Why is Dar's budget 2013-14 such a massive disappointment for the general public? If one compares the PML (N) manifesto (whose release was reportedly delayed as the party chief Nawaz Sharif wanted more work done on the document) and the budget proposals it is clear that Dar failed to deliver. Dar as a Senator, with no constituency other than his own party, has badly let down his party and most importantly his party chief.
The ambitious macroeconomic budgetary targets including bringing the deficit down to 4 percent in five years and increasing tax-to-GDP ratio to 15 percent in five years are taken from the manifesto which would remain a wish list until and unless the budget is directly linked to the commitments made in the manifesto? The question is if the commitments have a likelihood of being met given the 2013-14 budget?
The manifesto claims that "fundamental tax reforms would be opposed by powerful interest groups and strong cartels" but claims that "PML (N) not only has the ability to make these fundamental institutional reforms but also the political will to confront the strong and powerful interest groups". Unfortunately the budget unveiled by Ishaq Dar does the exact opposite: (i) there have been no new taxes on the strong and powerful interest groups. The 3.7 million possible taxpayers identified through Nadra's assistance were not touched in the budget and when Dar was asked why he merely dismissed the question by maintaining that 'we will in future and we should not give them sleepless nights'; (ii) inexplicably the tax payable by the middle-income groups - from those with an income of 41,000 rupees per month to almost 150,000 rupees per month - will witness a rise in taxes while the next higher slab of income-earners would witness a decline in taxes which give Dar the dubious honour of being a finance minister who converted a direct equitable tax into an indirect inequitable tax; (iii) regressive taxes received a further boost as Dar announced a one percent rise in GST from 16 to 17 percent, including on fuel, leading automatically to a rise in transport costs and the price of essentials; in addition Dar took the unprecedented step to levy the rise in GST more than two weeks before the end of the current fiscal year and prior to the budget's passage from parliament of which the Supreme Court has taken notice and the judgement notes that its implementation prior to the passage of the budget has "no force of law." Dar's convoluted logic: prices rise soon after the budget is announced and not when it is passed by parliament and by bringing the implementation date forward he merely ensured that windfall profits do not filter to the manufacturers/wholesalers/retailers but fill the treasury's empty coffers. This is simply flawed logic reflective of Pakistani government's inability to take effective measures to combat hoarders; (iv) savings will be promoted the manifesto maintains but the rise in tax on cash withdrawals compromises this objective; and (v) the manifesto claims the most important area where fundamental and structural reforms are required is in the area of taxation and here too Dar came up with flawed policies. These policies included supporting withholding tax which is adjustable (however adjustment from our depleted treasury is much delayed as a matter of routine which impacts negatively on manufacturing output and compromises the manifesto's target of raising output through private sector) and by requiring a return to be filed by all he gave a boost to the business of chartered accountants, his real profession, but this would seriously cause much more angst amongst the middle-class public.
To add insult to injury Dar failed to withstand criticism with respect to his decision not to raise salaries of civil servants, and three days after he took this bold decision he backtracked and agreed to raise salaries by 10 percent. Why was it an economic compulsion for the government to resist a salary rise of civil servants? Economic theory dictates that increasing incomes (salaries/rents/dividends) especially when the budget deficit has reached alarming proportions fuels inflation; and if the economy is experiencing stagflation (high inflation coupled with low output which Pakistan has been facing due to massive power shortages that have compromised the economy's ability to operate at capacity) then any attempt to increase salaries would negate austerity measures as well as fuel inflation. In other words, salary rises increase the circulation of money in the economy and thereby have a detrimental impact on the cost of living mainly of the vulnerable.
Prior to looking at Dar's u-turn on civil service salaries it is essential to note two historical facts - one national and the other international. The national historical fact is that the PPP-led coalition government in its budget was responsible for a civil service pay rise of 50 percent three years ago, well in excess of the rate of inflation, and 15 percent in the two subsequent years, also above the rate of inflation. This accounted for severe criticism by the PML (N) in the centre and the Punjab with party stalwarts arguing that the announced salary rise required the provincial governments to reduce their development budgets and divert the money to its federal government employees, a criticism that was economically sound as civil servants witnessed a pay rise well in excess of the rate of inflation for three years running and should have been required to make a sacrifice and forego a rise in 2013-14; or the government should have restricted itself to a pay rise of only those in grade 1 to 16.
The international historical fact is the use of what is termed incomes policy by several countries effectively usually during war times ranging from "voluntary" wage and price controls to mandatory controls. By keeping wages and price rises at a minimum the government of the day can distort the market and interfere in economic efficiency however because it was of limited duration the wage and price push inflation can be kept under control.
Dar in his budget (like in the past five years) envisaged price controls through Jumma and Sunday bazaars as well as through strict monitoring of the markets, for which he simply does not have manpower. In this context, a better option would be to adopt a variant of the incomes policy namely tax-based income policy which would allow the government to impose a fee on firms and importers who raise prices by more than allowed. Research indicates that tax-based incomes policies would be more effective in countries which are dominated by monopolies, a single buyer, or an oligopoly where multiple buyers collude to set a price well above their costs of production. Such conditions normally apply to nationalised industry where labour is organised and therefore collective bargaining and monitoring of wage and price agreements is possible. Additionally in Pakistan, one has only to look at Competition Commission of Pakistan's action archives to come up with an entire range of industries which are operating under oligopolistic conditions namely cement, sugar, textiles, cell phone companies, to name just a few therefore a tax-based income policy should be supported.
The federal government has taken several measures to show it is serious about austerity measures including the cut in PM's funds, a reduction in the number of ministers/advisors as well as in not providing security to federal ministers many of who are driving their own cars to work but little austerity is seen in all other expenditure items. Current and development expenditure have been raised by 9.9 percent and 37.7 percent respectively and based on Dar's own actions during his term as Finance Minister during Nawaz Sharif's government a considerable amount would have to be diverted from development to current expenditure by the end of the current year if he is to meet his deficit target reduction of 2.5 percent.
The budget document lacks economic vision and is focused solely on milking the urbanites that are already in the tax net. It penalises consolidation in the corporate sector and rewards those that have kept their industrial holdings in a fractured state to avoid various levies by the government. This may have a telling adverse impact on business confidence and economic growth.