The less said about the priority given to development initiatives and poverty reduction in Pakistan, the better. A glance at the country's policy books will show there are, perhaps, better things on policymakers' minds, such as how to control the fiscal deficit at the cost of development expenditures.
One would skew towards alienating core macroeconomic policies from developmental ones, but unfortunately, the categorisation is not as convenient as an assumption. Take for example, the country's expanding fiscal worries. Revenue collection remains a tormenting exercise given the inadequacies of the tax collector and the narrow tax base. Unchecked tax evasion, burgeoning debt service payments and growing defence outlay do not offer much respite on the expenditure side either.
As fiscal space shrinks, economic managers invariably slash developmental expenditures first. The wide gap between budgeted and actual PSDP spending is not an alien concept in the budget accounts of Pakistan. Revised estimates of PSDP expenditures in budget documents at the end of every fiscal year since FY09 have been at least 20 percent less than what had been initially budgeted.
When development expenditures are chunked away, areas such as infrastructural work, education and housing which are important for poverty reduction are affected and this affects the most disadvantaged factions of the Pakistani population. Further, employment opportunities created by developmental work also suffer as development expenditure shrinks further and further.
The grievance is compounded by the government's borrowing from commercial banks for fiscal financing, which crowds out the private sector; in particular SMEs, which are the prime employment generators in the economy. SMEs are traditionally more labour-intensive than large companies and therefore, more instrumental in employment generation and poverty reduction.
As poverty alleviation efforts are frustrated by the lack of fiscal space for the government and crowding out of the private sector; it is little wonder that the devil of poverty grows stronger and more threatening. Besides, the government's borrowing from the central bank is also fuelling inflation, pushing the prices of food and other essentials beyond the reach of millions.
The inflation rate in the country has been in double-digits since FY08 and the chances of it receding to single-digits in the coming fiscal year appear slim. Since the central bank adopted a tight monetary stance to combat rising prices, economic growth in the country has remained dull. Besides the high cost of borrowing, factors such as poor law and order situation and the energy crisis are also discouraging local and foreign investors from undertaking new ventures. As a result, job creation stands much below the desired levels in the country.
These problems are exacerbated by an inadequate taxation policy and warped tax collection methods that have plagued Pakistan since long. Many observers consider the country's taxation structure to be regressive due to a greater inclination towards indirect taxes. The Economic Survey shows that tax revenue from indirect sources has been higher in the country than from direct sources.
The impact of indirect taxes is particularly hard on poor consumers. Dr Akmal, during an interview with BR Research published in this magazine, said, "A study shows that the real income for the bottom 10 percent falls, and the real income of the top 10 percent increases as a result of indirect taxes; so the real distribution of income shifts in favour of the rich."
While the lopsided tax burden puts a constraint on poor households by itself, the discrepancy between actual and potential revenues continues to narrow the country's fiscal space and crowd out development expenditures as explained earlier. The efficacy of direct taxes is low due to massive tax evasion. The elites enjoy various undocumented sources of income and manage to escape the tax net quite conveniently.
Wealth tax, which can be a great potential source of revenues for Pakistan, remains absent, as do taxes on capital gains on the sale of property, and on agriculture income. The author of a 2006 paper on Pakistan's tax system, Jorge Martinez-Vazquez, said, "Fairness or horizontal equity (with respect to taxes) in Pakistan is likely to be quite low...The unequal treatment of individuals with the same income arises because of the exemption of some forms of income...or because of different effective tax rates paid by different sectors. (Therefore), employees subject to withholding tax tend to bear a disproportionate share of the tax."
The case of broad-based subsidies doesn't offer much respite in terms of poverty reduction either. Over 88 percent of total subsidies have been allocated to the power sector in the current budget for FY12. The allocation for FY11 had been around 70 percent for the power sector which swelled to around 87 percent in revised estimates. One questions the absence of targeted subsidies for the oppressed sections of the Pakistani society and such directed support does not seem to be on the top of the country's economic agenda. The only mentionable targeted support program to be initiated in the past 3 years is the Benazir Income Support Programme (BISP), and that too, was brought down to Rs 35 billion in FY11 from the initially budgeted Rs 50 billion.
It is not that subsidising the power sector bears no benefit for poor households; they will indeed bear the brunt of a hefty electricity bill in the absence of such subsidies. However, substituting these for more targeted versions will help slew the benefits more towards the most disadvantaged segments of the population who deserve to be the foremost beneficiaries of any subsidy program.
Besides this issue of negligible targeted subsidies; subsidy overruns, which have become a norm with Pakistan's fiscal managers, pose another cause for concern. Actual subsidies to the power sector at the end of FY11 were nearly four times the amount budgeted at the start of the year. And guess what was sacrificed for this great (in monetary terms only) cause? Development expenditure, dear readers.
In particular, budgeted grants for SME sector development and venture capital funds were done away with in FY11, the Benazir Income Support Programme (BISP) - the only prominent targeted subsidy observed in last year's budget - saw it's actual share fall by Rs 15 billion from a budgeted Rs 50 billion, and the budgeted Rs 45 billion for rehabilitation of the IDPs were done away with altogether.
No increase worth mentioning has been proposed in the allocated amounts for the above in the FY12 budget. And even though a greater allocation for PSDP has been made, the actual implementation of the promised outlays is a huge question mark. The indifference of economic managers to these ignored policy areas is nurturing the creation of a polarised society with pockets of have-it-alls and a large section of dissatisfied, resentful have-nots. Policymakers may want to think otherwise, but poverty remains a grave macroeconomic concern besides being a mounting social problem. It needs to be addressed from as many perspectives as the multitude of effects it has on society.
The writer is a Research Analyst at Business Recorder. She can be reached at [email protected]
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