On Monday, the National Economic Council approved a development budget worth Rs 1.675 trillion for the fiscal year 2016-17 in unconventional circumstances, with Prime Minister Nawaz Sharif presiding over the meeting from London a day before his heart surgery.
Minutes before the NEC meeting, the federal cabinet approved the Rs 4.54 trillion national budget with a 3.8 percent deficit. The cabinet meeting was also spearheaded by the PM. This resulted in the debate over the budget being overshadowed by this unprecedented move by the PM to use technology to preside over the meeting attended by all chief ministers.
In the budget dominated by development and infrastructure, Rs 800 billion have been allocated for Public Sector Development Programme (PSDP) and Rs 875 billion for their provincial counterparts by the National Economic Council. A 5.7% growth rate, 17.7% investment to GDP ratio, and 6% inflation have been set as the principal targets. A Rs 3,600 billion tax collection target has been set for FBR, with the non-tax collection target being Rs 950 billion.
According to the Finance Ministry sources, government employees’ salaries are expected to be increased by up to 10 percent.
It has also been reported that the government will be augmenting the tax net.
According to the approved budget, the federal government is transferring Rs 2 trillion to the provinces as per NFC Award. The defence expenditure is Rs 860 billion, with Rs 245 billion allocated for pensions. The foreign exchange reserves have been fixed at $23.6 billion and tax-to-GDP ratio projected to be 12.5 percent.
“Pakistan has achieved an eight-year in terms of growth rate, which was 4.71 percent during the outgoing financial year,” the PM said while addressing the cabinet meeting. “Inflation is down to 3 percent and budget deficit down to 4.3 percent of GDP. Tax collection has been increased by 56 percent over the past three years with the foreign exchange reserves reaching $21.6 billion from $7.8 billion in 2014,” he added.
Former caretaker finance minister Salman Shah doesn’t expect any major surprises in today’s announcements. “I think the budget would be a virtual copy paste of last year’s budget. The IMF programme is still going on and hence the budget would obviously be formed according to the government’s commitments. Once you’ve set your fiscal deficit targets then you will put in your estimate for revenues and then you give them an ambitious target. You would then go on to put in some measures for growth and inflations, which would later on be revised just like the taxes. We’ll have to see whether they would actually follow through with their claim of enhancing the tax net.”
He adds: “Then they would give a humongous PSDP estimate, including all kinds of projects. Once the budget deficit is set, we’ll see expenditures in the coming months which would be nowhere to be seen in the approved budget. The revenue projections would be over optimistic as well, not to mention the mini budgets that will spring up. At the end of the day they will cut the development expenditure to hit the fiscal targets. This is the story of the past 4-5 years.”
Former advisor to the Federal Government of Pakistan on economic policy and author of Strategic Issues in Pakistan’s Economic Policy, Akmal Hussain also believes that IMF programs would dictate the budget. “Since we have been jumping from one program to the other, the results are very short-term, which perpetuate underdevelopment and our dependence on the IMF.”
That leaves budgeting to become an ‘accounting exercise’, he believes. “This results in the government not taking any actions for the betterment of the people of this country and focusing only on the necessary numbers dictated from elsewhere.”
Hussain maintains that Pakistan should eye more forward-looking budgeting. “We are approaching the end of the IMF programs and it is time to design a budget that is a part of an economic strategy – medium to long-term. The central problem for Pakistan has been that they have been unable to retain a high level of per capita income growth.”
However, Farrukh Saleem, economic theorist and author of A Feasibility Analysis of Marginal Trading System, believes that had it not been for the IMF programs, Pakistan wouldn’t have witnessed any economic reform at all. “I think we should be thankful that we’re under the IMF programs. If there weren’t any budgetary targets or reform targets, I don’t think what our decision makers would do with the budget.”
“Whether we’re talking economics or the society, we internally fail to reform ourselves, unless the reforms are imposed on us from outside. Panama Papers have also been God-sent otherwise we were busy in our corrupt ways, with no intention to let go!”
Hussain cites health and education as two sectors that epitomize Pakistan’s economic troubles.
