Budget 2008-09: far away from economic realism

By Zafar-ul-Hassan Almas

There is no denial of the fact that the current budget was presented in the most difficult conditions in Pakistan’s history and thus no big miracle was anticipated in this challenging environment. However, some realisation of the problem and some serious thinking about way out was expected out of the budget. It was expected that the budget would account for the difficult situation and suggest policy measures to face the major challenges being faced by the economy. Surprisingly, the budget remained more or less oblivious about major challenges being faced by the economy such as widening current and fiscal account imbalances, skyrocketing prices, reckless borrowing and surrounding uncertainties. It seemed that the federal budget has completely remained ignorant about these issues.

The federal budget 2008-09 seemed to support aggravating these problems. For instance the upward adjustment in indirect tax rates is in sheer contradiction with earlier stated economic policy of this government about placing the burden of adjustment on higher income strata for cross-subsidisation of poorer income segments having lower ability to share the tax load. Under the new arrangements the lower income groups has to pay proportionately higher incidence of tax. The hike in the sales tax has no exception of essential items like food, medicines etc. The government has taken the conventional route of ease of collection. The blue eyed stock brokers and property mafia which has made the most in the recent economic turnaround remained immune of revenue mobilisation efforts.

Pakistan is the unique country in the world where tax system is full of overt or covert exemptions. The income earned through property deals or stocks are still tax free or not documented. The capital gain tax was thwarted by the powerful lobby with strong political clout. The income tax is very complicated with 21 slabs and as a matter of fact the economic theory regards an income tax system with as many slabs as distortionary and corruption prone. The Budget has failed to envisage any serious revenue mobilisation effort and the un-taxed and under-taxed areas of activity remained out of the tax net. The government is simply relying on plugging the holes/ leakages via administrative improvement without any concerted reform program. It is simply ridiculous to expect 25 per cent growth in the tax revenue without making drastic improvement in the tax system.

The status quo is maintained in the overall tax system and rates are revised upward. This will take away any fiscal stimuli from the economy. The economic activity may succumb to already vanishing purchasing power. The Budget FY 08-09 has simply avoided the course of difficult decisions and fixed income groups are once again victim of lax revenue mobilisation policy of the government. The reliance on withholding tax regime would be enhanced and those who are paying taxes would continue to pay for their weak political clout and tax evading class will tend to enjoy lax tax policy of the government.

The Federal Budget 2008-09 has yet again offered amnesty scheme and this rekindled the ray of hope among the tax evaders that the government will not take any stern action against them and yet another amnesty scheme to follow. The writ of the government is evident from the fact that its announcement to close shops by 9:00 pm fell on deaf ears of the traders and they kept opening their shops till late night. This is also encouraging for the tax evaders that this government could only talk and impotent to act.

Energy has remained the most crucial challenge during the last year. The budget seemed to be completely oblivious about the issue. It has failed to propose concerted efforts to tackle energy crisis. The government should have come up with its plan of action to attract new investment in the sector. Pakistan needs additional capacity in electricity generation, exploration of new alternative sources of energy and improvement in the current one on war footing basis. The policy inaction or delay could be proved fatal for industrial development. The government is currently relying more on conservation which is out of question because it is based upon voluntary compliance and the compliance from the government is evident from glaze of thousands of bulbs on the constitution avenue and surrounding buildings. The government must realise that charity begins from its own house. The public at large must be convinced that what the government is saying can not be rhetoric but it means it.

IMF recently mentioned two threats to macroeconomic stability in Pakistan and number one is current account deficit while second less threatening is inflation. But I think energy breakdowns and shortages are threatening jobs and industry. So it is crucially important to look into this crucial problem on war footing basis. The last Benazir government was the last government which had taken the issue of energy shortages as a serious issue. Otherwise, all other governments has paid lip service to the problem. The government has not suggested serious measures to realise gravity of the current account deficit which has serious implications for debt burden and expose us to exchange rate depreciation.

The government has to impose more duty on luxury goods and work on import substitution efforts. We have to look into the feasibility of replacing energy imports with indigenous fuels or sources of energy like coal. We have to explore new vistas to look for alternative energy resources to replace some fraction of import bill on account of petroleum group.

Pakistan’s economy which seemed to move into higher growth trajectory during the last few years, is struggling to keep reasonable growth rate of around 5 per cent. Even the IMF and the World Bank are talking about 3.5 per cent growth for the next fiscal year. The Federal Budget 2008-09 envisages a growth target of 5.5 per cent and mainly banking upon good growth prospects of the agriculture sector. It is ironical that water is not available for irrigation in most parts of the country and thus due to water shortages the agriculture is likely to fell short of expectations. The manufacturing activity is suffering from lower demand in the market and power breakdowns. So we are expecting that the real GDP growth might be in the range of 4 to 5 per cent.

Real GDP grew at an average rate of 6.6 per cent during the last five years and a growth below 5 per cent would be a major deviation from historical growth path. This growth path in the backdrop of vulnerable labour market and poor job creating abilities of the current economic fundamentals, ever rising inflation, belligerent exchange rate, and higher fiscal deficit; is really daunting. Pakistan’s recent economic performance still evokes concern among economists and policymakers: the large and growing current account deficit supported by rising fiscal deficit.

The interactions of a wide range of economic forces create the current account deficit and thus a large number of economic forces are just on lookers. These same forces have lessened our ability to anticipate the consequences of a build up of a current account deficit. The economy lacks early warning system and we have to install this kind of activity.

A growing economy requires investment in new capital goods and the up-grading and replacement of existing depreciating capital. This investment need to be financed either through the pool of national savings or borrow savings of the foreigners. In our case we have to borrow a lot from foreigners but unable to invite them in productive sectors to invest. We have only profit mongers in the disguise of investors. The Federal Budget 2008-09 has failed to provide adequate incentives to people to invest in productive sectors and generate employment, rather it kept the tradition of pulling genuine investors out of the ring.

The overall analysis of the budget suggests that it lacks the genuine substance. It is based on unrealistic targets of the tax revenue and the expenditures. The budget envisages a nominal reduction in the current expenditure which is next to impossible. The revenue target of 25 per cent is also hard to realise. This means the fiscal deficit target of 4.7 per cent is meaningless.