The expectations from the Pakistan Muslim League-Nawaz’s (PML-N’s) maiden budget are high – but information leaked out to the media reveals that policy makers have decided to keep the focus on industrialists (one of the party’s key voter groups), rather than ordinary citizens.
Ahead of the May 11 elections, the PML-N assured frustrated voters across the country that they would show them greener pastures. As a result, they won a majority, and more significantly, a thumping majority in Punjab. It appears that the dividends, as a result, will also be given to the same province.
The composition of the cabinet further confirms this fear – key federal minister positions have been taken up mostly by politicians from Punjab. This is important, since the cabinet takes decisions particularly pertaining to the allocation of resources and other key policy decisions.
The June 12 budget will be a acid test for the PML-N as to whether the party believes in the cause of the federation, or whether it will just focus on Punjab in terms of development, allocation for mega projects or schemes for youth employment. Otherwise, it will prove sufficient for ‘anti-Punjabi’ slogans to resurrect themselves.
In essence, winning elections in one province or losing in others should not guide the budget formation. Moreover, laptop schemes will no longer be an attraction for a burgeoning youth demographic which wants jobs no matter what province they represent.
Nearly 60 per cent of the youth in the age group of 15-24 in Pakistan is idle, unemployed, not studying, not in training and not looking for jobs, according to a World Bank Development Report. The youth unemployment ratio is at seven per cent compared to the overall unemployment rate of a projected five per cent. Even those who work, do unpaid jobs. If paid, they are less likely to have access to social security.
This demographic need jobs which can only be created by reviving the country’s industrial growth. This may not be an easy job, as de-industrialisation is deep-rooted.
For the past few decades, the manufacturing sector has been beset with a host of problems, including an absence of an industrial policy, a crippling energy crisis, and a narrow industrial base.
For industrial development, the PML-N will have to finalise the industrial policy, coupled with fiscal incentives to resolve the energy problem, and also encourage the use of alternative sources of energy like coal-based captive power generation through incentives like tax breaks. It should club together all ministries created for looking after the affairs of various industries, like the ministries of industry, production, textile and commerce, into one single ministry, ‘Ministry of Commerce and Industry,’ as is the case in countries like India. A single ministry deals with production as well as exports in these countries to remove overlapping in policy formation.
Meanwhile, a draft National Industrial Policy was evolved in May 2011, but it was not implemented. While this looks good on paper, it raises the question as to how targets will be achieved. However, these targets can be revisited to be fine tuned.
For carrying out development, the government needs money that can be raised through taxes, especially from taxing those who fall in high income brackets. It also needs to reduce expenditure on wasteful projects.
The PML-N, on the other hand, is set to introduce over Rs150 billion new taxes in the upcoming budget which are likely to hit the middle class. As per the direction of the new finance minister, the taxation proposals for the budget are being based around three main points — facilitate local industrialists, broaden the narrow tax base and bolster revenue collection in the next fiscal year.
The industrialists will get more protection from cheaper imports. This protectionist policy of the government will add to the profits of the industrialists, who supported PML-N in industrial cities like Faisalabad, Gujranwala and Sialkot.
Again, undue support for industries will be costly for the government exchequer as well. Data shows that more than 2.03 million wealthy people in Punjab are not paying taxes. Contrary to this, less than one million people in Sindh, 386,233 in Khyber Pakhtunkhwa, 69,174 in Balochistan, 5,311 in Gilgit-Baltistan, and 46,657 in Pakistan-administered Kashmir are evading taxes.
At the same time, the tax return filing rate in Punjab is behind that of the rest of the country. Around 54 per cent of taxpayers did not file returns here in 2012. In 2012, Lahore emerged as a major city where 439,901 wealthy people did not pay taxes. It was followed by 208,274 people in Rawalpindi, 165,698 in Faisalabad, 116,748 in Sialkot and 110,864 in Gujranwala. This will be a test case for the PML-N to improve tax compliance in the province which gave it a thumping electoral victory.
In Sindh, Karachi emerged as the leading city where 726,375 people did not figure on the tax roll, followed by Hyderabad at 65,188.
The challenge is to improve the tax to GDP ratio irrespective of provincial political associations. Pakistan’s tax-to-GDP ratio will come down from 9.1 per cent to around eight per cent this year – the lowest in the last 35 years.
Three factors have led to this dismal revenue realisation. It was agreed in the 7th National Finance Commission (NFC) Award that provincial governments will take effective steps to collect taxes on farm income and real estate to help the country’s falling tax-to-GDP ratio increase to 15 per cent by the terminal year 2014-15. However, nothing has happened on this count, although provinces are getting their enhanced share from the Federal Divisible Pool as entitled under the award.
Meanwhile, the tax compliance level fell to 23 per cent in 2012 from 39.5 per cent in 2011. It was 65 per cent in 2010. This poor tax compliance level can be attributed to the suspension of the tax audit. The compliance level in performing countries ranges between 70-80 per cent.
Altogether, around 3.1 million tax-evaders were identified. Of these, 2.4 million did not have a National Tax Number (NTN), and 0.7 million were NTN holders who did not file tax returns. Bringing these people into the tax net will be a challenge for the PML-N government.
The whopping exemptions extended over the past few years have benefited mostly influential people. These SROs are a ‘financial NRO’ for the elite. Can PML-N bring an end to these exemptions or will it, as usual, pass the burden of additional taxation to the non-industrialist middle class? This will fuel inflation further as projected at 8 per cent for the next year.
The government has already approved Rs1.115 trillion for next year’s development programme, including a Rs115 billion block allocation for new initiatives like the launch of the Metro Bus in Karachi and Islamabad. The size of the federal public sector development programme will be Rs540 billion and of provincial development plans, Rs615 billion.
To make a difference, the incoming government will have to overcome three challenges in pursuing its development strategy: creating fiscal space by doing away with ‘perverse’ subsidies; bringing an end to discretionary funds provided to members of the parliament and often used in unproductive pursuits; and focusing on high priority projects, especially those in the energy sector.
With one of the highest-ever budget deficits (more than 7.6 per cent in the current fiscal year), the government has to first reduce the deficit to four per cent over the next three years either through additional resource mobilization, or a cut in current expenditures. The PML-N is committed in its manifesto to cut current expenditure by about one-third, perhaps, during its five-year tenure.
Over the past few decades, development expenditure has been restrained by an enormous rise in debt servicing and defence spending, with the economy badly hurt by the fallout of the Afghan war.
Looking at the current expenditure, it may not be possible to cut defence spending at the moment while debt servicing is on the rise along with the cost of other government services. However, policymakers still have enough room to rationalise/cut undue payments to state-owned enterprises like Pakistan Steel, PIA, Railways, etc and introduce much-needed reforms.
Another challenge for the newly-elected government will be to discipline, or bring an end to, parliament members’ PWP I & II Development programme introduced by military dictator Ziaul Haq. It is alleged that contractors openly offer MNAs and MPAs facilitation fees for these political ‘constituency’ support projects.
Many of the projects under the constituency support fund end up in ghost projects and do not meet the required quality standards. In the past, no doubt, these projects were used for horse- tradin – but after winning a simple majority in Parliament, PML-N needs to bring an end to this discretionary funding which is a drag on development.
The government needs to prioritise the allocation of resources to sectors like energy, water, human capital, innovation and technology transfer to lay the foundation for sustainable development. But provinces will also need to mobilise domestic resources, especially taxes from the agricultural sector. PML-N will also have to spell out its long-term development strategy.
The focus of the budget should be to revive growth, create sufficient employment and raise revenue for the development projects.