A welfare state is one where the state undertakes extensive intervention in the society to assist and protect those who are hit by some calamity or are underprivileged. In other words, the state provides a form of social protection. Most countries, including Pakistan, already have some welfare policies. For example, the Benazir Income Support Program is a welfare program for those living in poverty. The first thing which is common among the welfare states of the world is they collect a large proportion of their GDP in taxes.
Norway collects 38 percent, Denmark about 45 percent and Sweden about 44 percent. This means that these states have a large and extensive tax infrastructure and people pay a large proportion of their income in taxes. The rich pay more: in Denmark, the top marginal tax rate is about 60 percent.
Now, if we compare this with Pakistan, we collect only 12 percent of our GDP in taxes. Denmark spends over twice as much of its GDP on social welfare alone. After recent tax reforms in Pakistan, the top marginal tax rate is just 15 percent which is significantly lower than the Scandinavian countries. This means that, if we were to make a move towards becoming a welfare state, we would need to radically expand the tax system — not only taxing more people but also taxing more the higher income people who do pay taxes. As welfare states require significant redistribution and government provision of public services, these tax revenues would be used to finance the growth in the size of the state, both by spending more on welfare services but also hiring more people to manage such a far-reaching infrastructure.
The main issue why raising taxes is hard in Pakistan is because Pakistan’s economy is cash-based with a large informal sector, which provides avenues for tax evasion. Even various amnesty schemes announced from time to time could not motivate people to comply voluntarily. This is unlike welfare states in the developed world which are highly formalized with a strong paper trail and where tax evasion is costly and considered a crime. Secondly, the size of Pakistan’s economy is small which could be gauged from the fact that per capita income of Pakistan is $1,500 whereas in Norway it is $70,000. Thirdly, Pakistan’s population is not homogenous hence we see a lot of community services coming to the rescue for the people who are living at the bottom of the pyramid.
Perhaps, the only thing that works in favor of Pakistan is its demographic youth bulge (63% of our population comprising of youth, 69 million aged below 15) and an increase in the working-age population as a share of the total population. To reap the ‘demographic dividend’ of this change, the economy needs to provide education and create productive and remunerative employment for young workforce entrants. In this connection, providing free or subsidized education and healthcare could be a common welfare state goal.
While the common man expects initiatives for job creation and social uplift and businesses would like to put the economy on fast track, the reality is that the government is presently cash-starved. In order to motivate the private sector to come forward for public-private partnership, the government needs to incentivize them heavily, which, in the current scenario, appears to be an uphill task. An ideal model would be a unique mix of free market capitalization and social benefits where citizens have high trust in the government because it delivers top quality social services, including free education and free health for all.