Inflationary Burden of Taxes

Salman Ahmed Shaikh

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In the Budget 2024-25, the tax target has been raised to almost Rs 13 trillion while subsidies and exemptions have been slashed. At the same time, public monopolies in Pakistan continue to raise gas and electricity tariffs. Formal corporate businesses in manufacturing sector are becoming uncompetitive under heavy taxation and tight monetary policy.

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The formal sector is in a further disadvantageous position. Even though, tax measures are introduced in real sector to discourage short term holding and frequent sale for capital gain, there are no clear incentives to ensure that the capital is shifted towards the productive and industrial sectors of the economy. As a result, it is feared that people may shift their savings and capital to outside of Pakistan.

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While there is talk on bringing ease of doing business, there is no decrease in taxes in fiscal policy and interest rate in monetary policy. Result is decline in competitiveness, export demand, foreign direct investment and lackluster response in privatization. There has been a slight decrease in interest rate to 20.5%, but it is still not enough to bring improvement in gross fixed capital formation. Regionally, Pakistan has one of the lowest investment to GDP ratio, i.e. 13%.

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Despite huge burden of taxes in this budget, 75% of all tax revenues will just go in paying interest on and instalments of previous debt. Last year, government spent around Rs 400 billion in PSDP. Spending every year in PSDP falls short of announcement. This Rs 400 billion is less than even 5% of what we will pay in debt servicing and less than 20% of what we will spend in defense.

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PSDP allocation and spending is not directly reflecting spending on services either. Rather, it is earmarked for different divisions and first and foremost, it is used up in the salaries, administration and operating expenses. Heads of allocation also do not reflect direct connection with human development. For instance, funds in PSDP are earmarked for cabinet division, defense division, defense production division, religion and interfaith harmony, inter provincial coordination, railways, maritime, narcotics, interior division, information and broadcasting division etc.

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Federal net revenue receipts are only enough to cover interest payments. Pensions, civil government and defense are not coverable through net revenue receipts after that. Now, we pay more in pensions than to run civil government.

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Still, there is no focus on privatization. Almost all borrowing is going to be at market rate. By keeping high interest rate, government is burdening itself and by raising taxes, it will remain constrained to control inflation and kick start sustainable economic recovery.

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Austerity is invisible as expenditures are budgeted to increase by 25%, mainly in the head of debt servicing, defense and pensions. Budget for recreation, culture and religion (Rs 18.46 billion) is more than law courts (Rs 13.60 billion) and environment protection (Rs 7.2 billion) while just a little less than health (Rs 28.17 billion) and housing (Rs 27.91 billion).

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Even though, health and education are provincial matters, but whatever budget is allocated usually from the federal pool, it has also been kept at virtually the same absolute amount this time compared to last year. Budget for education and health adjusting for inflation has declined in real terms and also as a proportion of the total budget outlay.

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For sustainable economic development, health, education and climate change are most important. There is almost no discussion in the budget about these important issues. There is no commitment to reforms and efficient utilization of resources.

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With trust deficit between the government and public, there was scope of enhancing public private partnerships, especially in the health and education sector. But, there is hardly any focus on that. Just like private savings, the pro-social spending by overseas Pakistanis could be leveraged in remittances through public private partnerships.

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On energy, we are unable to utilize surplus generation and fix distribution losses. There is need to bring private sector and move focus from generation to distribution. It is important to get measure of the critical nature of multiple crises rather than relying on short-sighted populism in a fire-fighting survival mode.

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Even the skilled workers are looking for opportunities abroad given the security threats, weak enforcement of laws, intolerance, deteriorated quality of life, high cost of utilities, and unresponsive public services and governance. They can afford to go and settle abroad with family and they are likely to do so given the deteriorated socio-economic situation in the country. Not only this will reduce productivity and tax collection from them, but also remittances as they are settling permanently and may no longer be interested in Pakistan’s real estate and narrow capital market with the rise in taxes and depreciation of currency.?

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Going forward, it is important to ensure prudence in allocation and spending. Both time and money are scarce. Structural reforms in energy, taxation, governance and public services require consistent long-term policy focus with political will and consensus and which is only possible with political stability.