The Social Policies and Development Centre (SPDC) on Saturday launched its first pre-budget report here on 'Fiscal Policy Choices in Budget 2008-09'. Giving press briefing, Dr Khalida Ghaus, Managing Director (MD) of SPCD, along with Dr Hafiz Pasha, highlighted the major factors of the report aimed to suggest steps to overcome the economic crisis, swelling poverty, high imports, etc.
Dr Pasha, a prominent economist, said that the report consisted of five important sections, including macro economic trends in recent years, macroeconomic scenario for 2008-09, taxation policies, oil pricing policies and social protection programmes in Pakistan.
The report said that the 2008-09 Budget would have to focus on reducing the deficits and bringing the economy back on the path of stability. However, during the process of adjustment, the poor are likely to be further burdened. Therefore, along with achieving stabilisation, the budget should also have to strongly focus on a package of relief for the poor.
Strong social safety nets will have to be put in place to ensure that there is adjustment with a human face, says the report of Social Policy and Development Centre titled 'Fiscal Policy Choices in Budget 2008-09'.
It suggests that the goals of fiscal policy for 2008-09 should include: macroeconomic adjustment to be achieved in two years to bring fiscal and current account deficits down to sustainable levels; minimise inflationary pressures; preserve growth momentum to the extent possible; and strengthen the redistributive role of fiscal policy. The report says that, subject to skillful management of the economy with the appropriate mix of policy instruments, an outcome in terms of the growth rate of 5 to 5 1/2 percent may be considered as a good performance of the economy in 2008-09 fiscal year.
The fiscal policy should aim at containing the budget deficit to 5 percent of GDP, which is achievable according the analysis presented in the report. However, it will involve intensive, but feasible, efforts at mobilising resources and containing expenditure in ways that should hurt growth the least and do not impact adversely on the poor. Simultaneously, the current account deficit in the balance of payments will have to be brought down from 8 percent to 5 percent of GDP.
The report suggests that containment of budget deficit could be achieved by higher level of fiscal effort in the form of broadening the tax base by taxing the under-taxed and through restricting the growth of current expenditures.
Accordingly, the growth of current expenditure must be restricted to a maximum of 6 percent with the following actions: i) POL prices be adjusted upwards to higher international prices in a timeframe of two years; ii) the defence budget should be brought down by Rs 50 billion following a process of normalisation in the North; and iii) Non-salary expenditure of all government departments be kept constant in nominal terms at the 2007-08 level.
On the taxation side, the report says that the tax-to-GDP ratio has remained largely stagnant during the current decade because the gains due to the expanding tax bases were almost neutralised by the decline in effective tax rates. Factors contributing to greater regressivity of the tax system include: abolition of wealth tax, continued reduction in corporate income tax rates, further reduction in import tariffs (especially on luxury goods), extension of GST to fertilisers, and a number of exemptions and tax relief provided. The report estimates that these concessions and exemptions have resulted in a revenue loss of Rs 300 billion in 2006-07. Tax proposals for the 2008-09 federal budget will have to be designed not only to mobilise more revenues for the public exchequer, but also to generate them in a way that the burden of taxes is not on the lower income groups.
The suggestions include: introduction of capital gains tax on real estate by the provincial governments; imposition of a regulatory duty on import of luxury goods and introduction of a tax on services catering primarily to the demand of upper income groups and of corporate entities.
In addition, the report suggests a number of fiscal incentives and reliefs including: enhancement in income tax exemption limit by Rs 50,000; extension of the R&D allowance to emerging exports; withdrawal of GST on fertilisers and tax credit for investment in power generation and energy-saving equipment.
The report highlights that full elimination of oil subsidy in 2008-09 would involve primarily an increase in the price of HSD by almost Rs 35 per litre. This is not only a massive increase which would cause dislocation in the transport sector and jeopardise the process of growth but also the inflationary impact is sizeable, with a relatively higher burden falling on the poor. It is, therefore, recommended that the elimination of the oil subsidy should be phased over a period of two years and be implemented in small steps, periodically.
The report strongly emphasises that the 2008-09 Budget should focus on a package of relief for the poor. Using a set of objective criteria, the report evaluates current social safety nets and livelihood programs recently announced by the government. These include Food Support Program in the form of cash transfers under Baitul Maal and Food Subsidy Program being executed through Utility Stores Corporation (USC). It is recommended that Baitul Maal would be a better choice to implement the food support program as compared to USC through income supplements of Rs 1000 per month for 4 million households.
The report also suggests that the adoption of livelihood programs including the Employment Guarantee Scheme and the Graduate Employment Scheme, announced by the Prime Minister, be implemented initially on a pilot basis in some backward districts of each province.