The good, the bad and the uncertain of PTI's 'mini-budget'

We speak to experts to get their take on the amended 2018-2019 budget.
Published September 18, 2018

The amended finance bill for the remaining months of fiscal year 2018-2019 was read out during today's session of the National Assembly.

Finance Minister Asad Umar presented the budget speech, detailing the amendments the PTI-led government is bringing to the federal budget announced by the outgoing PML-N government in May this year. spoke to various experts in the field to get their take on PTI's decisions.

"Government should provide more incentives to filers"

Usman Hayat, former executive director at Securities and Exchange Commission of Pakistan

The stock market has reacted favourably to the announcements.

Perhaps what the markets need to see is economic leadership in the driving seat taking bold actions, and these measures are signalling the beginning of the actions.

One of the taxes that has gone up, but wasn’t mentioned, is inflation. It is the tax that we all pay, filer or not, and it is being fueled by the depreciation of the rupee.

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It hurts the salaried class the most because it cannot pass it on to others. There is a desperate need to broaden the tax base and not force the captured salaried class to “give more.”

The government should also consider providing more incentives to the filers. Giving a stick to non-filers is not enough. There should also be a carrot for filers.

If the government can implement the promised good governance, the bitter tax pill would probably become digestible for the tax payers.

"The bill is anything but populist"

Shahrukh Wani, researcher at Blavatnik School of Government, Oxford

The announcement contains pretty straightforward short-term stabilising measures.

Essentially, this allows the government to 'tighten its belt' a bit and give a signal to the world that we can pay back our debts.

For all talk about populism, interestingly, this bill is anything but populist. Overall, in the short-term, the markets are likely to react positively to this.

The good parts of the bill are that the government does need to genuinely increase revenue, and increasing taxes on high-income earners was pretty much expected and required.

Giving them these extensive tax breaks last year was ill-advised considering the revenue shortfall the government has and high-level economic inequality Pakistan has.

The uncertain part is that increasing tax revenue by improving administrative procedures is going to be easier said than done, as this requires the government to expand the capacity of the national tax infrastructure. This usually takes time and money to do so. It is unclear from this bill how the government expects to do this.

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The bad: there is a well-founded fear that increasing the withholding tax on non-cash banking transactions might create an incentive for people to not use the formal banking channel.

This fear is backed by the State Bank of Pakistan's impact analyses of this very tax back in 2017 which found that it led to a decline in private business deposits.

Also, while the finance minister claimed that the lifting of the ban on non-taxpayers from acquiring cars or land is due to pressure from overseas Pakistanis, it might be safer to assume that it could very well be due to influence of real estate developers and the automobile industry.

In the long run, this is a wrong move as it takes away a strong incentive for people to file their taxes.

Going forward, all of this will need to be combined with reforms to increase the number of taxpayers instead of increasing taxes on the already compliant ones, which seems to be what the government has done.

But, as taxes are mainly aimed at high-income earners, it is unlikely to have a direct widespread impact.

The government will also have to think more about how to increase exports and boost productivity. Without this, we will need another set of stabilisation measures soon.

"These amendments are a short term measure"

Afshan Subohi, editor of Dawn's Business and Finance Weekly

We did not see the glimpse of the promised 'change' under the PTI in the mini-budget.

The PTI seems to have given in to pressures exerted by the realtors and automakers by removing the bar imposed in the last budget on non-filers to buy new cars and property.

Under the last budget, purchase of a new car and property exceeding Rs4 million was declared illegal for non-filers.

Despite the retention of tax rate cuts for people earning up to Rs2.4 million annually and maintaining the income tax exemption limit granted earlier, as well as a 10pc increase in the lowest slab of EOBI pensions, deep cuts of Rs450bn to the Public Sector Development Programme will limit the capacity to invest in projects of public welfare meant for vulnerable segments and will negatively impact prospects of well-being.

These amendments are a short term measure to control fiscal deficit.

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It is good that the government has tried to shield the poor from the impact of revenue mobilisation measures — for example, taxes have been increased on the upper income brackets.

The government could have broadened the tax net, but it chose not to. Without that, a significant improvement in revenue collection is unlikely.

The government has also been ambiguous with regards to approaching the International Monetary Fund.

It is likely to approach the IMF sooner or later, and should have used the occasion to spell out clearly its position to ease uncertainty and let the markets know what to expect from structural adjustment.

I believe it is still too early to comment on the general direction the PTI government is trying to take the economy in.

The delay in decision making, however, does reflect a lack of preparedness of the economic team to deal with challenges the country is faced with. It can again derail the economy from the growth trajectory.

"Some of the steps are positive"

Shahid Karim, chartered accountant

Due to media coverage, awareness about the state of economy is high among the masses and there is understanding in the country for some of the difficult decisions taken today.

But we desperately need “good firms” who can export as well as service local demand as alternatives to imports. Constant harsh steps will only discourage entrepreneurs and the vicious cycle of trade and fiscal deficits will keep widening.

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For good firms, we need “good professionals” and when the salaried class will be taxed this high with very limited benefit from the state in return, one won't be able to attract good professionals, especially from abroad.

These good professionals can increase productivity, enhance quality of local production and services, and improve the governance of our institutions.

Some of the steps are positives: non-filers should be able to buy cars and properties. In a country where the percentage of people who file tax returns is so low, we should not penalise real estate and other industries.