Averting fiscal disaster – Dr Ikramul Haq

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The coalition government of the Pakistan Tehreek-e-Insaf (PTI) is facing fiscal disaster as evident from Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, released on May 6, 2021 by the Ministry of Finance, for the first nine months of the current fiscal year. It shows that 37 percent of defence spending is now funded by borrowing. This is a very serious matter but remains unnoticed. It has national security repercussions if remedial measures are not taken.

The total debt and liabilities reached 94 percent of GDP. The impact of mindless borrowing and reckless spending resulted in fiscal deficit of Rs 1.652 trillion in first nine months of the current fiscal year that is 3.6 percent of GDP. Nobody in official quarters has yet highlighted it what to speak of devising a strategy how to deal with debt servicing surged to 62 percent of total revenues (tax and non-tax) of the federal government. It should be kept in mind that Pakistan is enjoying waiver of foreign debt servicing under G20 to which it owed US$ 25.4 billion as on August 31, 2020. Had debt servicing on it was not suspended, the situation would have been totally disastrous. It should also be kept in view that our external debt servicing will remain over US$ 10 billion in the next two years.

Total tax revenue collection by Federal Board of Revenue (FBR) from July 2020 to March 2021 was Rs. 3.4 trillion and after transferring shares to provinces under 7th National Finance Commission (NFC) Award (Rs. 1986 billion), the net available to federal Government from tax (Rs. 1408 billion) and non-tax revenue (Rs. 1145 billion) was Rs. 2.6 trillion that could not even meet the two major heads, debt servicing (Rs. 2103 billion: domestic Rs. 1933 billion and foreign Rs. 170 billion) and defence (Rs. 784 billion). It means that even defence expenditure of Rs. 287 billion was funded by borrowing.

Punjab is the most populous [110 million people] province of Pakistan with largest resources and budget size after the Federal Government and beneficiary of lion’s share from NFC Award. From July 2020 to March 2021, it received Rs. 973 billion from the Federal Government and collected only Rs. 168 billion of taxes at its own. For this period the total expenditure of Punjab was Rs. 946 billion. For the last many years, performance of Punjab in tax collection has been much below its real potential details of which are available at the website of Federal Ministry of Finance: http://www.finance.gov.pk/fiscal_main.html. Performance of Punjab under the coalition government of PTI is quite appalling. In the first three quarters of 2020-21, Punjab collected Rs. 104 billion from sales tax on services (regressive indirect tax). The only progressive tax on rich and mighty absentee landlords sitting in the Punjab Assembly—Agricultural Income Tax (AIT)—is not even reported separately in the Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21. After mentioning all tax items [sales tax on services Rs. 104 billion, excise duty (Rs. 1.8 billion), stamp duty (Rs. 28 billion), motor vehicle tax (Rs. 11 billion)], “others” are mentioned at Rs. 24 billion (including AIT but not mentioning its exact figure).

People are suffering due to Covid-19, yet the provinces — instead of meeting their needs — are indicating surpluses at the behest of the government to show less fiscal deficit

In the wake of Constitution (Eighteenth Amendment) Act, 2010, [commonly called “18th Amendment”], progressive taxes e.g. estate duty (also known as inheritance tax), wealth tax and capital gain tax on immovable property, and gift tax etc. are with the provinces, but the Punjab like other provinces, has shown no interest in the last 10 years in levying these taxes to reduce fiscal deficit so that our reliance on domestic and foreign debts could decrease. The total share (Rs. 370 billion) of all provinces in total tax collection (Rs. 3769 billion) of Pakistan is 9.8%.

The position of other provinces from July 2020 to March 2021 of total revenues (tax and non-tax), expenditure and share under NFC Award is as under:

* Sindh government spent Rs. 617 billion against total revenues of Rs. 684 billion, out of which Rs. 494 billion received under NFC Award and it collected taxes of Rs. 163 billion that is only Rs. 5 billion less than Punjab.

* Government of Khyber Pakhtunkhwa incurred total expenditure of Rs. 445 billion against total revenues of Rs. 480 billion (tax only Rs. 24 billion). It received Rs. 320 billion received under the NFC Award.

* The total revenue of Balochistan was Rs. 230 billion out of which Rs. 199 billion received under NFC Award and taxation of Rs. 15 billion. The total expenditure was of Rs. 164 billion.

The above shows heavy dependence of all provinces on share from NFC Award. None of the provinces has shown any will to tax the rich and mighty classes through progressive taxes transferred under the 18th Amendment. The purpose of devolution of health, education, agriculture, labour welfare etc. was to look after the needs of citizens at grass root level. However, not a single province devolved political, financial and administrative powers to local governments under Article 140 of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. The fundamental right under Article 25A: “The State shall provide free and compulsory education to all children of the age of five to sixteen years”, remains unfulfilled after two decades.

The position of healthcare, civic amenities, improving infrastructure, ensuring social mobility, alleviating poverty and spending adequately on human resource, especially in IT sector to contribute towards export-led growth, is highly pathetic. Agriculture sector is neglected to the extent that the country is spending millions of dollar to import wheat, sugar and cotton that we once exported after meeting our needs. The prices of commodities used by citizens are skyrocketed.

The rich agriculturist lobby and crony capitalist control the provincial assemblies. Welfare of farmers and labourers is merely on paper or verbal, to get votes. The urban centres in all the provinces present nightmarish conditions as millions are living in sub-human conditions. It is simply shocking that when people are in need due to covid-19 deadly third wave, the provinces instead of meeting their needs are showing surplus on the command of the Federal Government to show less fiscal deficit. Shameless, Punjab showed surplus of Rs. 67 billion, Sindh and both Khyber-Pakhtunkhwa and Balochistan Rs. 66 billion each.

In the wake of Eighteenth Amendment, the fiscal management, both at federal and provincial levels needs fresh thinking. The federal government, having all buoyant and broad-based taxes is not tapping the real tax potential even though the country is heavily indebted. On the other hand, provinces, which are almost entirely dependent on the NFC Award, have failed to raise their own sufficient resources for increasing needs of the ever-growing population. The solutions are suggested in PIDE Reform Agenda for Accelerated and Sustained Growth (April 2021), ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, December 2020, available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/), Tax Reforms in Pakistan: Historic & Critical View, (PIDE, 2020) but the policymakers and legislators are least pushed for reforms and growth and busy fighting each other for their own interest.