Budget 2024-25: expectations

A budget is not merely a document of aggregated information on revenues, capital, and external receipts and on the current and development expenditures of the federal government for the upcoming fiscal year.

But it is also an indicator of the economy and a country’s future and growth. The FY 2023–24 growth rate is hardly 3%, the lowest ever in 77 years after independence.

The fiscal deficit between income and expenditure in FY 2023–24 is one of the highest fiscal deficits, i.e., 6%–7% of GDP. So, therefore, the focus in the Federal Budget for FY 2024–25, to be proposed in the next few days, should be on (a). income generation and cutting down expenditures to reduce budget deficits; this is possible through fine fiscal policies like broadening the tax base without imposing any new tax or increasing the rate of the existing taxes, and improving the tax to GDP ratio.

Compared to countries like China, Egypt, India, and Malaysia, Pakistan has a relatively low tax-to-GDP ratio. (b). the incidence of direct tax be enhanced and of indirect tax be reduced; the reduction in indirect tax rates will give a boost to every sector of the economy; it will increase savings that would trigger investment and support higher economic activity; (c). to increase growth in important sectors of the economy, this will be done through agriculture, manufacturing, and investing more and more in social sector development, i.e., human resource development, education, health, skill development, and the information technology (IT) sector, through increased production.

The goal of this year’s budget proposals is to preserve jobs in the formal services and manufacturing sectors while also laying the framework for an extended economic rebound powered by exports and homegrown manufacturing rather than imports. Our expectations for the Federal Budget 2024–25 are divided into the following points: To enhance income generation, tax collection is currently a fraction of the tax due to the GOP.

If the tax-to GDP ratio is increased to at least 15% of GDP, it is recommended to allocate a major portion of FBR resources (IT, manpower, intelligence, and data collection) towards broadening the tax base.

All sectors should contribute to the national exchequer in proportion to their contribution to GDP, including agriculture, real estate, and wholesale and retail trade.

Pakistan’s wholesale and retail sectors have the lowest tax rates. This sector is characterized by high taxation and tax evasion. According to a recent report by Planet Retail, the retail market in Pakistan has crossed $152 billion, which makes the sector the third largest contributor to the country’s GDP and its second largest employer.

According to the Federal Board of Revenue (FBR), the retail market accounts for a whopping 18% of the GDP. Meanwhile, its contribution to the national exchequer is a meager 3.9%.

There has long been an understanding that the only way to bring these retailers within the tax net was to digitize transactions and keep an eye on buying and selling at these retailers. The latest idea was that under the FBR’s new POS system, details of each transaction would go directly to the board, and they would be able to calculate and charge tax accordingly.

Additionally, the rate of tax on builders for a 3000 sq ft commercial building is Rs. 80 per sq ft, which is calculated as Rs. 240000 total. Knowing the valuation of a flat in Karachi, a 3000 sq ft flat can be worth not less than 30 million rupees, which means that the builder has to pay tax at 0.8% only and all his liabilities will vanish compared to the salaried class, which is paying tax at 35%, and the corporate which is paying taxes at 29% + 10%.

The viz-a-viz salaried class is the most compliant taxpayer because their tax is deducted at source. Despite this, putting the burden of all other sectors on this small sector is sheer injustice. Salary is taxed at gross income, and no expense is allowed in the computation of taxable income.

Hence, by this means, the salaried class is paying a substantially higher proportion of their income compared to the corporate class. Salaried individuals are the think tank of this country, and pressurizing them to this extent has forced them to leave the country, and very good resources are leaving Pakistan at the pace of around 800,000 people per year.

The salary tax rates should be rationalized; currently, salaried classes are paying more tax than exporters and retailers combined. To revive the tax credits available for the salaried class in terms of investment in mutual funds, house building loans, and insurance premiums.

By reducing expenditure through fine management and austerity measures, Pakistan could achieve PKR876 billion in potential savings from short-term expenditure measures and PKR458 billion in potential savings from SOE reform and divestment. Substantial progress in reducing the deficit and improving accountability could be achieved by gradually transferring the current PKR953 billion of federal spending in devolved areas to provinces, with provincial governments financing new spending from increased revenue collections and efficiency improvements.

These immediate measures should be implemented to reduce overall fiscal expenditures: The temporary imposition of stringent review requirements over staff and operational costs, as well as development spending, can generate immediate cost savings.

The government could consider setting a recurrent expenditure reduction target of 10 percent and implementing a government-wide hiring freeze, wage freezes for the mid- to upper echelons, and conservative salary increases (if any) for the lower echelons.

Moreover, reduce the annual pension expenditure, i.e., 1.5 trillion to 375 billion PKR, with a corresponding monthly reduction to 31.25 million PKR. This adjustment aims to optimize budget allocation while ensuring sustainable financial commitments. Measures to constrain the growth of pension spending include automatic indexation to inflation, subject to a cap, instituting a minimum retirement age to receive benefits, and limiting dependents eligible for survivorship benefits.

To create an effective and sustainable budget, governments should adhere to several guidelines. These include defining priorities and allocating resources accordingly, involving stakeholders such as citizens, businesses, and civil society organizations in the budget-making process, relying on actual data and evidence for budget decisions, and being transparent about budget decisions and communicating them clearly to the public.

Above all, these suggestions can promote trust and accountability while ensuring that the budget accurately reflects the needs and priorities of the community.

Copyright Business Recorder, 2024