PRE-BUDGET THINKING
FEDERAL BUDGET 2008-09

PROF. DR. KHAWAJA AMJAS SAEED
Emails: professor@kamjadsaeed.edu.pk
principal@puhcbf.edu.pk

May 12 - 18, 2008

CONSTITUENTS OF THE PAPER

This piece addresses the following issues:-

A: Federal Budget 2008-09 : Background

B: Budget Deficit as Projected for 2007-08

C: Budget and Constitution

D: Federal Budget 2007-08 : A Quantitative Review

E: Tax System: Public Perception

F: Suggested Strategic Initiatives for Federal Budget 2008-09

Founder Principal, Hailey College of Banking & Finance, Constituent College of the University of the Punjab, Lahore.

Member Governing Council, International Federation of Accountants (IFAC) (1997-2000)

President, South Asian Federation of Accountants (SAFA) (1997)

President, Institute of Cost and Management Accountants of Pakistan (1997-2000)

President, Association of Management Development Institutions of South Asia (AMDISA)

(1993-96)

Pro-Vice-Chancellor, University of the Punjab, Lahore (1994-1996)

Founder Director, Institute of Business Administration (IBA), University of the Punjab, Lahore

(1973-1996)

A: FEDERAL BUDGET 2008-2009 : BACKGROUND

IN SEARCH OF AN ECONOMIC SYSTEM

On July 01, 1948, while inaugurating State Bank of Pakistan, Quaid-e-Azam Muhammad Ali Jinnah, the father of Nation, said:

"In achieving our goal of creating a happy and contended people, we must work our destiny in our own way and present to the world an economic system based on the true Islamic Concept of equity of manhood and social justice".

We tried capitalism, later switched to socialism, them moved to mixed economy and are now talking about P3 (Public Private Partnership). We are in search of an economic system. A right direction will be to implement the guidelines provided by the father of nation who is often quoted by our top leadership for implementation of his thoughts.

CONTINUING LEGACIES

Major legacies which need proper handling are stated below:-

DEBT BURDEN

At present internal debt of Pakistan is over Rs.21 trillion. Based on past practice, no provision for return of principal is made in the annually announced federal budget. We need a sound and sustainable strategy to handle this difficult issue. The outstanding foreign debt of Pakistan is US $ 41 billion.

To our fortune several foreign debts have been liberally rescheduled. Some amounts have been written off. A sum of Rs.US $1.2 billion was repaid to Asian Development Bank earlier than its due date. A debt reduction strategy upto 2010 has also been announced. It is high time that we should, in the interest of establishing economic sovereignty, evolve a sound strategy to be self reliance and taper off the reliance on external assistance. Due to socio-economic of aid (non-returnable financial assistance) is on the constant decline to our country. Even Saudi Arabia, after permitting free oil facility after 9 / 11, withdrew it in 2004. Therefore, the crying need is to evolve directions for self-reliance, use of indigenous technology, austerity economics and determined will to live within our means.

DEFENCE IMPERATIVES

Geo-political compulsions put pressures on appropriate allocations to defence expenditure to defend the territorial integrity Pakistan. India, in their Union Budget for 2008-2009 has, in terms of Pak rupee allocated a sum of over Rs.1.50 trillion as compared to allocation of Pak Rs.275 billion for 2007-2008.

Nuclear deterrent is a positive factor for Pakistan, failing which we need huge money to match India's growing allocation for defence.

It is interesting to note that India is justifying its increasing allocation to defence with one object of becoming a regional power. Paradoxically, in a recent issue of Economist, London, India has been identified as a single country in the world with the highest Hunger in the world.

A thought for political leaders is a significant shift from "D" (Defence) to "D" (Development). Fortunately, due to announcement of confidence building measures, relations between India and Pakistan appear to be improving. A No-War Pact for twenty years between both the countries will be a bold step in the right direction.

