Punjab’s fiscal management reforms, initiated in the annual current budget, will create limited — if any — fiscal space for building economic and social infrastructure in the province.
In the budget for 2012/13, the provincial government decided to set up the Punjab Revenue Authority (PRA) (initially for collecting provincial general sales tax (GST) on services), design and implement budget execution and monitoring framework for provincial departments under the Medium Term Budgetary Framework (MTBF) and automate pension disbursements.
The purpose of these reforms, according to the budget documents, is to improve tax administration over an unspecified period of time to plug leakages, corruption and evasion in tax collection to optimise revenue generation capacity and increase efficiency of public expenditure to achieve fiscal sustainability as well as provide adequate resources for economic development and growth.
Many Punjab finance department officials and development economists agree that the fiscal management reforms announced in the provincial budget will somewhat improve utilisation of funds and reduce leakages without significantly increasing the province’s revenue generating capacity.
“It will be correct to say that the provincial government will not be able to generate the required resources for social and economic infrastructure development without overhauling the existing taxes, revamping tax administration and taxing the untaxed services and under-taxed sectors,” admitted a provincial finance department official.
He, nevertheless, defended the government’s fiscal management reforms’ initiatives and said these reforms were a “step in the direction of better collection of existing taxes and utilisation of funds available for development”.
Others say the provincial revenues and development will remain dependent upon federal transfers under the National Finance Commission award unless the government takes steps to raise its own revenues by effectively taxing sectors like agriculture and real estate and expanding the scope of provincial GST on services to out-of-the-net services.
Over 83 per cent of the Rs783 billion Punjab budget for the current year will be financed by federal transfers (of Rs650.74 billion) and 12 per cent by provincial tax revenue (Rs95 billion) and the remaining five per cent by other sources like provincial non-tax receipts (of Rs35 billion).
The province’s main reliance on federal transfers meant that its original development budget of Rs220 billion for the last fiscal was cut to Rs165.5 billion. The revised estimates for different sectors showed that development funds for education were cut by a whopping 57 per cent, health by 30 per cent, livestock by 60 per cent and agriculture by 42 per cent. Not a single paisa was released for the provincial Millennium Development Goals (MDGs) from Rs8.5 billion set aside for the same in the budget or for energy from an allocation of Rs9 billion.
A development economist agreed that the government’s fiscal management reforms could be the “first step in the right direction”. But he noted that no measure had so far been announced to implement governance reforms required to successfully implement the new fiscal management reforms initiative.
“The government has also dithered on giving a deadline about developing and revamping the existing provincial taxes and transfer them to the newly established PRA,” he said.
The failure of successive provincial governments to develop its taxes and implement effective financial and governance reforms during the last four years is seen by many as a major factor slowing the pace of growth of regional economy of Punjab.
A recent report on the state of the economy in Punjab compiled by economists and released in May this year had claimed that Punjab’s regional economy had increased at a much slower pace than in ‘the rest of Pakistan’ over the four financial years to 2011.
The province’s annual average growth rate of 2.5 per cent between 2007 and 2011 lagged far behind 3.4 per cent for the rest of Pakistan, according to the Lahore-based Institute of Public Policy (IPP). It estimated that the provincial gross regional product (GRP) expanded by 5.6 per cent, or slightly faster than the national average of 5.5 per cent and the rest of Pakistan average of 5.4 per cent between the financial years 2000 and 2007 before falling sharply in the following years.
The government’s development priorities have also come under fire in the recent years as some accuse it of spending more on politically-motivated projects like multi-billion rupee Metro Bus System in Lahore rather than removing structural weaknesses and infrastructure gaps like reduced water availability for agriculture and decreased public sector investment in economic infrastructure responsible for dragging down the provincial economy.
“The misplaced development priorities of the government have definitely increased unemployment and poverty and widened the regional disparity in different regions of the province,” the anonymous economist said. “The province needs to shift its development focus to removal of constraints to economic growth to create jobs and alleviate poverty.”
The economist did not agree with a suggestion that it was not possible for the government to expand the tax base or reform and increase rates of existing taxes in the given poor economic conditions.
“This is an untenable argument and is often made by governments and officials as an excuse for the lack of political will to implement tax and governance reforms. Take the case of agriculture tax. The government’s collection has substantially decreased over the years under this tax to less than Rs800 million although there has been no downward revision in the rates.
On the other hand, the global commodity prices and domestic support prices for different crops have phenomenally risen over the last few years, raising the incomes of farmers. This change in the prices of agriculture commodities has enabled many farmers to pay taxes, but they don’t because of their political clout.
The government could treble its collection under the agriculture tax even by raising presumptive tax rates per acre from the existing Rs150-250 per acre, and without burdening the growers. Same is the case with property tax and GST on services. The revenues can be increased substantially just by eliminating exemptions. It is just that our leaders do not have the will to do so and all provincial governments are shy of taking tough decisions to avoid the political costs.”