Budget tightens the screws on urban middle class

The FY25 budget has been passed, potentially securing next programme from the IMF (International Monetary Fund) and unlocking up to $7.5 billion in external flows. While this is a rare positive note, the budget lacks substantial reforms and strategic direction. It is described by some as a “Form 47 budget,” as the total tax revenue figures fail to align with the actual budget measures (Form 45).

This budget disproportionately targets the urban high income, and upper middle-income segments with heavy taxation. Professionals and small businesses have also been hit hard, with sales tax exemptions on frequently used products such as packaged dairy products, being eliminated. The tax burden on both salaried and non-salaried individuals has also increased.

Those lacking political power, organized lobbying, or the ability to influence the government are more likely to face increased taxation. This sums up the budget: formal businesses and their employees, who contribute significantly to the economy, are at a disadvantage. Multinational corporations and large local businesses, crucial for investment, are frustrated by the harsh taxation measures.

Meanwhile, non-filers will likely continue evading taxes despite higher withholding rates and threats such as SIM blocking or restricted foreign travel. The government blames the IMF for removing sales tax exemptions on essential items such as dairy products and medical services. While the IMF has long pushed for ending exemptions, the government did negotiate to keep some intact, reflecting its priorities.

The government made no significant effort to reduce sales tax on dairy products, including baby food and infant formula.

Attempts to lower income tax for exporters failed, though they did manage to prevent an increase in the FED for first-class air travel, leaving economy and business class travelers to bear the burden. Their counter offer for revenue neutrality included taxing stock market transactions, surcharges on high incomes, and measures affecting the urban middle class. Civil and military bureaucrats, however, received exemptions on tax from property sales.

While growth and employment-generating sectors are heavily taxed, certain “sacred cows” remain protected. The government succeeded in insulating fertilizers from regular sales tax regime, leveraging coalition partners’ votes and possibly influence from powerful quarters. The PPP (Pakistan People’s Party), for example, publicly opposes the taxation measures but benefits the most, gaining influence over bureaucracy and increased FBR (Federal Bureau of Revenue) taxes without political or financial liability. The KP CM and FM also benefited, securing more funds to spend while also scoring political points against the federal government.

It is unclear how much input the multitude of officially notified committees, tasked with developing economic policies, had in this budget. If the “Homegrown Economic Development Plan” committee, led by the eminent Professor Stefan Dercon, considers these budgeting measures the best they can suggest, then policymakers might have fared better by consulting competent local experts who have a deeper understanding of the political, feudal, and business interests and know how to counteract such pressures.

The overarching issue is Pakistan’s skewed fiscal framework, which requires a complete overhaul. The Punjab government’s accelerated spending spree, intended to counteract the federal government’s political maneuvers, does not address this need.

There is a pervasive “business-as-usual” approach that serves the interests of power centers rather than aiming for the transformative change the country desperately needs. This budget does not mark a step toward restructuring public finance. Continuing the status quo will do little to restore the confidence of local investors, let alone build credibility with the international investor community.

Without reforming this system and incorporating the undocumented economy into the tax net, Pakistan seems relegated to limited structural change and appears destined to return to the IMF in 2027, even before the next programme begins. Meanwhile, the burden tightens on the poor and middle classes.

Copyright Business Recorder, 2024