WHEN it comes to financial planning in developing countries, an aggregate fiscal discipline tends to be glaringly missing in the budget-making process. Pakistan is no exception.

The idea of aggregate fiscal discipline measures the ability of an organisation or a country to maintain spending and revenue throughout the fiscal year as initially set by the budget document presented at the outset of the financial year.

The aggregate fiscal discipline relates to all important aspects of a budget, i.e. total spending, total revenue, total national debt and total fiscal deficit.

Countries with sound aggregate fiscal discipline — such as New Zealand, Australia or England — make evidence-based revenue estimates. Resultantly, the actual revenue collection at the end of the financial year matches the estimate made at outset of the financial year.

In Pakistan’s national budget for fiscal year 2019-20, the federal government has tasked the Federal Board of Revenue (FBR) to collect tax revenue of Rs5.555 trillion, which represents an increase of about 26 per cent compared to the tax revenue target for the previous fiscal year.

The culture of low compliance of tax laws in Pakistan largely stems from inadequate enforcement capacity of the federal tax machinery and not a single disbursement-linked indicator

This begs a few questions: whether the financial managers of Pakistan have been pragmatic in assigning this ambitious target to the federal tax machinery? Moreover, has the FBR made any strategic move to achieve this target?

The target has already been lowered twice, but the latest figures show the tax-collecting authority is still struggling. During the first half (July-December) of the fiscal year, the FBR collected Rs2.08tr, a shortfall of Rs287 against the reduced target of Rs2.367tr.

This suggests that it will be highly challenging for the FBR to meet the collection target unless it is backed by an adequate level of enforcement that continues for the rest of the fiscal year.

In the fiscal year 2019-20, the FBR has also undertaken a reform project called Pakistan Raises Revenue (PRR), which is to be financed by a credit line of $400 million extended by the World Bank to the government of Pakistan.

Structurally, this project is divided into two components. The first component is result-based and promises to disburse $320 million during 2019-20 to 2023-24 fiscal years. But it is subject to the achievement of results specified in the form of disbursement-linked indicators.

The second component of this loan represents a traditional Investment Project Finance, which seeks to invest $80m on Information and Communication Technology of the FBR.

This credit line is well placed for two main reasons. First, unlike traditional credit lines usually extended by international financial organisations, this loan is performance-oriented, as the disbursement of the loan is conditional to FBR’s performance delivery.

Therefore, this programme is expected to restructure the business processes of the tax machinery to make it more oriented to results.

Secondly, this loan represents a potential avenue for the resource-starved FBR to advance its broader organisational objectives, which have remained undermined largely due to unrelenting fiscal stress of the federal government.

On the flip side, the detailed study of the PRR appraisal document also reveals a striking limitation of this programme.

This project appears to have been predominantly designed by the financer. The involvement of the FBR, particularly at the time when the programme was being conceived, appears to have been very limited.

Consequently, the programme appears to have blatantly ignored the organisational setting within which the reform programme has to operate. The PRR would be more promising if it is thoroughly contextualised with the organisational problems faced by the FBR on ground.

For example, the culture of low compliance of tax laws in Pakistan, among other factors, largely stems from inadequate enforcement capacity of the federal tax machinery and not a single disbursement-linked indicator envisaged by the programme.

Had the FBR strongly engaged with the World Bank at the time when the programme was being tailored, this reform project would have been more problem-driven than it is now and thus making the PRR more result-oriented.

Notwithstanding, given the flexibility that exists in the design of this programme, the FBR still has got the space to reorient this programme with the aim of diverting resources to the areas of priority seen from FBR’s own prism.

In order to contribute meaningfully towards aggregate fiscal discipline by achieving high revenue targets, the structural decentralisation of the FBR is imperative. This may entail departing from the idea of regional tax offices and ensuring FBR’s presence at district level.

Similarly, setting indicators for a high level of tax compliance without reinforcing the enforcement apparatus of the tax machinery would be highly undesirable.

The writer is a Chevening scholar

Published in Dawn, The Business and Finance Weekly, January 27th, 2020