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Losing to populism

Updated December 05, 2016


Populism, constituency politics and fiscal deficit are showing early signs of an upward journey on the economic front as the government moves closer to the next general elections.

More than a week back, the government announced a 33pc cut in gas rates for industries without going through the legal process of approval from the oil and gas regulator — Ogra.

The move may go against the PML-N stronghold in Punjab where most of the industry depends on imported Liquefied Natural Gas (LNG) and not the domestic natural gas.

Structural reform can hardly be a priority while political governments prepare for the next elections

In fact the major benefit of lower gas rates would go to industries in the three other provinces — Sindh, KP and Balochistan — who have the resource in abundance. This would be to the competitive disadvantage of the industry in Punjab.

In another sign of popular politics, the government has started to absorb the impact of international oil prices; a move that follows the practice of the past two governments eve of the elections. In both cases, the fiscal deficit had gone out of hand and ultimately put the country under IMF programmes.

Last week, the government absorbed more than half of the oil price increase recommended by the regulator as total revenue loss, on this account alone, reached about Rs17bn in the first five months of the current fiscal year. Before this, the government had directed the Ogra not to notify any gas price increase required to meet the revenue requirements of the two gas utilities that are already operating in the red.

As if this was not enough, the government surrendered to the realtors demand for a tax amnesty to past holdings and transactions including benamis — a move that can now destroy Pakistan’s struggling tax culture. This is because owners of undeclared property will be able to pay just 3pc capital gain — at a time of their choice — to whiten about 97pc value of the property.

The move is against the basic theme of the income tax law under which the government charges up to 35pc of annual income beyond Rs7m. Under-declaration or concealment attracts a punishment of another 35pc of total income.

The property tycoons now operating an estimated economy of up to Rs7tr, including the under-declarers, would now be entitled to first invest their cash and kind holdings (ill-gotten money) in the property and then pay just 3pc in tax instead of 70pc under the existing law.

This comes from newly added section 111(c) of the 2001 Income Tax Amendment Act that envisages that real estate investors would be able to pay three per cent advance tax on the difference between the property valuation of the Federal Board of Revenue and the Deputy Commissioner rate, whenever disclosed.

The new property evaluation was expected to yield at least Rs70bn in taxes in the first year.

Disbursements for the development sector struggled at 15pc in the first four months, though boosted by 100pc disbursements for parliamentarians’ schemes, and about 42pc for security related spending.

In apparent slippage in fiscal discipline, the deficit topped Rs438bn (1.3pc) against a full year limit of Rs1.276tr excluding provincial cash surpluses of Rs339bn. The pace of deficit at this rate is expected to reach Rs1.750bn or about 5.2pc of GDP against a budgetary limit of 3.8pc.

Total revenue in the first quarter of the current year stood at 2.6pc of GDP — a steep fall from 3.1pc of GDP of the same period last year. This was also the lowest tax-to-GDP ratio in four years.

Tax revenues in the first quarter remained at 2.2pc of GDP as opposed to 2.4pc of the same period last year. Similarly, non-tax revenue also declined to a miserly 0.4pc of GDP from 0.7pc of GDP during comparable periods.

No wonder then, that the federal government startled the provinces with its demand for 3pc of the total divisible pool taxes allocated for security expenditure — a move by the finance minister to find new ways of gaining resources because of a constitutional protection for provincial shares of a past National Finance Commission.

The historically low tax recoveries appear to increase the resultant pull and push for a greater share in the existing pie. Structural reform can hardly be a priority while political governments prepare for the next elections.

Published in Dawn, Business & Finance weekly, December 5th, 2016