Budget 2023-24: Impediments to a viable economy

The provisional data issued by the National Accounts Committee portray a bleak picture of the economy where real GDP has registered a sluggish rate of 0.29% in the current fiscal year (FY2023) as compared to 6.1% in the FY2022.

The level of growth in FY 2022 proved to be unsustainable—it was achieved mainly through domestic demand, stimulated by expansionary fiscal policies that resulted into high fiscal and current account deficits.

The deteriorating geopolitical situation, challenging financial environment, and high pace of inflation have taken a toll on economies around the globe. In addition to global factors, Pakistan’s economic slowdown is a direct result of policy-induced contractionary measures and restrictive actions. Adding to it, the (un) usual incompetency on the part of the government and self-inflicted political chaos have further exacerbated the crisis.

With the challenge of a multidimensional crisis at hand, Pakistan is all set to enter the next financial year, for which the federal government tabled Budget 2023-24 along with Finance Bill 2023 as Money Bill in Parliament on June 9, 2023. These reflect the financial directions for the next twelve months.

The budget has a financial footing of a whopping Rs 14.46 trillion that is 51% higher than last year. The government’s revenues, like earlier budgets, will fail to generate resources that are sufficient to correspond with the estimated expenditures.

Hence, the government is anticipating a monstrous fiscal deficit of Rs 7.573 trillion. It is interesting to note that this amount is almost 80% of last year’s total budget outlay.

The alliance government of Pakistan Democratic Alliance (PDM) in the budget has set an ambitious gross revenue target of Rs 12.1 trillion in FY 2024 i.e., 38% higher than revised estimates of the outgoing financial year.

The government is expecting to collect total tax revenue of Rs.9.2 trillion with an increase of 28%, whereas the target to collect non-tax revenue is of Rs. 2.9 trillion, projecting an exuberant increase of 83% or Rs 1.3 trillion. The direct tax target is estimated at Rs 2.85 trillion and collection during July-April 2022-23 has been reported at Rs 2.5 trillion, whereas target for FY 2044 has been estimated at Rs 3.7 trillion, with expected growth of 32%.

The sales tax target is projected at Rs 2.8 trillion and collection during July-April 2022-23 has been reported at Rs 2.09 trillion, whereas the target for FY2024 has been estimated at Rs 3.53 trillion, showing an expected growth of 26%.

Similarly, while projecting 83% growth in non-tax revenue, the government estimates that profit from the State Bank of Pakistan alone would increase by Rs 0.7 trillion thus contributing around 55% to the estimated total growth of Rs 1.3 trillion in non-tax revenue.

However, the high revenue target would be falling short of the government’s estimated expenditures, mainly on account of increased debt servicing (Rs 7,303 billion) requirement, which consumes a major share, representing 51% of the total budget outlay, followed by a 12% share of defense affairs and services (Rs 1,804 billion).

On the one hand, continuous financial indiscipline by successive governments has landed our economy into a dangerous zone and, on the other, there exists no serious effort to revamp the existing economic framework by taking corrective and strategically important steps.

The budget 2023-24 is a continuation of the anti-business mindset where the compliant and existing taxpayers are burdened with additional taxes and surcharges. No serious efforts have been undertaken to stretch the tax net to cover those segments, which are operating beyond the radar of taxation authorities.

The government has adopted regressive measures by proposing super tax across the board for all taxpayers, by virtue of which the corporate tax rate for a company with taxable income above Rs 500 million (US$ 1.6 million at a conversion rate of 300) is now subject to a corporate tax rate of 39%. Businesses are already finding it difficult to remain afloat while combatting challenges like rampant inflation and historically high policy rates.

Another regressive measure is the introduction of a new concept of ‘additional tax on income, profits and gains from economic factors where the rate of tax on such additional profits can be as high as high as 50% and it is proposed that such additional tax would be imposed for any of the preceding five tax years.

The government will notify later the factors that fall under the ambit of “extraordinary incomes arising from economic factors”. However, it has completely ignored the basic principles of not applying such provisions in a retrospective manner and excessive delegation of powers to the executive to determine taxability.

Additionally, economic growth was severely impacted due to devastating floods, rains, and landslides that severely damaged a one-third of the country, killing more than 1700 people and displacing over eight million with an estimated damage of over US$ 30 billion. Resultantly, the growth rate dropped, and the inflation rate went up.

In its Press release of November 10, 2022, the World Bank stressed that Pakistan urgently needed significant investments in climate resilience to secure its economy and reduce poverty. However, despite knowing the adverse effects of climate change on the country, the PDM government has not introduced any measures to attract investment in climate resilience nor sufficient funds have been allocated for flood mitigation measures in the budget.

The government has not proposed any measure to improve the lives of labourers and domestic workers, the most neglected class of the country that works non-stop for over sixteen hours every day in return for the minimum pay set by the government—in many cases even the same is also denied. These long hours with low pay prevent them from attending to their family obligations as well as self-care.

This is a sheer violation of standards set by the International Labour Organisation (ILO), therefore the government should pay attention to this class.

The Economic Coordination Committee, instead of focusing on closing businesses/shops by 8:00 pm in the country should rather, ensure the implementation of a minimum pay rule of40-hour work week that is a requirement of ILO as well along with adequate compensation for over-work.

The government should give businesses/shops the liberty to schedule their hours of operation in compliance with existing labour laws of the country. This step, while improving the living standards of labourers/workers would help the government document the economy, generate revenue and increase employment opportunities in the country.

Apparently, the steps introduced in the Budget 2023-24 are impediments to a vibrant and financially viable economy. The business community has limited, or no fiscal space available for its growth.

The government seems to be only interested in generating maximum revenues from the existing pool of registered taxpayers without placing reliance on new sectors and avenues. This short-term approach is extremely detrimental to the economy as it is tantamount to encouraging non-formal sectors that continue to operate without the issues of taxation and compliance.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023