Political Economy of Budget

Political Economy of Budget
The PTI government has unveiled a harsh budget. The FBR aims to collect about 40% (Rs 1.5 Trillion) more taxes in the next twelve months compared to last year, despite forecasts of a fall in GDP growth from 3.3% to 2.4%. Every reputed economist says this is grossly unrealistic and we should expect periodic mini-budgets when the government misses its IMF-dictated targets and is compelled to dish out more of the same medicine (increase in tax rates). Under the circumstances, how can the economy be “stabilized” when the fiscal deficit is targeted at 7.2% but may in fact hit 9% if the revenue targets are missed?

The Finance Minister, Hafeez Sheikh, claims the new budget is anti-rich and pro-poor. To give the devil his due, the rich will certainly have to fork over more, which is as it should be. So-called “non-tax filers” will be brought into the tax net by various means; property speculators will have to pay capital gains tax; property valuation for tax on registrations and transfers will be significantly increased to reflect market rates; dividend income tax will go up; rental income tax will be progressively at par with income from other sources; questions will be asked about source of foreign remittances for investment if these exceed Rs 5m; those who don’t disclose foreign assets can be imprisoned for up to 7 years apart from paying hefty fines; “gifts” from non-family sources will be taxed as income; the condition of foreign residency – used to evade filing tax returns in Pakistan – has been increased from six to nine months. The super-rich will have to cough up as much as 35% of their income. And so on. What is conspicuously missing in this area are death duties and inheritance taxes. Both are levelers of wealth in rich countries but haven’t been countenanced in Pakistan! Similarly, corporate tax rates remain low, having fallen from 33% in 2015 to 29% last year and today.

But the poor will be at the receiving end of the stick. The burden of a regressive income tax structure on the salaried lower and middle classes is all too palpable – for instance, as noted economists have argued, those in the salary range of Rs 30,000 -50,000 per month are fated to lose the equivalent of two salaries in the year due to various tax measures. Given the recent devaluation of 25% and the additional burden of heavier import duties on edible oils, pulses, tea, and a range of household items, inflation of 15% is bound to hurt the relatively poor more than the rich. Indeed, over 2400 import tariff lines are going to be enhanced, some of which will inevitably take a toll of the lower and middle classes. Similarly, a substantial increase in the taxes on cement, sugar, juices, aerated water, etc, will hurt the consumption of the middle classes. Taxes on retail have been extended across the board.

There are misgivings in other areas as well. The PSDP is frozen and the budgeted outlays for CPEC related projects are down by 40%. Both are critical to economic growth and employment.

The government’s problem relates to two main necessary expenditures: debt service and defense. The former will gobble up 50% of all projected revenues while the latter will account for up to 34%. We were told that the defense budget would be cut. In fact, however, it is proposed to rise by 11% from last year’s budgeted sum of Rs 1694 Trillion to Rs 1882 Trillion this year. But that is partly because of overruns last year owing to tensions with India.

The PTI government doesn’t inspire confidence. It has missed major targets in the last twelve months. Despite a devaluation of 25%, exports haven’t registered any rise. Large scale manufacturing was targeted to grow by 6.8% but it fell to 2.9%; Agriculture growth was set at 3.8% but scraped through at 0.8%. The IMF program was delayed by nine months. A U-Turn was taken on the Amnesty Scheme after a year of vacillation and, despite repeated exhortations by Prime Minister Imran Khan, not much has come of it.

In a veritable midnight knock, Mr Khan has ranted about the piling up of the national debt to crippling proportions “in the last ten years”. He is setting up a task force to determine who is responsible for this policy debacle. But, instead of economic and finance experts, this will comprise civil-military intelligence and criminal investigation agencies and the tax collection authorities. His intention is clear: to further castigate the PPP and PMLN regimes of the last decade to divert attention from the PTI’s own mess-ups.

This Miltablishment-dictated model of political economy comprises elements of state repression, media suppression, judicial interference, enforced extraction and dispossession, as in Turkey and Egypt. Both these countries are autocratic, relatively homogenous and enjoy foreign backing. Still, they are racked by high inflation and simmering political discontent. But Pakistan is bristling with passionate ethnicities, class inequalities, regional tensions, foreign hostilities, resilient party political structures and “civil-democratic” traditions. It won’t work here.

Najam Aziz Sethi is a Pakistani journalist, businessman who is also the founder of The Friday Times and Vanguard Books. Previously, as an administrator, he served as Chairman of Pakistan Cricket Board, caretaker Federal Minister of Pakistan and Chief Minister of Punjab, Pakistan.