PRIVATIZATION

The success story on economic front during 1960s was marred by 1965 war between Pakistan and India. Later due to social upheaval and political instability, East Pakistan became Bangladesh in December 1971. Later, large scale nationalization of industries, agro-based activities, Banks, Insurance, Oil Companies etc; the confidence of the private sector was shattered. During 1980s some efforts were made to denationalize the above activities and their attached economic units. During 1990s some efforts continued. Except for few profitable nationalized units, most of the same suffered huge losses. Consequently these are continuing as huge burden on the Federal Budget. For avoiding these losses and with a view to redefining the role of the Government, Privatization has been pursued as a conscious policy by the Government of Pakistan. During 2004-05, Privatization has been pursued vigorously. This trend will continue with greater temp.

It is high time that all investments be made through Stock Exchanges with credible degree of transparency and naked honesty to inspire confident in the public. Stakeholders need to be given a participative role to pave the way for smooth privatization. The interests of consumers and employees must always be given top priority.

AUTONOMOUS BODIES

A sizeable sum of ADP for 2007-08 was allocated for autonomous bodies. This amount has been allocated for WAPDA and National Highway Authority. It would be advisable for autonomous bodies to explore the possibilities of mobilizing resources for their development activities from reliance of other than the ADP. Suggested ones may include stock exchanges, build operate and transfer, build, operate, own and transfer etc. Innovative strategic initiatives may be undertaken.

POPULATION GROWTH

The rising trend of population growth needs to be put on the track of steep decline. In 1947, Pakistan's population was 32 million and this is 166 million now (in 2008). If the growth activities at this rate, the total population of Pakistan is likely to be significantly higher. Accordingly, considerable pressure will be put on the budgetary resources (recurring and development). Therefore, it is in fitness of things that population growth should be given strategic focus for steep decline.

POLITICAL UNCERTAINTIES

By Allah's grace, we are in transitory phase of moving to genuine democracy at national and provincial levels. District Government system is also firming up in its strong roots. The system is growing and the message is getting into the minds of outside world. It is the national duty of the Government in power and the opposition to strengthen the democratic roots to ensure a flourishing role of democracy in future. All differences must be resolved through continuous dialogue in the national interest to uplift the image of Pakistan.

Indeed this will have a positive impact on Pakistan, will attract foreign investment from Pakistan expatriates and foreign investors. Accordingly this will add strength to budget making in the country.

PLUNDER AND LOOT

As reported in the press, several persons, after plundering and looting the economic and financial wealth of Pakistan have taken money abroad. They need to respond to national needs and it is well advisable they should bring that money to Pakistan to add to the national exchequer and beef up resources of the Government to wipe out budget deficits, strengthen inflows of revenues, substantially reduce the internal and foreign debt and accelerate socio-economic development of the country. In the spirit of self accountability, positive response; as suggested above, ought to be evoked.

POVERTY

Based on Gini Index computed from the World Development Report 2008, Pakistan's Gini Index* is 41%. According to estimates of Economist, London of 2003, Thirty-Three (33%) percent of people live below poverty line in Pakistan. This posses a great challenges to give poverty alleviation in the short run and poverty elimination in the long run a high and top priority. The country is following a poverty reduction program. The stakeholders yearn for a fast track solution.

*This measures inequality of income on a scale of 10. The lower the index, the lesser is the inequality. The higher the index, the higher is the income inequality.

TAX EVASION

Tax avoidance under exemptions and facilities available under the tax laws is not illegal. However, tax evasion is illegal immoral and unethical. This has been having telling effect on the finances of the country.

Based on research study of Newsweek of 1997, underground economy is fairly large. There were only 1.4 million income tax payers in the country, GDP ratio to tax was 11% - one of the lowest in the World, two conspicuous groups which were not paying income tax included small businessmen and Oligarchs (wealthiest people), tax officials were also corrupt in general, one Karachi based lawyer paid more income tax than the elected parliament and corruption caused loss of more than 60% in tax revenue.

The following table presents the declaration of black money in Pakistan.

TABLE # A

DECLARATION OF BLACK MONEY

YEAR

BLACK MONEY DECLARED
(RS.MILLION)

PERTINENT COMMENTS

1958

1,350

Rs.1,120 million relates to areas which constituted the then West Pakistan.

1969

920

Rs. 780 million relates to areas which constituted the then West Pakistan.

1976

1,500

Rs.270 million was paid as tax on declared income by August 31, 1976.

