Mini budget or reform package?

Hassnain Javed

February 06, 2019

 

 

The recent government’s new mini budget has left the critics in dismay. The reaction was not surprising since just after the PTI government came into power in September, a ‘mini-budget’, that was in the form of a bill was presented. The bill increased income tax rates, levied additional indirect taxes by imposing higher custom duties and reduced development expenditures. Now with just about 4 months later, a new ‘mini budget’ has been introduced that has raised the taxes to approximately Rs.200 billion. This has created an uproar amongst the opposition who claim that the government has already failed to deliver in its 100 day promise and that the increased tax burden would only pressurize the common man.

Survey statistics reveal that the nominal growth of revenue this year shows only two percent increases since last fiscal year. However, the figure should have increased to at least thirteen percent to support the fiscal year with a 4.5 percent economic growth and 8.5 percent inflation, which implies that the tax revenue has declined by 11 percent. Although the Pakistani rupee has depreciated about thirty percent, the customs duty and other taxes collected at the port has not increased where it should have quadrupled. Therefore, the main problem stems from the fact that the Pakistan economy has slowed down considerably and more taxes would further slowdown the economy and not generate enough revenue. What the economy of Pakistan needs right now is a tax reform policy that is focused on not only increasing taxes but also some tax exemptions to add incentives and stimulate economic growth that was the agenda of the new and improved mini budget of 2019.

After the last government’s poor financial performance, Pakistan is still recovering from a growth which was fueled by short term debt and declining investments. The economy was in a bad shape, and by the end of year 2018 Pakistan was almost on the verge of bankruptcy. Since the term for the last IMF of 2016 was expiring and oil prices hiked, the later seemed inevitable. The previous government’s poor implementation of both its fiscal and monetary policy was the reason for this catastrophe. The Rs. 1300 Billion of the government spending was being funded by printing money and monetization of public debt which implies the usage of money that the country did not hold. Of Course going to the IMF is inevitable for the government at this point which means that the government must reduce its fiscal deficit either by increasing revenue or cutting its expenses. And the current PTI government has chosen to control the supply side of the policy by cutting on government spending by wide range austerity drives and an increase in taxes.

So what is the government trying to achieve by its new ‘mini budget’. A major focus of Finance Minister Asad Umer’s speech was the relief and incentives being given to the investors to ensure the ease of doing business. According to recent stats, Pakistan is ranked at the 136th position in the ‘ease of doing business’ index, and 173rd in terms of complicated tax systems. Hence the new policies announced that the withholding tax on trading in the stock exchange will also be removed and all machinery in special economic zones exempted from all taxes. Furthermore, new industries will be exempted from income taxes for five years. The government has put forward a proposal for a 20 percent on income tax from loans to Small and Medium Enterprises and agriculture sector. Similarly, the government has increased taxes on small marriage halls to just Rs. 5000 from Rs. 20,000. Lastly, the minister also announced to eliminate withholding tax on banking transactions for filers to encourage the tax-paying culture. Such policy transformations would reduce costs of doing business in Pakistan, and encourage businesses and SME’s to operate freely. The power of government departments are proposed to be redistributed in order to reduce redundant and precarious steps that businesses need to get through in order to get government approvals.

With the beginning of 2019, Pakistan is entering into the second phase of China Pakistan Economic Corridor. This means that government would focus on trade policies and industry development, moving on from infrastructure. Large multinational companies are already interested in setting up industries in the automobiles, telecommunications, energy and electronics industry, in order to tap the undiscovered potential of the people of Pakistan.

Senator Imamuddin Shokeen of PPP, accused the government of having an under the table agreement with the business bless and banks hence, the reduction in the tax rate for the banks on their income from agricultural financing. He argued that the growers would not get any benefit from the step. However, they fail to recognise that the policy is only to jump start the stagnant economy of Pakistan and the reforms that are announced contains pretty straightforward short-term stabilizing measure. This can be seen from the fact that stock market has reacted favorably to the announcements and even international rating agencies like Moody’s called the budget good for the economy and predicted that the finance bill will assist in bringing expenditures and deficits down. Also more policies to incentivize the farmers have been introduced like the value of Produce Index Unit has been increased from Rs. 4000 to Rs.6000. Farmers can now attain subsidies of up to Rs 7 billion on fertilizer purchases and a reduction of GIDC by 50 percent for industries.

Another argument that critics have is that the budget is too pro non-filers because under the new finance bill, non-filers will now be able to purchase vehicles of up to 1300cc engine capacity after paying higher taxes. Also non-filers will only be allowed to buy vehicles that have been locally assembled/manufactured. However, the move was essential because overseas investment registered a decline of almost 50 percent after the imposition of the ban in the last budget. Therefore, withdrawing ban on non-filers was imperative to kick start activity in the real estate and auto sector by allowing non-filers to purchase these items as well.

Conclusively, prompt and adequate measures taken by the new government have impeded the immediate crisis of the balance of payment however, much more effort is needed to bring the proposed plan to life. Macroeconomic indicators have to be stabilized in order to encourage steady foreign direct investment in Pakistan. Until now the government has been successful in creating a fiscal space to encourage new investments by delaying the bailout support from IMF. However, immediate favorable results from new policies are not possible as economic development will take years to pick up its pace.