THE annual budget season is up, where the federal and the four provincial governments — interestingly belonging to or led by four different political parties — will be presenting their priorities.

There will be some media hype for a few weeks; political rhetoric and arguments in favour and against the proposed fiscal arrangements will be made; and talk shows will debate the merits and demerits of the budget. But none of this will have any major impact on the very basic structure of fiscal policies.

Then there will a long silence till next May, while the citizens will swallow the bitter pill on the promise of a better future. And this cyclic process will keep on repeating until fundamental changes take place in the political economy, because fiscal policies are not politically neutral.

Pakistan is a highly unequal society where a few powerful groups control the political, social and economic institutions, and the rest of the citizens are kept at a distance from important decision-making.

Due to imbalances in power, the political elite has played a parasitic role in public resource mobilisation — through fiscal policy measures — by a two-pronged approach: avoiding paying its due share of taxes (hence putting the burden of financing public expenditure on the poor and middle class through indirect taxation), and using budgetary resources to serve its vested interests.

Earlier this year, the Lahore University of Management Sciences (Lums) and Oxfam published a research on multiple inequalities. It revealed that Pakistan’s taxation system is regressive and allows a great deal of space for tax evasion.

To varying degrees, both these issues reflect elite capture. An important indicator of the elite bargain is the mismatch between its share in GDP and its contribution to tax revenue. For example, the agriculture sector contributes 21pc to GDP but just 1pc to taxation.

Similarly, the services sector contributes over 50pc to GDP but only 30pc to taxation. And hundreds of billions of rupees are lost in unjustified tax exemptions and concessions.

Due to low domestic resource mobilisation, successive governments have been unable to adequately invest in essential services. This has affected the overall quality of public services on which the poor mostly rely on, such as basic health, universal primary education, and safe drinking water and sanitation facilities.

Limited access and lower quality of public services exhibit the minimal redistributive effect of fiscal policies, hence indicating fiscal injustices having two broader implications. First, citizens cannot see a link between tax payment and the services delivered to them.Therefore, those who can afford to pay don’t see any reason for paying taxes.

The second and the more important implication is the diminishing chance for poor households to break away from the poverty cycle. With limited endowment of natural resources in a highly unequal resource base, the state can promote social mobility by investing in quality education, health and nutrition. The useful instrument for this is fiscal policy.

A true and participatory democratic process requires engaging with citizens to decide on fair taxation and spending priorities to reverse the current trend in favour of the majority.

The government also has to establish a clear link between taxes and the services it delivers, and ensure that its fiscal policies are fair and that all incomes are equitably taxed. This is necessary to regain the public’s lost trust in paying taxes and to strengthen the contract with citizens.

It may be unrealistic to expect a sudden course correction, but the intention and future direction also count. There could be three important areas where bold decision-making can indicate the government’s commitment.

The first could be introducing tax reforms, starting with reducing the general sales tax and other duties on food items used mostly by the poor, including the GST on high speed diesel, which increases the transportation cost. This consequently affects overall food prices in the short-term. And the government could gradually reduce the GST on other goods consumed by poor households, and offset the revenue loss by raising direct progressive taxation.

The second is to increase pro-poor allocations, including public expenditure on education, health, nutrition and social protection programmes. This should be a part of an overall medium-term plan and gradually implemented.

The third is to create an institutional mechanism for regularly engaging citizens in making fiscal policies and keeping an oversight on public expenditures in order to improve accountability and efficient use of public resources. It is simple to say, but it has been difficult for successive governments to introduce these shifts. The citizens’ demands for better quality public services, social protection support and to be included in important decision-making related to taxation and expenditure are essential and represent the true spirit of democratic dispensation.

In addition to this, public debate through the media and citizens’ mobilisation needs to be continued for the entire year, as these are continuous processes. They should not end in a month when the budget has been presented in the assemblies, in order to change the fiscal policies and address rising inequalities, create equal opportunities and a fair society.

The writer is an Islamabad-based development professional

Published in Dawn, Economic & Business, June 1st, 2015

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