Am I painting a bleak picture?

A disastrous fiscal policy!

Growing gap between collection and spending is worrisome. If you look at the previous budgets we have had over the years. You will be stunned because of the significant changes for the worse. Not only just the deficit increasing but also lesser amount available for social welfare notably for education and health. Debt servicing is the single most contributing factor in this whole budget deficit phenomenon. It almost consists of 25% (on average) of the whole budget, left behind a smaller pie for the welfare of its 200 million inhabitants.

Forget about the fairy tale of ‘balanced budget’ for decades if the same allocation of budget continues… Priorities are not right from day one; consequently, they left us scratching our heads. Fiscal discipline is what requires at this point in time. If we look at the revenue side of the picture, tax collection is seriously hampered due to leakages, complex procedural collection mechanism and lack of political credibility of past Governments precisely. The tax to GDP ratio is around 9-10%, it should be around 18-20%. Direct to Indirect tax ratio is 40:60 that ought to be the other way around. More and more taxes are imposed on current taxpayers instead of extending a tax net by including new tax payers into it. A large unemployed workforce should have been inducted into mega projects like CPEC by providing vocational training to skilled and unskilled workers in order to reap the fruits of mega projects and to curtail unemployment to some extent. Moreover, Crowding out effect is another alarming issue in our economy where often very less amount is available for micro financing to private sector/young entrepreneur/businesses because the major chunk is absorbed by the government due to its extravagant spending (domestic debt).

The defense budget is high i.e. 12-15% (of total budget) on average but it is justifiable in such a terrorism-ridden circumstance, Nevertheless, it should be further curtailed by intelligent diplomacy. Devaluation of currency makes harder and harder to fill the deficit gap as the majority of the capital goods have been imported from abroad. However, exports are getting cheaper and cheaper but it didn’t enhance our exports in a long run as it supposed to be. It requires discovery of new exportable articles, continuous innovation and value addition rather than to rely on same conventional textile, leather, and other perishable products to boost the exports, the Service sector has not been performing well for ages. At the cost of brain drain on an epic scale, overseas Pakistanis contribute a lion’s share around 19-20 billion annually in the form of remittances only and they’ve been desperately waiting for concrete steps to be taken by the Government to make investment-conducive environment for them to invest more in other sectors especially that generates employment opportunities. Meanwhile, they’re relying on Real estate sector which causes skyrocketing prices in real estate sector.

A double-digit capital gain tax on capital market profits makes it less lucrative to invest in. Moreover, it diverted a private sector especially household investment towards stagnant investing arenas like real estate. In nutshell, the governments have been imposing taxes on risk takers and incentivize the risk-free investments i.e. Real estate. Irrespective of the revenue streams via which people make money, every income should be taxed to boost direct taxation and ensure that the fat cats pay their fair share in the economy. It has direct linkage with the welfare (education & health) budget. Tax evaders must be forced to contribute their fair share and cannot be allowed to get away with it but Government’s credibility remained questionable because of back to back corruption scandals that make it really hard to convince the general public to pay taxes especially direct taxes. Without investing in Human development/capital, there is no way out from this vicious circle until the serious budget/fiscal policy reforms will be initiated, consulted, publicised and implemented while ensuring overall transparency.  

Twitter: @Salmanshah_syed