaders say the implementation of agriculture tax is not possible at the moment as it is a provincial subject and “you can enforce it in Punjab (where the PML-N is in power) and not in Sindh (where the PPP is power)”. “Similarly, it is also not feasible to implement value added tax (VAT) because you don’t exactly know if it will help improve the revenues,” the anonymous PML-N leader argues.

Some analysts do not agree with this strategy. “It will be unrealistic to expect the government to introduce radical policies in its first budget. Yet it will have to implement some credible policies to reform taxation system to widen the net and boost the revenues and cut subsidies and other expenditure in this budget to show to the people that it is holding the course on reforms,” says Shahid Zia, a Lahore-based analyst.