“All prominent researches point towards expenditure in health and education, which play a pivotal role in long-term economic growth. Currently we are spending something like 0.7% of the GDP on health expenditures, which means that Pakistan is 192nd out of the 193 countries with the relevant data available. And we spend 1.8% of our GDP on education, which is the lowest in South Asia,” he says. “If the people are sick and uneducated, how will you improve the productivity and growth?”
“It seems that even the health and education numbers would only improve through exterior influence,” says Saleem.
Salman Shah doesn’t believe the current government is reform minded in the first place. “I don’t expect any reforms in the near future, like reforms in the power sector for instance or addressing any institute’s losses. They have announced inflated projects that cost a lot. Our energy sector is in dire straits and the circular debt is still there,” he says.
Shah says the budget needs a complete revamp in the revenue side. “The tax gap that runs into almost a trillion rupees needs to be curtailed. We need to simply the tax code, reduce the tax rates and make everything compatible with what our economy is all about.”
“Secondly,” he adds, “we have major crises in manufacturing and agriculture. The cost of doing business is to high that they have been run out of business. Instead of reducing the cost of business through reforms, instead of bringing reforms that could improve productivity, instead of building competitiveness in the economy and investment climate, our attention is elsewhere.”
Farrukh Saleem says Pakistan’s taxation process is all messed up. “I have been watching the budget closely for the past 20 years and every time I see additional indirect taxes. This year they’re saying that they will make things easier for the industrial sector and the PM has said that the input cost in the agricultural sector will be reduced,” he says. “But over the past 20 years all we’ve seen is increase in government expenses, with a failure to collect direct taxes. The burden of indirect taxes keeps on increasing, and I think that trend is going to continue.”
Saleem continues: “The split between taxes is indirect 60 percent and direct 40 percent. And 80 percent of the 40 percent is based on withholding taxation. This means that the tax machinery has completely failed in collecting any money. What we need is to reverse the numbers.”
The larger chunk of the tax net should be direct taxes. Indirect taxes are known as repressive taxes, which means as your income falls the tax burden increases. This creates inequity in taxation. But it seems as though we don’t have the intent and/or the capability to collect direct taxes.”
Akmal Hussain reiterates that Pakistan needs a quantum leap in health and education expenditure. “And here they are dedicating a large chunk of the budget to making roads. Our budget makers should be ashamed of themselves.”
Minutes before the NEC meeting, the federal cabinet approved the Rs 4.54 trillion national budget with a 3.8 percent deficit. The cabinet meeting was also spearheaded by the PM. This resulted in the debate over the budget being overshadowed by this unprecedented move by the PM to use technology to preside over the meeting attended by all chief ministers.
In the budget dominated by development and infrastructure, Rs 800 billion have been allocated for Public Sector Development Programme (PSDP) and Rs 875 billion for their provincial counterparts by the National Economic Council. A 5.7% growth rate, 17.7% investment to GDP ratio, and 6% inflation have been set as the principal targets. A Rs 3,600 billion tax collection target has been set for FBR, with the non-tax collection target being Rs 950 billion.
"The tax machinery has failed"
According to the Finance Ministry sources, government employees’ salaries are expected to be increased by up to 10 percent.
It has also been reported that the government will be augmenting the tax net.
According to the approved budget, the federal government is transferring Rs 2 trillion to the provinces as per NFC Award. The defence expenditure is Rs 860 billion, with Rs 245 billion allocated for pensions. The foreign exchange reserves have been fixed at $23.6 billion and tax-to-GDP ratio projected to be 12.5 percent.
“Pakistan has achieved an eight-year in terms of growth rate, which was 4.71 percent during the outgoing financial year,” the PM said while addressing the cabinet meeting. “Inflation is down to 3 percent and budget deficit down to 4.3 percent of GDP. Tax collection has been increased by 56 percent over the past three years with the foreign exchange reserves reaching $21.6 billion from $7.8 billion in 2014,” he added.
Former caretaker finance minister Salman Shah doesn’t expect any major surprises in today’s announcements. “I think the budget would be a virtual copy paste of last year’s budget. The IMF programme is still going on and hence the budget would obviously be formed according to the government’s commitments. Once you’ve set your fiscal deficit targets then you will put in your estimate for revenues and then you give them an ambitious target. You would then go on to put in some measures for growth and inflations, which would later on be revised just like the taxes. We’ll have to see whether they would actually follow through with their claim of enhancing the tax net.”
