Any imbalance between spending and taxation ruffled their feathers. They warned of a looming debt crisis and called for swift action to rein in fiscal deficits”—Stephanie Kelton in The Deficit Myth
The adoption of the Federal Budget 2024-25 and Finance Bill 2024 by National Assembly on June 28, 2024 without any meaningful debate, ignoring all the major recommendations by the Senate, and in utter haste—in just 27 days—with a number of amendments proposed on the last day, was a disgrace for the National Assembly. This shows the apathy of the elected representatives towards important constitutional obligations under Article 73 and Article 82 of the Constitution of Islamic Republic of Pakistan.
Every year at the time of budget approval, the attitude of elected members confirms that they are only interested in safeguarding their privileges, untaxed and undeclared assets, besides obtaining more and more perquisites and benefits, and protecting the financial interests of the un-productive civil-military bureaucracy and greedy, unscrupulous businessmen. The de facto rulers — the militro-judicial-civil complex —get what they want from members of Parliament in all matters.
Indifference shown by the Treasury and Opposition benches during budget session amounts to open defiance of the mandate of the masses of this country, that voted them into power with the hope that they would do something for their socio-economic uplifting or at least provide them basic essential social services—housing, transport, education and health, to say the least.
The members of national parliament has once again proved that they are least bothered to work for the welfare of the people by devising long-term economic policies aimed at achieving the cherished goals of self-reliance, social justice and equal opportunities for the deprived segments of society.
The Finance Act, as passed by the National Assembly, is an epitome of apathy of the men sitting in the Parliament towards the poor masses of this country. It represents the lamentable continuation of the existing oppressive tax system. It can never achieve the desired results, as claimed by the banker-turned Finance Minister for Finance & Revenue, Muhammad Aurangzeb, on the floor of the House.
As was in the past, worthy members of the National Assembly (MNAs) did not assess nor even bothered to ponder about the impact of regressive taxation on the ailing economy and its devastating burden on the poor—out of total tax revenues, 75% comes from indirect taxes (if we exclude pass on withholding taxes from income tax) and tax-to-GDP ratio is one of the lowest in the world.
The Finance Act, as passed by the National Assembly, is an epitome of apathy of the men sitting in the Parliament towards the poor masses of this country. It represents the lamentable continuation of the existing oppressive tax system.
Till 2008, the excuse was that “we are not allowed to perform our constitutional duties under the umbrella of a military dictator.” After 15 years, in the absence of this pretext, it is obvious that fault lies somewhere else. Time and again, it has been emphasized in these columns that democracy is not electioneering per se. Establishment of a responsible government caring for the needs of its people is a prerequisite for true democratic dispensation.
An open and responsible government is only possible if the Parliament performs its Constitutional role, implements the process of accountability and ensures good governance. Constitutionally speaking, the Cabinet is answerable to the Parliament, but the truth is that MNAs run after ministers for personal favors and gains!
The Government was adamant to pass the Finance Bill 2024 without any evocative debate and Opposition was not at all interested to suggest any changes. Some amendments suggested by Senate were incorporated but without any debate. The Parliament once again proved that it is a mere rubber stamp as far as tax legislation and policy are concerned. The Finance Bill 2024, as usual, was the handiwork of the wizards sitting in the Finance Ministry (MoF) and Federal Board of Revenue (FBR) at the dictates of the International Monetary Fund (IMF).
Due to non-participation of public representatives in budget-making, financial managers and the Revenuecracy have persistently failed to overcome the fiscal deficit and remove fiscal imbalances, as their tax policies are based narrowly on collecting taxes at source, without bringing the mighty sections of society within the tax net or collecting what is actually due from them.
Pakistan is a unique country where successive governments—military and civilian alike—have frequently introduced amnesty schemes allowing whitening of untaxed and undeclared assets.
They are interested only in the number games and are hell bent upon collecting taxes where they are not due: there is a direct link between growing poverty in Pakistan and distortion in the tax base since 1991, when major tax burden was shifted onto consumers by the introduction of massive presumptive and minimum taxes in income tax law.
A lack of judicious balance between direct and indirect taxes and levy of regressive taxes in the garb of income tax has pushed an overwhelming majority of Pakistanis either towards or below the poverty line—a number that is now over 90 million.
It is reported in the Press that IMF for yet another bailout, wanted as a precondition tax target of Rs. 13 trillion for the fiscal year 2024-25. However, in view of the precarious condition of economy with only 3.6 percent growth target for the next fiscal year (FY 2025), the government agreed to a target of Rs. 12.970 trillion. However, our real challenge is not on revenue side, it is on expenditure side. It needs to be analysed.
Pakistan is a unique country where successive governments—military and civilian alike—have frequently introduced amnesty schemes allowing whitening of untaxed and undeclared assets.
Historically, both the Legislature and Executive have always shown a keenness in appeasing tax evaders through frequent and generous amnesties and obnoxious laws like section 5 read with section 9 of Protection of Economic Reforms Act, 1992, sections 111(4) and 236W of the Income Tax Ordinance, 2001—just to mention a few. It is a fact that terrorists, kidnappers, extortionists, arm dealers, drug barons and other criminals have also exploited these instruments to decriminalize their assets and funds held benami.
Every Finance Minister, politician, technocrat or banker, poses like a magician who can do wonders, whereas facts speak otherwise. Even the basic figures like growth rate and per capita income are clearly manipulated to paint a rosy picture with hollow claims.