1999

Tax Amnesty

1) Rs.10 billion was collected on truthful Scheme announced

disclosure of tax evaded assets on 10% on 15-12-1999 payment as tax.

2) No black money whitener schemes will be announced in future.

3) Immunities, protection and exemptions on existing investments, deposits, bonds, foreign currency accounts etc. will be fully honoured.

B: BUDGET DEFICIT AS PROJECTED FOR 2007-08

Several kinds of budget deficits are being talked about. Table "B" captures the position of three budget surplus / deficit, namely Primary Surplus, revenue budget deficit and overall budget deficit.

TABLE # B

BUDGET 2007-08 SURPLUS . DEFICIT

.

RS.b

RS.b

1) PRIMARY SURPLUS

Net Current Revenue

.

902

Less: Current Expenditure

. .

> Other Expenditure

367

> Defence

275

642

Primary Budget Surplus

.

260

2) REVENUE BUDGET DEFICIT

Current Expenditure

.

1079

Less: Net Current Revenue

.

902

Revenue Budget

.

177

3) OVERALL BUDGET DEFICIT

Financial Requirements

.

1,599

Less: Available Finance

.

902

Budget Deficit

.

697

C: BUDGET & CONSTITUTION

The Constitution of Pakistan 1973 has identified some vital issues relating to socio-economic matters. These can be addressed by the Government through undertaking innovative budgetary measures. There is a crying need for the Parliament of Pakistan to address these issues and add a golden Chapter to the socio-economic history of our country. A brief position in this respect is tabulated below:

TABLE # C

SELECTED ARTICLES FROM 1973 CONSTITUTION OF PAKISTAN

ARTICLE

FOCUS

3

Elimination of exploitation

18

Freedom of trade, business or profession.

37

Promotion of social justice and eradication of social evils.

38

Promotion of social and economic well being of the people.

D: FEDERAL BUDGET 2007-2008: A QUANTITATIVE REVIEW

A sum of Rs.1599 billion was needed for financing in the above. This consisted of Rs.1079 billion as current expenditure representing debt servicing 41%, other expenditure 34% and defence 25%.

An all time record ADP for Rs.520 billion was announced focusing two areas, namely federal government departments 71%, provincial government 29%.

Against the above net federal revenue of Rs.902 billion was available against current expenditure of Rs.1079 billion - leaving a shortfall of Rs.177 billion. A sum of Rs.258 billion was expected to be mobilized from external resources to finance ADP 2007-08.

A master chart (Table "D") has been prepared to capture the overall position indicated above.

TABLE # D

FEDERAL BUDGET 2007-08 AT A GLANCE

Particulars

Rs.b

%

A: FINANCIAL REQUIREMENTS

Current Expenditure

1079*

67

COMPOSITION

Rs.b.

%

1.Debt servicing

437

38

2. Other expenditure

367

35

3. Defence

275

27

 

1079*

100

Annual Development Plan

520

33

COMPOSITION

Rs.b.

%

1.Departments of Federal Government

370

71

2. Provincial ADPs

150

29

 

520

100

1,599

100

B: FINANCIAL RESOURCES AVAILABLE

Current Revenue

902

56

COMPOSITION

Rs.B.

%

1.Indirect Taxes

622*

45

2.Direct Taxes

408

30

3.Non-Tax Revenue

338

25

.

1,386

100

Less: Transfer to Provinces

Provinces

466

.

Net Federal revenue

Receipts

902

.

COMPOSITION

Rs.B.

%

1.Sales tax

375

60

2. Custom Duties

154

28

3. Federal

93

12

Excise etc

622*

100

C: Shortfall

697

44

1599

100

D: FINANCING PLAN

External Resources

258

37

Bank Borrowings

131

19

Self Financing of PSDPs by Provinces

123

18

Changes in Provincial Cash Balances

52

07

Privatization Proceeds

75

11

Cash Balances

58

08

 

697

100

E: TAX SYSTEM: PUBLIC PERCEPTION

Perceptions of Government, Tax Payers and the society are different. Some of the shared concerns by stakeholders are briefly reviewed below:

1) TAX RATES

Mrs. Indra Ghandi. Former Prime Minister of India, checked up during her tenure and it transpired that effective income tax rate was 97%. During the early days (1970s) of Late Zulfiqar Ali Bhutto, former Prime Minister of Pakistan, the effective income tax and Wealth Tax aggregated together was 100%. The public perception of income tax today is that rates are too high. These need to be reduced to try Lafers Curve application in Pakistan with strong backing of marketing strategies to ensure larger base of income tax payers with substantial increase in the amount of income tax as a significant contribution to the national exchequer.

