EDITORIAL: Match the rise in taxes to a cut in government expenditure is a cry gathering momentum not only amongst economists but also the general public that is consistently forced to pay for the elite capture of our scarce resources.
A sustained poorly managed energy sector for example is manifest by over 2.5 trillion-rupee circular debt today and rising, coupled with financially unviable contracts with Independent Power Producers (IPPs) signed by the then Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N) administrations that envisage capacity payments in dollars.
The condition for extending loans by multilaterals/bilaterals has been to achieve full cost recovery in this sector as well as in the gas sector, an economically viable objective, though former and current Pakistani administrations have opted to pass on the buck to consumers, instead of improving governance. In November last year, the federal government acknowledged on the floor of the House that it charges 58 percent tax on commercial electricity users, who naturally pass it on to the general public, and 29 percent on households (17 percent general sales tax and 10 percent advance income tax).
Disturbingly, this data in no way deterred the incumbent Finance Minister from announcing on 6 October 2022 a 110 billion rupee electricity subsidy to exporters. Additionally, the State Bank of Pakistan’s (SBP’s) appallingly low reserves of 3.6 billion dollars necessitated the imposition of crippling administrative measures that at present are inordinately delaying opening of letters of credit, including for critical imports, repatriation of profits and piling containers at our ports.
The rise in the price of petroleum and its products, another major source of government revenue budgeted at 750 billion rupees for this year, is another source of revenue that can be labelled not only as a low-hanging fruit but an indirect tax whose incidence on the poor is greater than on the rich. At present, petroleum levy (PL) is maxed out on petrol though for high speed diesel the levy was raised by five rupees — to 40 rupees per litre — last Sunday and, therefore, there is room to raise it by a further 10 rupees per litre.
There is no sales tax on petroleum and its products yet, though the government had agreed to a contingency plan consisting of tax measures in the event that the target revenue was unmet for any given quarter. Tax exemptions continue and their reduction/eventual elimination were also part of the contingency plan agreed with the International Monetary Fund (IMF) in the seventh/eighth review.
And then of course, there has been a long-standing demand of the general public that is becoming clamorous with the massive rise in inflationary pressures of imposing a tax on the incomes of wholesalers and retailers, and not legitimizing the non-filers by allowing them to pay a higher sales tax (under the guise of withholding tax) on their purchases and not making appropriate changes in the constitution that would make farm income tax at par with the tax payable by the salaried class.
There is therefore an urgent need to undertake tax reforms and make them fair, equitable and non-anomalous that come within the jurisdiction of the Ministry of Finance and resist from raising existing taxes or widening their ambit through reliance on the low-hanging fruit.
At the same time, it is desirable that the government match each rupee of additional revenue measures imposed in the expected ‘mini-budget’ with a commensurate reduction in expenditure. In this context there is a need to undertake pension reforms by enforcing employee contributions and abandon the disastrous policy of funding from the budget.
A wage freeze as well as a freeze on procurement, civilian and military, must be implemented for a year if not two. The public would also expect the 70-plus cabinet to be reduced, and all perks and privileges including cars, petrol, housing, free electricity, etc., withdrawn forthwith. Moreover, disbursement to parliamentarians, a normal practice once elections are scheduled, must be abandoned.
And finally, the implementation of policies violative of basic economic theories must not be pursued as has been the case with respect to controlling the interbank rupee rate, especially when reserves were low and could not be used to strengthen the rupee that led to a loss of nearly 4 to 4.5 billion dollars in terms of lower remittances (nearly 2 billion dollars during the first six months of the current fiscal year compared to the year before) as well as export revenue inflows.
The SBP refuted this claim but it needs to understand that the public is not only much more informed today than say five years ago due to unlimited information available on the net as well as social media but is also more likely to express criticism of policies that continue to sustain elite capture, or in other words, the danger of civil unrest in the event that such flawed policies continue is very real.
Copyright Business Recorder, 2023