FANTASISING PRO-POOR BUDGET

SHAMIM RIZVI
(feedback@pgeconomist.com)

May 24 - 30, 2010

The budget (2010-11) making exercise is in the final stages as it is likely to be placed before the National Assembly during the second week of June 2010.

As per routine the Prime Minister has directed his economic manager that the coming budget should be a pro-poor, without perhaps fully comprehending the ground realities.

According to the independent economists and observers the situation appears bleak. Even some of those government experts involved in the budget making share this view. They are of the opinion that budget making this year is the toughest exercise of their life and they apprehend that the economy could get off the track anytime due to vulnerabilities such as rising inflation, deficits and security.

Apparently, however, Dr Hafeez Sheikh under whose supervision and guidance the coming budget is being prepared seems composed as he said. "We have variety of options at hand including yet another programme of International Monetary Fund (IMF). I agree that there are difficulties, but the economy has achieved the stability and henceforth it is poised to recover." He said this during his first interaction with the media after becoming Prime Minister's Advisor on Finance, Revenues and Economic Affairs out of the entire lot of the so called IMF brand economic managers. Dr Sheikh has come up as Finance Minister who is highly in favour of IMF support to Pakistan. Addressing newsmen he said "you perhaps don't know that there is an article (No 4) in the UN Charter that requires every country to go to IMF once a year even if it does not need any financing. It is a concept of checkup of economy just like you go for medical checkup even if you are not suffering from any disease. Therefore, there is no harm in availing a programme of the IMF."

The Financial Advisor to the Prime Minister, however, evaded a question asked by a newsman that was it possible to have a pro-poor budget under harsh conditionalities of the IMF for which his boss the Prime Minister appeared so keen.

Under the present standby arrangement, the IMF pressured the government to culminate all kind of subsidies meant to provide some relief to the common man resulting in soaring inflation. High cost of fuel and electricity has added to the cost of every thing. With constantly slashing expenditure on social sector we have added fuel to growing poverty. Now they are asking for across the board imposition of value added tax (VAT) as a precondition to extend the standby arrangements. If the government agrees to imposition of VAT to increase the revenue generation as per the demand of IMF, it would result into a fresh wave of inflation under which about 70 per cent of population living at a 2 dollar a day income level cannot survive. IMF is not concerned how its conditionalities would affect the poor masses. Surprisingly neither the economic managers of the country nor the IMF has ever suggested that for more revenues fabulous income of big land lards should also be brought under tax net. The former finance advisor Shaukat Tarin had once suggested last year that all types of income including income from agriculture sector should be brought into tax net. As Pakistan's National Assembly and the Senate are dominated by big landlords they out rightly rejected the proposal and managed to pass a resolution by the NA that income from agriculture would not be brought into tax net.

One cannot dispute the contention of IMF that Pakistan's revenue generation is by all means low and only a small percentage of population is paying taxes when in fact hundred of thousands are financially capable of paying. Tax evasion should be dealt with an iron hand. Rampant corruption in the taxation department is helping the huge tax evasion. Tax to GDP ratio in Pakistan is the lowest in the region.

The coming budget estimates a fiscal deficit of Rs992 billion for the fiscal year 2010-11 with an estimated public sector development programme (PDSP) of about Rs250 to 300 billion - almost equal to current year despite imposition of VAT from July 1, which is being vehemently opposed by the business community. According to them this would result in high prices of their product and thereby the sale volume would drop considerably. VAT would shove even further the high price level and this would make the end consumer bear the burden. Revenue generation target from VAT would not be realised because of the fall in the sales volume.

The government needs to review its overall fiscal management with of focus on increasing tax-to-GDP ratio, reducing tax evasion and corruption in the Federal Board of Revenue which according to an estimate amounts to Rs500 billion, bring income from agriculture into tax forthwith and curtail none-development expenditure. The upcoming budget under the new Advisor to Prime Minister would be crucial to improve macro-economic conditions to a satisfactory level.

Prominent economist, financial experts, political leaders and intellectuals who participated in the pre-budget seminar arranged by the Nawa-i-Waqt group on Saturday last were of almost unanimous view that the government should cut its non-development expenditure. Opposing imposition of VAT they said that it may not add to revenue generation as expected by the government. Instead it would create huge inflation. They demanded that the income from agriculture should be brought into tax net and the rich class should be taxed rather than the poor. Corruption must be eliminated and special measure be taken to check tax evasion. Above all the speakers unanimously urged the government to take austerity measures at the highest level.