2) DISCRETIONARY POWERS

Discretionary powers can be helpful if the tax officials attitude is positive and constructive. To ensure flexibility, these exist on Statute books on global basis. However, their misuse can create great problems. The issue is complex and needs to be properly addressed. However, the general perception of public is that discretionary power need to be reduced to bare minimum.

3) TAX PAYERS RECOGNITION

Public perception is that genuine tax payers are not being given the recognition which they deserve. At times, the Government had been announcing that positive measurers will be taken in this respect. However, this appears to be an agenda of the future.

4) INCOME TAX DEPARTMENT

The tax officials deserve a better deal in terms of remuneration for the services which they, under great stress and pressure, are rendering. Some are dead honest. Others are enjoying their life styles beyond their means. Income Tax return be reduced to one page. There is room for improvement for simplifying procedures. Qualitative aspects of on-going training programs need to be addressed. Institutional upgrading is needed to strengthen the frontiers of human resource development. Application of modern information technology is the crying need.

5) EXEMPTIONS

Except for pensioners and widows, all exemptions currently available under the Second Schedule annexed to the Income Tax Ordinance 2001 needs to be carefully reviewed and withdrawn. This will have healthy impact on income tax revenues and will also enable fuller participation of the people of Pakistan who are potential tax payers.

6) POTENTIAL ASSESSEES

The public perception is that there is a vast scope of potential income tax assesses who need to be brought into the net of income tax. These estimates are: FBR 3 million, various Chambers of Commerce and Industry 5 million, earlier governments 7 million. However a realistic number appears to 3 million. The Federal Board of Revenue needs full political support to tap the hitherto untapped vast net of income tax potential persons who have not bothered to deposit their income tax returns in the past.

Finance Supplementary Act 1997 contributed an excellent definition of an income tax assessee. The scope of treating persons as tax payer was well defined as under:

1) Telephone subscriber
2) Owner of a motor vehicle
3) Owner of a house or a residential plot of 250 sqr. Yards.
4) Foreign travel (except Haj / Umrah / Ziarat)

There is a need on market front to implement the spirit of the above to expand the base of income payers. The earlier this is done the better. Legislatitive changes to reincorporate the above provisions is the crying need of today. This will expand domestic resource mobilization.

F: SUGGESTED STRATEGIC INITIATIVES FOR FEDERAL BUDGET 2008-09

1) Domestic resources should be mobilized with quantum jumps in all sources of revenue. Some of these have been suggested earlier in this paper.

2) An all out effort should be made to rationalize expenditure and through using a doctrine materiality expenditure review should be undertaken and wherever possible expenditure reduction should be ensured. The Institute of Chartered Accountants of Pakistan and the Institute of Cost and Management Accountants of Pakistan be associated to accomplish this goal. It is suggested that an Expenditure Review Committee be set up to undertake the above exercise.

3) Indigenous approach to development programs be followed and expertise and technologies within the country be productively harnessed to accomplish the above goal.

4) Forward looking strategic initiative in the area of agriculture, industry and services sector be initiated to accelerate the socio- economic development of the country resulting in lowering poverty and creating more jobs.

5) A genuine self-reliant approach be undertaken to achieve economic sovereignty and fitting image in the comity of nations.

6) Common man concerns should be reflected in budget proposals - health, education, sanitation, inflation etc.

7) Alongwith the financial figures reflected in the budget, an Employment Budget giving an indication of number of jobs to be created arising out of the Government effort for creation of jobs through Annual Development Plan and other Government initiatives to be included in the above proposed Employment Budget.

8) The role of professional accountants be given due recognition and their productive association in the preparation of budget be given due emphasis.