Pakistan aptly fits in the concept of a “soft state”—famously articulated by the Nobel Laureate, Swedish sociologist Gunnar Myrdal in his 1968 three-volume work, Asian Drama: An Inquiry into the Poverty of Nations. It is a broad-based assessment of the degree to which the state, and its machinery, is equipped to deal with its responsibilities of governance. The softer a state is, the greater the likelihood that there is an unholy nexus between the lawmaker, the law keeper, and the lawbreaker. Pakistan is a classic case of this unholy nexus where since 1958 numerous tax amnesties have been announced, but failed to achieve desired results.
In the current fiscal year, FBR has shown satisfactory performance of collecting Rs. 8.122 trillion from July 2022 to May 2023 against the target of Rs. 8.162 trillion keeping in view embargo on imports and negative growth in almost all sectors of economy. However, funds available with the federal government are still not enough to meet current expenditure, what to speak of funding federal development outlay of Rs. 1,400 billion originally projected in the budget for the FY 2025 and later purportedly reduced by Rs. 250 billion. Simple calculation from the figures provided in Budget 2024-25 Brief expose the claims of fiscal consolidation: the total current expenditure is estimated at Rs.17,203 billion, debt servicing alone is Rs. 9,775 billion and defence, excluding military pension, is Rs. 2,122 billion.
The net income of the federal government, after transfer to the provinces under the 7th National Finance Commission (NFC) Award is Rs. 6,979 billion. Thus, even for payment of interest of Rs. 9,775 billion, Rs. 2,796 billion will have to be borrowed. All other current and developmental expenses will be met from costly borrowed funds, both internal and external. This is the worst one can expect from any regime. The reckless accumulation of debt by successive governments has pushed the country into a deadly debt trap for which no remedial measures are suggested in the budget.
What is the position of fiscal deficit? The following are official figures. Total net revenues (tax and non-tax) of the federal government after transfer to the provinces under 7th National Finance Commission (NFC) Award and other direct grants for FY 2024-25 are Rs. 10,377 billion. Total expenditures (current and developmental) are Rs. 18,777 billion, whereas the fiscal deficit is Rs. 8,500 billion.
This picture is frightening: further domestic borrowing of Rs. 7,803 billion in the FY 2024-25. It is also surprising that the federal government has forecast surplus of Rs. 1,217 billion from the provinces to meet the monstrous fiscal deficit. In these testing times, when the overwhelming majority of the population is in dire need of financial support from respective provinces, the federal government is incentivising them not to spend! The surplus funds with provinces are criminally kept for the federation rather than being utlised for helping the poor or for development programs. After transferring funds under the 7th NFC Award, is it justifiable from any angle on the part of the federal government to ask provinces to show surplus?
During the existing difficult times when inflation is skyrocketed, revenues, whether taxes or non-taxes, must be spent by the provinces for the wellbeing of the needy, restore economy and move towards growth. What makes the situation more painful is the fact that there is continuation of oppressive taxes, e.g. a sales tax of 18% even on edible items on the part of the federation, whereas this tax has historically been vested with provinces. Hyperinflation in the price of food, rising food security and cost-push inflation pose daunting challenges.
There is nothing in the Finance Act, 2024 to raise revenues by lowering tax rates and broadening the base to tap the actual tax potential of Rs. 32 trillion. Of course, there are clichés as usual of using technology to broaden the tax base, but where is the research showing the actual tax base?
Taxes are meant for spending on welfare of masses, not to be kept in the kitty by provinces in the most difficult days when millions are jobless. Why should provinces show surplus when millions need financial help to mitigate historic high inflation and exorbitant interest rates.
The Prime Minister wants to help marginalised sections of society but the budget is anti-growth, anti-poor and inflation-prone. Besides, relying on surplus of Rs. 1,217 billion from the provinces, other sources of meeting the huge fiscal deficit are net external receipts of Rs. 666 billion; bank borrowing of Rs. 7,683 billion; and privatization proceeds of Rs. 30 billion.
The first and the last one are mere expectations and the second one is at an astronomical cost from private commercial banks!
There is nothing in the Finance Act, 2024 to raise revenues by lowering tax rates and broadening the base to tap the actual tax potential of Rs. 32 trillion. Of course, there are clichés as usual of using technology to broaden the tax base, but where is the research showing the actual tax base?
With meagre growth of just 0.29% in the current fiscal year and just over 3.5% projected in the forthcoming fiscal year, one cannot even think of improving tax-to-GDP ratio to meet even half of the burgeoning fiscal deficit of Rs. 8,500 billion. It will undoubtedly rise after the FBR’s failure to achieve the target assigned of Rs. 9,415 billion for FY 2023-24 and current expenditure will as usual be more than estimated.
Though the worthy Finance Minister looked firm and determined (during the post-budget Press conference) but, as in the past, he was hoodwinked by his incompetent team—crafty bureaucrats pushing the country to further debt enslavement by killing growth through withholding taxes that are anti-business in nature.
Every Finance Minister, politician, technocrat or banker, poses like a magician who can do wonders, whereas facts speak otherwise. Even the basic figures like growth rate and per capita income are clearly manipulated to paint a rosy picture with hollow claims.
Fixing of unachievable tax targets for FBR and then tax expenditure of as high as Rs. 3.879 trillion in the current fiscal year (36.4% of total collection and 73% higher than the last year) confirms our real dilemma! Prime Minister and Finance Minister are thus not justified to blame FBR and business community. They must look towards erratic taxation and unjustified tax concessions granted to elites.
The majority of the measures announced in the Finance Act 2024, as passed by the Parliament, amount to over-taxing an economy that is deep in recession, while huge tax benefits to vested interests continue. Shamelessly, the incidence of taxation has also shifted to the salaried class that is already feeling the real brunt of hyperinflation. This is a tragedy with no parallel in malevolence.