He adds: “Then they would give a humongous PSDP estimate, including all kinds of projects. Once the budget deficit is set, we’ll see expenditures in the coming months which would be nowhere to be seen in the approved budget. The revenue projections would be over optimistic as well, not to mention the mini budgets that will spring up. At the end of the day they will cut the development expenditure to hit the fiscal targets. This is the story of the past 4-5 years.”
Former advisor to the Federal Government of Pakistan on economic policy and author of Strategic Issues in Pakistan’s Economic Policy, Akmal Hussain also believes that IMF programs would dictate the budget. “Since we have been jumping from one program to the other, the results are very short-term, which perpetuate underdevelopment and our dependence on the IMF.”
That leaves budgeting to become an ‘accounting exercise’, he believes. “This results in the government not taking any actions for the betterment of the people of this country and focusing only on the necessary numbers dictated from elsewhere.”
Hussain maintains that Pakistan should eye more forward-looking budgeting. “We are approaching the end of the IMF programs and it is time to design a budget that is a part of an economic strategy – medium to long-term. The central problem for Pakistan has been that they have been unable to retain a high level of per capita income growth.”
However, Farrukh Saleem, economic theorist and author of A Feasibility Analysis of Marginal Trading System, believes that had it not been for the IMF programs, Pakistan wouldn’t have witnessed any economic reform at all. “I think we should be thankful that we’re under the IMF programs. If there weren’t any budgetary targets or reform targets, I don’t think what our decision makers would do with the budget.”
“Whether we’re talking economics or the society, we internally fail to reform ourselves, unless the reforms are imposed on us from outside. Panama Papers have also been God-sent otherwise we were busy in our corrupt ways, with no intention to let go!”
Hussain cites health and education as two sectors that epitomize Pakistan’s economic troubles.
“All prominent researches point towards expenditure in health and education, which play a pivotal role in long-term economic growth. Currently we are spending something like 0.7% of the GDP on health expenditures, which means that Pakistan is 192nd out of the 193 countries with the relevant data available. And we spend 1.8% of our GDP on education, which is the lowest in South Asia,” he says. “If the people are sick and uneducated, how will you improve the productivity and growth?”
“It seems that even the health and education numbers would only improve through exterior influence,” says Saleem.
Salman Shah doesn’t believe the current government is reform minded in the first place. “I don’t expect any reforms in the near future, like reforms in the power sector for instance or addressing any institute’s losses. They have announced inflated projects that cost a lot. Our energy sector is in dire straits and the circular debt is still there,” he says.
Shah says the budget needs a complete revamp in the revenue side. “The tax gap that runs into almost a trillion rupees needs to be curtailed. We need to simply the tax code, reduce the tax rates and make everything compatible with what our economy is all about.”
“Secondly,” he adds, “we have major crises in manufacturing and agriculture. The cost of doing business is to high that they have been run out of business. Instead of reducing the cost of business through reforms, instead of bringing reforms that could improve productivity, instead of building competitiveness in the economy and investment climate, our attention is elsewhere.”
Farrukh Saleem says Pakistan’s taxation process is all messed up. “I have been watching the budget closely for the past 20 years and every time I see additional indirect taxes. This year they’re saying that they will make things easier for the industrial sector and the PM has said that the input cost in the agricultural sector will be reduced,” he says. “But over the past 20 years all we’ve seen is increase in government expenses, with a failure to collect direct taxes. The burden of indirect taxes keeps on increasing, and I think that trend is going to continue.”
Saleem continues: “The split between taxes is indirect 60 percent and direct 40 percent. And 80 percent of the 40 percent is based on withholding taxation. This means that the tax machinery has completely failed in collecting any money. What we need is to reverse the numbers.”
The larger chunk of the tax net should be direct taxes. Indirect taxes are known as repressive taxes, which means as your income falls the tax burden increases. This creates inequity in taxation. But it seems as though we don’t have the intent and/or the capability to collect direct taxes.”
Akmal Hussain reiterates that Pakistan needs a quantum leap in health and education expenditure. “And here they are dedicating a large chunk of the budget to making roads. Our budget makers should be ashamed of themselves.”