Finance Minister Muhammad Aurangzeb is expected to present the Finance Bill 2025-26 in the National Assembly tomorrow (Tuesday). Much has been said in the lead-up to the big day; the finance minister has pledged to introduce “bold measures” to steer the national economy in a strategic direction, while the International Monetary Fund (IMF) has stressed the need for tight expenditure controls to ensure sustainable debt servicing.

Meanwhile, the government has decided to cut allocations for almost all sectors, barring a rise in road building schemes and no changes to parliamentarians’ schemes.

Asad Umar — Finance Minister [Aug 2018 - April 2019]

During the last 10 years, the fiscal deficit has averaged more than 6 per cent of the gross domestic product (GDP). These heavy deficits running over a long period of time have landed Pakistan in a classic debt trap. Not only are we borrowing to repay loans, we are also borrowing to pay the interest on these loans.

The fundamental question for the government at this point is: how to increase the revenue and what expenditures to cut. No government, whether military, civilian or hybrid, has been able to expand the tax net by fairly taxing severely under-taxed sectors such as retail. Similarly, the many efforts to identify big tax evaders and money launderers and collect their due share of tax have failed. This budget must include implementation measures using the legislation enacted in the last few years regarding the sharing of information on lifestyle, asset ownership and benami (fictitious) properties. We must shut down the biggest loophole in the form of real estate being used to hide wealth by the severe under-recording of transaction prices.

This budget must lay the foundation for a structural shift. Last year’s budget placed a crushing burden on the salaried class. This budget must include a reversal of that unfair taxation. We have also now taken taxation on the documented economy to a level where it has become counterproductive. This is one of the reasons why we have seen unprecedented wealth outflows in recent years. We must now look at the beginning of a reduction in these tax rates.

The federal expenditure is dominated by interest payments, which are now more than four times the defence expenditure. This is the result of massive accumulated deficits and curtailment of low-cost external financing. Ten years ago, for instance, the deficit was financed through 40pc external finance, 40pc domestic banks and 20pc domestic non-banks. Last year, almost the entire deficit was financed by domestic banks, with external financing down to only 3pc.

This 800-pound gorilla in the fiscal room, à la interest payments, has to be dealt with on a priority basis. A mere curtailment in deficits, though necessary, will not be sufficient. Debt restructuring, which protects the financial stability of the banking system and creates fiscal space, has become absolutely essential.

Our growth rates are low and decreasing further. The GDP growth rate, which averaged around 7pc in the mid-80s, stood at 3.5pc in the last 10 years and a meagre 1.6pc in the last three years. One reason is the cut in development spending from 7pc of the GDP to a mere 2pc, to contain the fiscal deficit.

Poor and inconsistent macroeconomic policies, which led to recurring external shocks and the economy having to go into a demand compression mode every few years, have been largely to blame. The exchange rate management and trade taxation policies have had a long-term anti-export bias, putting the brakes on exports becoming an engine of growth.

However, equally important is the lack of any kind of meaningful and long-term growth strategy. Macroeconomic stability is a necessary but an insufficient condition for sustained growth. Our economic structure is low value-added and static. Unless we produce products and services of increasing complexity and value, we will be unable to compete in the global market and generate a sustainable and non-inflationary growth momentum.

In the first two decades of this century, Pakistan’s economic structure remained virtually unchanged. Vietnam, on the other hand, saw a dramatic rise in the complexity index, indicating a marked shift to more sophisticated products. As a result, during this period, Vietnam’s exports grew at a rate almost six times higher than Pakistan’s.

This budget must lay the foundation for this structural shift. We must break out of this low-value-added trap that the economy is in. Growth engines must be tradables, have high job intensity, be globally competitive and help move to higher value. The fiscal and non-fiscal incentives, skill development, pursuit of foreign direct investment and all other government policies and actions must be aligned with this strategy.

To meet the immediate need for growth, barring huge external deficits, it is essential to focus on measures to help farmers. One of the key reasons for the extremely weak growth in the current fiscal year is the terrible state of agriculture. Farmers have suffered terribly due to multiple factors, and the budget must address some of these, including a close look at farm input costs, which have gone up drastically.

