WHATEVER the budget to be announced tomorrow contains, there are two crucial areas where we can already say it will fall woefully short. These areas are safeguarding the interests of the poor and those of future generations.
In a country where a third of the population can be said to be living on a monthly per adult income of Rs3,000, there can be no other priority more important for the economic policymaker than to ensure that this segment can improve their lot.
And in a country where the dismal tax-to-GDP ratio ensures a constant build-up of unsustainable debt, the interests of future generations fall by the wayside. Instead the country’s economic policy is designed to safeguard the interests of its creditors first, to meet its own current expenditures second and the profits of its business elite third, with all else coming a distant fourth.
This budget is not going to be any different. A sleight of hand ensures that the interests of the poor are defined as a subset of the interests of the business elite by proposing economic and industrial growth as the sole solution to poverty alleviation. And a constant muddle through approach towards revenue generation, with future capital investments left largely to projects in the China-Pakistan Economic Corridor (CPEC) ensures that the today’s consumption is paid with tomorrow’s possibilities.
An example makes this clearer. Ever since the government abandoned any attempts at comprehensive tax reform designed to document the economy, it has muddled through with revenue measures that burden existing taxpayers. Last year it introduced a new tax that it billed as a documentation exercise which called for a 0.6 per cent tax on banking transactions of all those who are non-filers of income tax returns.
As a documentation measure this was fine. Initially it led to a sharp increase of currency in circulation, meaning people preferred to transact in cash rather than use banking instruments to avoid this tax. All the government had to do was hold the line and eventually those non-filers who transact large volumes, millions of rupees on a daily basis, would find cash too cumbersome to continue with.
But the government blunted the impact of this measure by entering into negotiations with the trader community, which was the main target of the tax, and which led the protests against it. It agreed to reduce the rate to 0.3pc, and kept extending the deadline by when traders were required to file their returns.
As a result, traders kept using cash as a medium in the hopes that the tax will soon be withdrawn. This constant cycle of negotiation and extensions fuelled the wrong hopes, and the consequence is that currency in circulation accounts for 80pc of all the fresh money created since July 1 of last year — when the fiscal year began and the tax began to be applied. By comparison in the preceding year this same percentage was 40pc.
Bankers are nervous about this development. “This volume of cash in circulation can be dangerous for the economy,” says one senior banker who did not wish to speak for attribution. “It can trigger speculation, in commodities, property, stocks, and then it can be very hard to get a handle on things.”
Now we hear the government is keen on expanding this tax to other sectors too, having tasted the revenues from it. As a documentation measure the idea is a good one, but as a revenue measure it is a lousy idea. We are reduced to resorting to these tactics because since 2013 we turned our backs on the best documentation measure that has a proven track record from around the world: the Value Added Tax.
The story on the poverty side is very similar. The last big idea that any budget contained for the poor was the Benazir Income Support Programme (BISP). Since then all we’ve ever seen are growth measures disguised as poverty alleviation, or little schemes like the Prime Minister’s Health Insurance Scheme or a free interest rate scheme.
The good thing about this is that with the poverty score cards that are used for targeting in the BISP, we have the tools to build large scale poverty alleviation programmes. The bad news is that all we’re building are small schemes, many of which barely take off before implementation issues arise, such as with the interest free loans schemes that banks refused to participate in.
With no meaningful policy conversation, let alone proposals, on poverty alleviation, and no substantive movement towards tax reform, the country’s economic policy has lost its moorings. The budget making exercise has now devolved into a massive squabble about who will be charged how much FED next year, whose products will be zero rated for GST purposes, and a collage of schemes for the poor.
Haris Gazdar, one of Pakistan’s leading researchers on poverty, says a policy focus on poverty alleviation is “first and foremost a political choice”. Some political parties propose economic growth as the leading poverty alleviation mechanism, whereas others argue to make this growth more inclusive, although “neither paradigms are actually able to prevail in practice due to the acceptance by the political leadership of existing constraints”.
Inviting the poor to come eat out of your hand is not a poverty alleviation exercise.
And a pass the parcel style revenue effort, where the one holding the bag when the music stops pays the incremental taxes required for next year, is no way to manage a revenue effort. Little wonder then that the country’s domestic debt has jumped almost 50pc since May 2013 and the number of those living below the poverty line has now been set at 29pc of the population.
Economic policy must find a way to make future generations and the poor its central focus. Until that happens, the budget speech might as well be read out in a drawing room somewhere, because that will be the sum total of those for whom it holds any relevance.
Published in Dawn, June 2nd, 2016