Burgeoning fiscal deficit

The persistent failure of successive governments-civil and military alike-to overcome budgetary deficit, remove fiscal imbalances and check ever-increasing wasteful expenditure has created a situation, where the very economic viability of Pakistan is at stake. It is feared that the fiscal deficit this year may rise to Rs 1.1 trillion or 6.4 percent of the GDP against the budgeted target of Rs 685 billion or four percent of the GDP.
During the first quarter (July-September) of the current fiscal year, the budget deficit has surged to Rs 274 billion or 1.6 percent of the GDP-this is Rs 33.2 billion more than the agreed limit with the International Monetary Fund (IMF). In fiscal year 2009-10, the fiscal deficit was Rs 950 billion as compared to Rs 777 billion during the fiscal year 2007-08.
The fiscal deficit is rising due to drastic shortfall in revenue collection and reduction in foreign inflows. The Federal Board of Revenue (FBR) collected only Rs 290 billion from July to September 2010 against the target of Rs 336 billion - a gap of Rs 46 billion. Net inflows during the first quarter stood around $30 million (Rs 2.6 billion) due to the blockade of budgetary aid by the World Bank and the Asian Development Bank over the issue of tax reforms and zero releases by the Obama administration owed on account of the war on terror.
The government in order to finance the yawning gap of Rs 274 billion, left with no choice but to borrow Rs 119 billion from the State Bank of Pakistan (a step creating more inflation) and rest from commercial banks by floating treasury bills ( a step choking private sector credit).
Pakistan in strategic dialogue with United States in Washington today is asking the Obama administration to take a clear position on the issue of disbursement under the Coalition Support Fund, as the inordinate delay is affecting deficit financing plans. The Coalition Support Fund covers the expenditures incurred by Pakistan on the war on terror.
Total outstanding claims have reached $2.5 billion (Rs 215 billion) and the government had earmarked $1.4 billion (Rs 120.5 billion) of that money in the current budget to finance the deficit. Meanwhile, the international community continues to mount pressure on Pakistan to tax its privileged elite instead of looking towards the world for help in case of financial constraints or even natural calamity.
US Secretary of State Hilary Clinton has time and again insisted that the rich Pakistanis should pay their taxes honestly-we have been saying this in these columns since 1994. The Friends of Democratic Pakistan (FoDP) have also asked the government to raise resources domestically for flood related reconstruction instead of relying entirely on aid.
It is shameful that in a country of 180 million, there are less than 2 million registered taxpayers. The break-up of tax collection shows that 60 percent of taxes are paid by the manufacturing sector, one-third is collected on services, while the agriculture sector contributes less than one percent towards total collections.
Officials in the Ministry of Finance say that Pakistan will also take up the issue of delaying the delivery of foreign funds with the IMF during the team's upcoming visit. The IMF delegation will arrive on October 27 to discuss the option of a second loan programme, imposing taxes on services, withdrawing exemptions and revising the budget in the aftermath of the floods. Based on the commitments, Pakistan has to receive an estimated Rs 213 billion in external budgetary support and the delay is causing great difficulties.
It is a pity that total gap between current expenditure and tax collection has risen to over Rs 600 billion. We cannot overcome our budgetary gap unless rulers drastically cut non-developmental waste expenditure and increase tax collection.
They will have to show political will in collecting taxes wherever due by abandoning the policy of appeasement towards the rich and mighty. An unshakable determination and consistency is required to curb the 63-year-old habit of defying tax laws along with complete purge in tax machinery. Do fiscal managers really know why our total revenues have fallen from 18% of the GDP to 9.8% of the GDP during the last twenty years? The answer is "NO".
Presently, the collection of taxes by the FBR is mainly based on imports and export as well as extraordinary profits by banks (who claim they have profit sharing accounts yet deny due share to deposit-holders!). Importers, contractors, retailers and even service providers are, in fact, passing on their tax burden to consumers and clients, courtesy presumptive tax regime introduced in income tax in 1991-92 and widened manifold since then. This erratic taxation is at the expense of equity and poor people are the real victims of this fiscal highhandedness.
It is an established fact that despite resorting to all kinds of highhandedness, illogical policies and unjust withholding taxes, the FBR has failed to improve the tax-GDP ratio, which is hovering around at 10% for the last 10 years. The burden of a number of presumptive taxes, levied under the income tax law (which are nothing but crude forms of indirect taxes), has been shifted from income earners to consumers and clients.
These presumptive taxes have not only distorted the whole tax system, destroyed economic growth and made the consumer/client the ultimate sufferers but these despotic, short-term, myopic and figure-oriented measures have even failed to bridge the fiscal deficit, which soared to Rs 950 billion in 2009-10.
The "man in power" says that 63 years of problems cannot be solved in a few months or even in 5 years' term for which the PPP has been elected. He announced flood tax on the rich but powerful tax bureaucracy is resisting it. On the recommendation of tax bureaucracy, successive governments have been announcing unprecedented concessions for the corrupt in the form of tax amnesty and money-whitening schemes and the last one "investment tax scheme" was the worst of all.
The rulers admit massive tax evasion through these schemes and no further proof is required of criminal culpability of tax officials in the entire episode. It is an unholy alliance between the corrupt politicians and tax bureaucrats. Through these schemes, tax bureaucrats please their masters, who are the plunderers of national wealth. If elected representatives are sincere in mending the situation, they should pass asset-seizure legislation and confiscate all the ill-gotten, untaxed assets for the benefit of have-nots.
In the wake of such a bold step, resource mobilisation will not be a problem any more. Once political elite starts paying tax and gives up wasteful expenditure on personal perquisites, the rest of the nation will follow their footsteps. 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 3% at one single point), there will be no budget deficit.
This goal can only be achieved if the government simultaneously tackles issues related to tax evasion and rampant corruption in the tax machinery (by not just throwing them out of job but rather, making the system workable and just). Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit within two year's time provided that a comprehensive programme, well designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation.
(The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences (LUMS)