FEDERAL BUDGET 2008-09
PROF. DR. KHAWAJA AMJAD SAEED*
July 21 - 27, 2008
Federal Budget 2008-09 has already being passed by the parliament and the honorable President of Pakistan has already assented to the Finance Act 2008. However, outcry against it continues. Strikes have been in the offing. Threats for future strikes continue to be the decoration of print media. Business community appears unsatisfied. Fixed income group was given 20% raise but it appears to have been washed out by the rise of inflation. In a survey of global inflation, Pakistan ranks number two (18% in May 2008), only behind Vensuala (26%) as reported in a recent survey included in India Today. The data relating to inflation released on July 11, 2008 by Federal Statistical Bureau is an eye opener. Inflation Monitor released on monthly basis by the State Bank of Pakistan continues to present monthly analysis of inflation. It is a pity that private sector does not have even one credible institution issuing inflation figures on monthly basis as an independent check on data relating to inflation released by government sources. We wish this commitment is demonstrated by private sector at the earliest.
Inflation is a global phenomena. In recent years two major international factors have contributed a lot in fuelling inflation. The first one is the price of crude oil which has now touched over US$140 per barrel in New York. One wonders why the cartel in New York is skyrocketing the above price to the financial detriment of developing countries. Why OPEC is not pushing the supply side to bring in an appropriate match between supply and demand?
A positive and prompt action on the part of OECP can halt the price spiral of crude oil and put some check on the cartel at New York. Moreover, developing countries must give their first priority to hitting the oil on their sovereign soils through financial re engineering. Conservation of the use of oil is the crying need of today. If one were to ask: What is the most singular cause of inflation in today's world the answer is skyrocketing price of crude oil. The second major cause is significant rise in food prices on global basis. These two major international factors have produced adverse impact on inflation in Pakistan. It is generally believed that Central Banks of a country are responsible for containing inflation. However, fifty three persons who attended World Economic Forum 2008 in Davos were of the opinion that central banks have, generally speaking, failed to control inflation. No wonder, the Governor of State Bank of Pakistan, while recently announcing Interim Monetary Statement stated that the following two more actions needed to be taken:
1. State Intervention-presumably against hoarders.
2. Strengthening supply side.
Common man has been terribly hit by inflation. Solutions will take time to tackle the menace of inflation.
BUDGETARY STRUCTURAL ISSUES
The following strategic directions need immediate attention by the federal government:
1. ENVIRONMENT SUPPORT
Fiscal Policy brain lies with Federal Board of Revenue (FBR). The democratic set up needs to extend full support to them to clearly conceive fiscal policy by following four Canons of Taxation of Adam Smith and translate these in reality with transparency and fairness. The golden principle of taxation for all above the threshold prescribed by the Parliament be enforced without any exception. The five Es of the ruling/serving Government of Pakistan ought to reflect all the above in their real life operations. These Es include Education, Employment, Equity, Energy, Environment.
The government has done well to taper off some of the exemptions allowed under the Second Schedule of the Income Tax Ordinance 2001. In view of resource constraints, a clear cut plan of withdrawing exemptions be prepared and implemented to ensure substantial increase in the revenues.
3. EXPAND REVENUE BASE
Two niches need to be tried for a break through effort in expanding revenue base. These include the following:
a. Income Tax
At present total population of Pakistan is 162 million out of which 1.6 million file their income tax returns. There is a need to develop tax culture to pave the way for 5.0 million income tax returns to be filed, although some believe that there is a potential of 7.2 million. Stakeholders consultation would be helpful and Stock Exchanges, Trade Association, Chambers of Commerce etc. can play a productive role synergy needs to be creating in this respects and indeed productive results will follow.
b. Sales Tax
A war footing effort is needed to increase registered sales tax persons. It is generally believed that as against the present number of 53,000 the potential is more than three times. Concerted Marketing efforts are needed to achieve the above suggested target so that potential can be harnessed to the advantage for the federal revenue exchequer.
4. EXPENDITURE RATIONALIZATION
a. The announcement of the Prime Minister of Pakistan to reduce his office expenditure by 40% is a welcome step. All other Ministries/Divisions of Federal Government should literally follow this spirit and ensure substantial reduction on non-salary expenditure headings.
b. The size of the Federal Government be reduced in the light of announcement of the honorable Prime Minister of Pakistan by transferring various Ministries/Divisions to provinces by reviewing the concurrent list.
5. TRANSFER TO PROVINCES
Currently Interim Award governs the distribution of Federal Revenues to Provinces. The democratic government has announced that National Finance Commission will be shortly set up to review the distribution formula. In this respect, the following humble suggestions be given due considerations:
a. Seventy (70) percent of federal revenue be distributed to all the four provinces on the basis of their respective population.
b. The remaining thirty (30) percentage be distributed as suggested below:
* Area basis of each province (15%).
* Other considerations e.g, underdeveloped areas, sectors requiring special attention etc. (15%).
6. DEVELOPMENT EXPENDITURE
It is high time for Federal Government to develop a three year plan to ensure 50:50 allocation of ADP to federation and provinces. This is the crying need to strengthen federation and help develop cordial and harmonious relation for restoring the much demanded provincial autonomy on financial front. Moreover autonomous bodies (Wapda and NHA) should test their financial muscles on sources other than ADP. The consequential savings be allocated for social sector. Financial Accountability for judicious and appropriate use of expenditure be ensured through strict audit and monitoring. Competent project managers be appointed for completion of projects on time and with no cost overruns.
Modern techniques such CPM, PERT etc. be effectively used to avoid time and cost over runs. Self reliant approach be followed to finance ADP. Rather than generating a projected deficit of Rs. 382 billion in revenue budget 2008-09, solid steps need to be undertaken to ensure generation of sufficient surplus for financing ADP. Moreover heavy reliance on foreign assistance (Rs. 300b) and on bank borrowings (Rs. 149 b) require active and due attention.
It is high time that the democratic set up should seriously address the forgoing issues and develop a sound strategy to evolve a framework to handle the foregoing issues to ensure development of sound budgeting to the advantage of Pakistan, failing which our economic sovereignty will continue to weaken to our detriment. The earlier this is done, the better.