Looking for a reformist budget

A trader counts Pakistani rupee notes at a currency exchange booth in Peshawar, Pakistan on December 3, 2018. — Reuters

HERE’S the good news: the contours of a reformist budget for Pakistan are clear to many of us. The better news is that we have penned down or spoken about it quite clearly on many occasions.

Intrinsically, this makes reform-oriented budgeting a little easier for the authorities. Hopefully, they will use this opportunity and lay down before parliament a budget document demonstrating their intent to resolve the entrenched fault lines on the revenue and expenditure sides.

Budget 2025 cannot be a run-of-the-mill document for so many reasons. First, it comes at the back of record fiscal deficits fuelling debt and inflation in Pakistan. Second, it will set the tone for the incumbent government’s expected economic management over the next few years. Third, it has to ensure the prerequisites for engagement with the International Monetary Fund (IMF) are fully in place.

Fourth, it has to cement the nascent macro stability and set the stage for sustainable growth. Fifth, it has to affirm the implementation of the 18th Amendment by confining the federal government’s role. Sixth, it has to make expenditure reforms a reality, showing beyond a shadow of doubt that every paisa taken from the citizens in taxes is being utilised for productive use in the country.

Seventh, the upcoming budget has to make a stride rather than take baby steps towards an efficient, and easy-to-work-with tax system. A truly reform-minded budget can give the 240 million Pakistanis a glimmer of hope.

Our cardinal policy errors have left the country in a perennially low tax-to-GDP at 10%. The tax collection of lower middle-income countries tends to be around 17% of GDP — the group in which Pakistan falls. There is no more time left for Pakistan to waste.

The fundamental element of a well-articulated budget strategy is a tax-policy agreement with those holding power to reconfigure tax policy, based on a fair and equitable domestic revenue mobilisation. This is a crucial task for the budget makers. They must convince the elite of the existing tax gaps and the need to create progressivity in the system.

Authorities must not fear taking on vested interests if a reformist budget is jeopardised. This will give room to make headway on policy and compliance gaps in our tax structure. Local practitioners have highlighted weaknesses in the areas of compliance and enforcement which must be overcome.

Our friends at the IMF follow an approach of well-researched agendas, discussed and formulated by several professionals. The IMF has conducted at least two tax assessments of Pakistan — one in September 2021 using the Tax Administration Diagnostic Assessment tool and another more recent evaluation in early 2024. Pakistan authorities are well aware of the results, including the shortcomings in tax equity and efficiency in administrative and policy areas.

There is a certain discomfort in the country regarding proposals for raising the sales tax rate, additional taxes on salaried class, introduction of tax on pensions, increase in excise duty and more transactional taxes to push for a highly challenging tax target nearing Rs12.9 trillion. All largely based on results from IMF assessments.

Tax expenditures form 24% of tax collected and need to be rationalised. In this regard, as an example, eliminating zero-rating on everything except for exports makes sense. Keeping essentials including food, pharmaceuticals and social services exempted also makes sense. The rest of the exemptions should be studied and an agreement reached with the IMF on their elimination. How difficult is that?

The need for a higher tax collection has made it crucial for the authorities to propose aggressive policy reforms. These must push direct taxation including inheritance tax, broadening of the base through retailers, provincial taxation including agriculture income tax, and a retention of some concessions based on serious economic benefits.

All incomes are not taxed equally, with special treatments for different sectors. A proper capital gains tax on real estate irrespective of the holding period at 20% and rental income to be merged with other incomes for tax purposes must form part of budget proposals. The authorities can publish a policy note highlighting avenues for additional revenues based on credible economic modelling and analysis, to convince the IMF.

Tragically, the conversion of GST into a modern VAT has been pending for over a decade. The separation of responsibilities for the sales tax on services and goods, that are usually part of the same value chain, continues to cause confusion and distortions. One would like to see some direction on implementation of VAT and some reference to the way forward on the NFC Award.

There is certainly much more room for reform on the expenditure side beyond the usual focus on estimated growth of current and development spending. The potential for savings of over 1% of GDP through expenditure reforms has been highlighted by recent research.

Unequivocal moves on targeting and removal of subsidies, devolution of current and development spending, pensions reforms, SOE reforms, functionality of a Treasury Single Account, and rethink of development spending based on return of investment are some reform-minded ideas that should hopefully show up in the budget document.

Pakistan’s fiscal policies have, by commission or omission, shaped an inefficient economic structure. It is time to acknowledge how unreasonable rules of the game, wasteful public expenditures, unfair taxes, and explicit industrial benefits to the old-guard businesses have shaped perverse incentives. It is Pakistan’s time to reimagine the way we conduct budgetary planning.

A reformist Budget 2025 would hope to create a delicate balance between fiscal prudence, policy reforms, adequate social protection, and sustainable growth while managing critical challenges in public finance management, and debt sustainability.

The writer is former adviser, Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at: [email protected]

Disclaimer: The viewpoints expressed in this piece are the writer’s own and don’t necessarily reflect’s editorial policy.

Originally published in The News

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