AMIDST all the twists and turns in the rather lively political and extra-political theatre of Pakistan, the common man, already stressed out, is struggling to make sense of how the changes proposed in the budget will play out for him and family.
There might be some confusion about the details, but what is beyond doubt and debate is the necessity of making adjustments in spending patterns to deal with the challenge of mounting financial insecurities. With the economy going south and the inflation moving north, the citizenry is, and will remain, under pressure in the foreseeable future. This much is what the common man does understand regardless of what the government or the experts say.
On their part, there are experts who defend the PTI government’s focus on book balancing because of the acute financial woes threatening the nation’s economic viability. For the common man, with limited knowledge of economic jugglery, the litmus test to evaluate a budget is simple; the personal prism. The budget is ‘good’ if it improves his well-being, and ‘bad’ if it hurts his interest (read survival).
A national budget can directly improve the welfare of people through wage increase, reduction in taxes or by offering subsidies. Else, it can lend indirect support by price controls, particularly for essentials and utilities.
In the current budget the government appears to be making some effort to shield the poorest of the poor by increasing the minimum wage from Rs16,500 to Rs17,500, announcing 10pc pay raise for grade 1-16 public-sector employees and pensioners, increasing allocation for cash transfers under the Benazir Income Support Programme, and a promise to protect those on the lowest economic rung from tariff adjustment of utilities. The poor, however, will be equally exposed to the vagaries of price fluctuations triggered by indirect taxes.
If implemented, the budget 2019-20 will render the tax regime of the country more regressive, by increasing the ratio of indirect taxes to 60pc, from 55pc in FY19. Though the leader of the government’s finance team claims that the rich will bear the brunt of revenue-generation measures, the pain will probably be most crippling for the middle class.
The rich, Dr Hafeez Shaikh said in a presser, despite their dismay have been asked to contribute fairly to the national kitty. He was referring to the increase in the tax rate of higher income slabs and the withdrawal of exemptions and subsidies for businesses that were not affordable for the government anymore. There is little doubt that the rich might end up paying more than before. It will be unpleasant but it will not compromise their families’ basic well-being.
For the salaried families, however, every rupee counts. This segment aspires for upward mobility and is sensitive to the perception of social standing. They often own some quarter or a flat or live in a rented place. They pay for amenities and are inclined to make sacrifices for reasonable, if not decent, education for their children. Chasing their dreams, they often stretch the family budget thin and are bereft of any financial cushion to absorb an economic shock as big as projected in the current budget.
These proposed steps will push them to the brink and put skills of homemakers around the country to test as they are challenged to deliver the impossible, to cover more with less. According to the background research, the middle class families will be forced to reshuffle their spending priorities. To make both ends meet, the composition of the family budget might change drastically. The higher cost of edibles will hike the kitchen budget or the quality of the food intake will be compromised.
Collectively, the kitchen, transport, utility charges and tax bill will consume higher ratio (60-65pc) of the family income now. The rent is unavoidable and consumes at least 20pc of the income of young parents. With less in pocket even if families choose not to switch schools, they might cut corners by pulling children out of, say, tuitions. There is little room for savings or financing durables in the immediate future. As such, it shouldn’t be surprising if the number of loan-seekers and bank defaulters increases in the years ahead.
The rising inflation and higher taxes will squeeze both nominal and real income of all tiers of the middle class. The massive depreciation has already eroded the value of fixed and liquid assets, depriving middle class people of whatever little comfort they drew from the worth of their holdings.
The dip in the growth rate is already massive; from 5.4pc in FY18 to 3.3pc in the outgoing FY19. Going forward, the government’s projection of growth rate of 2.4pc in FY20 in a country where the population is growing by over 2pc means practically no growth. By the looks of it, any reversal in the trend of falling wages and shrinking job market is beyond the realm of possibility in the short-to-middle term.
Besides, the steep hike in the interest rate to 12.25pc by the State Bank of Pakistan has increased the cost of credit that might add to factors that dissuade the prospective private investors from starting and expanding businesses. What does it mean for wages and job opportunities? As they say, your guess is as good as mine.
Currently the inflation at 7pc is already almost double of what it was in FY18. With expected jump in gasoline and utility prices (power and gas) the government forecast suggests a price hike almost double the current rate, to 12-13pc, over the course of the next year. It will slash the purchasing power of the nominal wage by the same percentage. So, with the same household income, the family will be able to buy 12pc less than before. And this is for the lucky ones who will still have the ‘same’ household income in a market that is using retrenchments and salary slash as pet words.
With the reversal of relief on the benchmark rate of taxable income from Rs1.2 million per annum to Rs600,000 now, people earning Rs50,000 per month will also be liable to pay income tax. The upward revision of tax rate will introduce and increase the tax burden on all tiers of middle class in the country. On the basis of background research, Dawn considers families with monthly income falling in between Rs50,000 and Rs200,000 as middle class in urban Pakistan. The dynamics of rural is different and the above definition may not hold true there.
The devaluation of rupee by as much as 23pc in FY19, from Rs121 to a dollar in June 2018 to Rs152 currently, has eroded the value in dollar terms of rupee holdings and has slashed the worth of properties by one-fourth even if one discounts the lull in the real estate sector. It did not affect the running income of households, but did affect the sense of well-being in families who live in self-owned properties.
It’s too early to project how the situation will play out for the ruling party by the end of the very first of its five-year term, but the budget, if passed, might erode its political capital, even if partially, in its educated middle class constituency.
Published in Dawn, The Business and Finance Weekly, June 17th, 2019