Miftah Ismail — Finance Minister [April 2022 - September 2022]

The Pakistani government’s fiscal or budget policy suffers from two fundamental structural issues and two political issues that render our budgets both anti-growth and anti-middle class.

The first structural issue comes from constitutional provisions that don’t allow the federal government to tax agricultural income, while it can tax all other types of income or property. These provisions together give the rich a means to evade income taxes and also keep their wealth out of the tax net, perpetuating income inequality in the country.

The second structural issue is the sharing of about 60pc of federal taxes with provinces. Given that provinces are awash in cash and have surpluses most years, and given that the federal government is running huge deficits, a change in the National Finance Commission (NFC) is particularly warranted. This will reduce the overall tax burden on citizens and also allow Pakistan to achieve economic growth, something we have not really seen in two decades.

The NFC refers to the National Finance Commission, a constitutional body mandated to determine how the federal government distributes financial resources (taxes, grants, etc.) to the provinces.

This year, the total taxes collected by the Federal Board of Revenue will be Rs12,000 billion, and yet, the budget deficit will amount to approximately Rs8,500bn. Now, to balance the budget, the FBR wouldn’t just have to raise an additional Rs8,500bn. It would in fact have to raise an additional Rs14,500bn, because 60pc of the FBR revenue goes to the provinces. We are talking about taxes totalling Rs26,500bn or 22.5pc of the GDP, which is substantially higher than the US federal government tax-to-GDP ratio of 16pc and more than our current taxes.

Hence, the possibility of substantially reducing the deficit under the current NFC award is remote.

But why do we need to balance the budget anyway? Why not just keep borrowing? Well, it turns out that when the government borrows money to finance the deficit, the preferred method is to borrow from the private sector. But since our private sector’s savings are less than the investments, it is unable to finance the government’s deficit. Therefore, the government has to print money or borrow from foreign sources, which means that we keep running a perpetual current account deficit (if we borrow from foreigners) and/or end up with a depreciated currency and high inflation (if we print money).

Therefore, as long as we have a large budget deficit, our country will not be able to post high growth rates. We have seen this since 2010, and especially in the last three years, when the per capita income of Pakistanis decreased.

As stated above, there are also two political problems with our fiscal policy. The first being that we are unwilling to tax the wealthy and happy to shift the burden onto the middle class. For instance, we tax people with a monthly salary of only Rs50,000, while agricultural landlords are exempt from taxes. Either that, or we are eager to tax, say, a small weaving unit — the backbone of our textile export — but lack the courage to tax large estates and properties.

Even our taxes on goods such as sales tax, excise tax, and customs duties disproportionately affect the poor and the middle class.

The second political problem is that our tax and tariff codes are solely focused on raising revenues, lacking consideration of their economic damages; think of the 38.5pc tax rate on salaried incomes. This policy is either forcing people to migrate out of Pakistan or to cheat on taxes.

On the other hand, there is the super tax of 10pc on the income of exporters. This is the government telling firms that if you export and earn more, we will penalise you with a 10pc super tax. In a similar vein, customs duties or sales tax are imposed on the import of solar cells, but the same is nowhere to be seen on finished solar panels. These are all counterproductive steps that should be fixed in the upcoming budget.

Moreover, the recent escalation with India has brought home the point that we need a well-financed defence sector that can ensure a credible yet conventional deterrent against the neighbour. This means our armed forces would require more resources. To finance this, I would like to see a substantial reduction in federal and provincial “development” spending, from this year’s Rs2,500bn to no more than Rs1,300bn next year. The Rs1,200bn in savings can then be used to increase defence spending and provide much-needed relief to both the salaried class and the very poor.

Finally, rather than giving subsidies and distorting prices, I would like to see the budget for the Benazir Income Support Programme be raised to Rs1,500bn so that we can finally make a dent in poverty, stunting and illiteracy.

Source: Dawn.