Dharnas, cotton crop... What’s going to be the PML-N’s next budget scapegoat?

Published June 7, 2016
Pakistani Finance Minister, Ishaq Dar.— AFP/file
Pakistani Finance Minister, Ishaq Dar.— AFP/file

Last year, it was the blasted Pakistan Tehreek-i-Insaf (PTI) dharna. This year, it's the cotton crop. Any guesses on who will be the government's fall guy next year?

It’s now a predictable drama: this year, a slightly disappointed, yet hopeful, finance minister said:

“Our GDP growth would’ve been 5.21 per cent had the cotton output not declined by 28pc.”

The low output of cotton — the country’s cash crop — has dragged the agriculture sector into negative growth, shaving off “around 0.5pc of Pakistan’s GDP growth this year,” Ishaq Dar told us as he presented the economy’s performance in FY15-16, reminiscent of the previous year’s economic survey, when he pinned the responsibility of the missed target on the three-month-long protest outside Parliament.

Yet, the missed target this year — that too by a wide margin — has not prompted Pakistan’s economic think tank into reviewing its strategy.

Also read: Budget without ideas

Instead, like other knee-jerk reactions from this government, a budget layered with short-term incentives for the drowning sector has been announced.

True to their nature, these economists have assumed that by strengthening the weak link, all will be well, which is in reality a half-baked promise because real problems plaguing Pakistan’s economy continue to persist.

How the tax structure doesn’t help

That Pakistan’s tax structure is in shambles is no secret.

Under pressure from IMF, Dar has been trying to increase tax revenue for four years now, and his go-to measure in all this time has been an excessive reliance on indirect taxes, which is a major problem.

Why?

Indirect taxes — such as withholding taxes, sales tax, etcetera, are all those taxes that the consumer has to end up bearing at the time of purchase or transaction.

A comprehensive look at our historic tax revenue trend reveals that indirect taxes make up a huge majority of the total revenue. For the past three years, our total tax revenue breakup has remained more or less unchanged — direct taxes make up around 40pc of the total, with indirect taxes accounting for the remaining 60pc.

Cause for concern

For an economy like Pakistan, which has been struggling to move past the 5pc growth mark, despite repeated attempts, higher indirect taxes are counter-productive because they end up hurting consumers’ disposable incomes — which, in turn, weighs down on demand — and thus the overall growth.

Despite the obviously damaging trend of indirect taxes continuing to account for a huge chunk of tax revenue, the government has been unable to take substantive measures on this front.

Neither has it succeeded in lifting Pakistan’s tax-to-GDP ratio, which came in at 8.4pc in 2015-16, not anywhere close to the 10pc target.

Also read: Budget 2016-17: Budgeting for the rich

For next year (2016-17), the government has added Rs204 billion worth of new taxes, targeting tax revenue at Rs3.62 trillion — a 6pc increase over its previous target.

But given that last year’s tax revenue target of Rs3.41tr was missed by a wide margin of over a trillion rupees, it is inevitable that next year, the story will be all too similar.

Why?

Because the additional Rs204bn that the government has budgeted under the tax revenue head for next year will largely come from income tax, customs, sales tax and federal excise duty, with the ever-increasing reliance on withholding taxes hard to miss.

If you look at the budget 2016-17 targets, direct taxes at Rs1.56tr once again make up around 40pc of the total budgeted tax revenue, with indirect taxes accounting for the remaining 60pc at Rs2.06tr.

With this breakup, even if the government does manage to lift actual tax collection like it did last year, this would come at the cost of disposable incomes, which will continue being chopped off through more indirect taxes – a paradox for a government that sells itself as ‘growth-oriented’.

Is CPEC the answer?

The agriculture sector, which accounts for almost 21pc of our GDP, registered negative growth of —0.19pc in the outgoing year but overall growth was compensated by the industry and services sectors, which outperformed expectations.

Yet, unemployment numbers remained largely unchanged, with the economic survey claiming the figure had gone down only slightly – from 6pc to 5.9pc in FY15-16.

This raises two valid questions:

1) What kind of growth is the CPEC generating?
2) How long will it take to impact our economy in the real sense?

Yes, the energy and construction sectors have boomed in the past year and are expected to maintain this trajectory as the government continues to provide incentives and Chinese investment flows in.

Also read: Tale of two CPECs

That this growth will be able to tackle seething structural problems is highly unlikely. Which is why it is important to understand that even though the China-Pakistan Economic Corridor investment has led to the increase in the energy and construction sectors, it is yet to be seen whether Pakistan has the capacity to sustain this growth.

If not, next year, be sure to hear more of, “our GDP would have been higher by 0.5pc if only it wasn’t for the...”

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