Overcoming economic predicaments

In moments of crises, difficulties and challenges, living nations correct their mistakes and bounce back. On the contrary, despair, hopelessness and further decadence become fate accompli if their will to struggle dies. The prevalent economic predicaments in Pakistan can be overcome with proper understanding of the issues and taking short term remedial measures and by devising a long term policy.
Propagation of the Dooms Day's scenario will lead us nowhere. The economic wizards, politicians, intelligentsia, media and citizens, instead of spreading hopelessness, should act collectively and resiliently for economic revival and reformation of the system. The persistent failure of the successive governments to overcome budgetary deficit and check the ever-increasing wasteful expenditure has pushed the country to debt enslavement.
The consolidated budget deficit for 2008-2009 of the Rs 680.407 billion was financed through borrowings of Rs 530.756 billion from local sources and Rs 149.651 billion from external sources. In the face of the huge fiscal gap, the rulers must drastically cut wasteful expenditure and increase tax collection. It is a pity that our total revenues have fallen from 18% of the GDP to 9% of the GDP during the last twenty years. On the contrary, non-development expenses have increased by 350% during the same period.
Presently, the collection of taxes by the Federal Board of Revenue (FBR) is mainly based on indirect taxes on imports, exports and milking three sectors, namely, oil and gas, telecommunication and banking. The erratic indirect taxation - constituting 77% of the total collection - at the expense of the poor has retarded economic growth. Despite this highhandedness, the FBR has failed to improve the tax-GDP ratio, which at 9% is one of the lowest in the world.
Successive governments have been announcing unprecedented concessions for the rich and corrupt in the form of tax amnesty and money-whitening schemes and the last one "investment tax scheme", like its predecessors, proved to be an utter failure, fetching just 1.54 billion. These schemes protect tax evaders and the plunderers of national wealth.
If we have to mend the situation, the Parliament should pass asset-seizure legislation and confiscate ill-gotten money and untaxed assets for the benefit of the have-nots. In the wake of such steps, resource mobilisation would not be a problem any more. Once the wealthy segments are taxed and wasteful expenditure on personal luxuries of rulers is eliminated, Pakistan will become an egalitarian State.
The rich and mighty, who do not pay taxes, should be taken to task. If the present government brings big absentee feudal landlords into the tax net, manages to get taxes from the influential ones and succeeds in imposing sales tax across the board (preferably with a low rate of 2% at one single point), there will be no budget deficit, hence no need to borrow from anybody. This goal can only be achieved if the government simultaneously tackles issues related to tax evasion and rampant corruption in the tax machinery.
Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit within two years, provided that a comprehensive programme, well designed work plan, scientific approach and multi-dimensional strategy is adopted for resource mobilisation. We must reform and reconstruct institutions as has been done by the other countries of the world.
The successive governments' policies of self-aggrandisement have reduced Pakistan to a state-in-perpetual-conflict. We need to move quickly and decisively to reverse this trend by restoring Pakistan's undeniable geo-strategic and business competitive position in the region. There is an urgent need to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest.
For example, if Gwadar port starts functioning with full capacity, our annual earning will not be less than US $60 billion. It will make Pakistan a self-reliant economy in just one year. The following steps are inevitable for overcoming economic predicaments:
1. Devising long-term and short-term strategies to break the shackles of the debt-trap, elimination of all kinds of wasteful expenditure and withdrawal of perks and perquisites of the rulers, civil-military high-ranking officials.
2. End to all wasteful, non-developmental and unnecessary expenditure.
3. Strict laws and their effective implementation to curb money laundering, plundering of national wealth, political write-off of bank loans, hoarding, and leakages in revenue collections.
4. Reform of technical, institutional and organisational dimensions of public finance.
5. Transparent public sector spending.
6. Efficient public sector performance.
7. Revitalisation of tax machinery and simplification of tax laws and procedures.
8. Reduction in excessive marginal tax rates making them compatible with other tax jurisdictions of the world, especially in Asia.
9. Substantial reduction in corporate rate of tax. It should not be more than 20%.
10. Elimination of onerous taxes and other regulations for the corporate sector that are the main stumbling blocks for new direct foreign investments.
11. Sufficient openness and accountability in the government to enable citizens to understand and participate fully in the process of national integration.
12. Good governance, corrupt-free government structures and dispensation of justice without delay.
The juxtaposition of economic restructuring and democratisation of governance is vital. We need to devise a comprehensive, well-integrated and unified plan of economic revival. The reform in one sector, ignoring the others, resorting to improving something at the cost of leaving aside the one interlinked, will not yield the desired results.
The case of tax reform, divorced from elimination of black economy is a point in focus. The main cause of poor revenue collection is the unprecedented size of the underground economy. Reform in the tax administration alone, without routing the causes of parallel economy, is not going to improve the GDP-tax ratio.
The collection of Rs 1.15 trillion by the FBR, during fiscal year 2008-09, was dismally low. Our actual potential is not less than Rs 4 trillion. If revenue of Rs 4 trillion is collected and wasteful expenditures to the tune of nearly Rs 800 billion are eliminated, we can overcome fiscal deficit in just one year.
The rulers, civil-military bureaucracy and government-run institutions are wasting billions of rupees, while the poor are dying of hunger. This is our main dilemma - we have plenty of resources which are not equitably distributed. We are not short of means, but the ruling classes are monopolising them.
They are heartless - having no desire to invest and spend for the collective well-being. The 2% rich, who own 80% of the wealth of the nation, are not affected by indirect taxes, rise in petroleum products and utilities. Tragically, their monstrous incomes and wasteful consumptions are not taxed, but the common man is continuously being over-burdened with exorbitant indirect taxes, even on essential food items sold under branded names.
The democratic governments try to keep the prices of essential food items within the reach of the less-privileged sections of the society, but in Pakistan we are doing the opposite. Successive governments have raised the prices of essential items beyond one's imagination and today's Pakistan is one of the most expensive places to live keeping in view the ratio of cost of utilities, food items, education and medicines and the per capita income. This situation needs to be reversed immediately by taxing the rich for the benefit of the poor.
(The writers, tax lawyers, are visiting Professors at Lahore University of Management Sciences (LUMS))