Tax incomes and spare poor consumers
AT the start of the new year, the best interest of millions is once again hostage to decrepit economic conditions and onerous foreign relations. The government is wriggling its way through myriad political and legal challenges while the common man is struggling with energy, food and security crisis.
It is not surprising in these circumstances that the opinion makers are clamouring for a change in fortunes and priorities. The vibrancy in the political landscape is exciting, the rhetoric appealing and the slogans contagious. However, the national debate is still bereft of concrete policy ideas to resolve the country’s major problems.
The biggest challenge for any incoming government would be the ailing economy. Currently, the inability to manage revenue generation and non-development expenditure is a long recognised problem that has historically sent governments scampering to foreign donors for assistance. It is high time that the temptation of short-term, off-the-shelf solutions is rejected in favour of long-term correction of the fiscal system.
In these critical times, any incoming government aiming at long-term sustainable social welfare would be best served by pursuing fiscal independence as its single point agenda.
Such an economic policy can be derived from debt limitation and revenue generation.
Pakistan’s debt profile as a factor of GDP has improved significantly in last decade. In 2001-2002 our total outstanding debt was equal to 82 per cent of GDP which currently stands at 61 per cent of GDP. The last year’s debt-to-GDP ratio was in compliance with the Fiscal Responsibility and Debt Limitation Act 2005, which sets the borrowing limits at not more than 60 per cent of GDP.
Furthermore, this ratio compares favourably against most heavily indebted European countries and at par with most of the developed economies. As compared to regional economies, Pakistan is slightly worse off than India (53), Bangladesh (43), while Sri Lanka is trailing at 82 per cent debt-to-GDP ratio.
However, the major underpinning for this debt-to-GDP improvement for Pakistan was the restructuring of foreign debt post 9/11 that reduced the overall debt burden while allowing for fiscal space for GDP to post handsome growth.
It is noteworthy, that total outstanding debt in dollar terms in 2001-02 was less than half of the total public debt as of today.
The government of the time did demand credit for this fiscal manoeuvring but it was hardly more than a short-term fix.
Pakistan’s public debt level at 60 per cent of GDP was quite manageable at the end of last fiscal year. However, the economy is expected to face major problems in the FY2011-12. Forecasts are pointing towards another year of modest GDP growth rates along with fiscal and current-account deficits. It looks highly unlikely that the government would be able to reduce the gap between its expenditure and revenues.
Unfortunately, the predictions are coming true half way through the current fiscal year. Total first-half government domestic borrowing for budgetary support is recorded at a sizeable Rs866 billion which alone is more than 10 per cent of our nominal GDP and the year-end report is expected to show a significant deviation from our self-imposed fiscal and debt discipline.
Hamstrung by low GDP growth, circular debt, huge losses of public enterprises and repayment of the IMF loans, the current economic burdens will have to be borne by many coming budgets.
The ever-rising levels of debt, especially non-productive budgetary support loans, point to an issue which goes beyond mere dereliction of duty by the political elite. The current revenue generation system will force, even the best intending governments to plead for foreign aid at the first sniff of economic threat.
The current tax-to-GDP ratio stands at a miserly 8-9 per cent. Its GDP ranks 26th in the world measured by purchasing power parity. We are the 26th richest people taking into account the relative cost of living and the inflation rates of other countries.
A glance across the region reveals that the same ratio is 18 in India, 13 in Sri Lanka, and an average of 15 per cent in low- to- middle income countries.
Pakistan ranks 160th in the tax-to-GDP index comprising of 178 countries. Out of a total population of 179 million, less than three million pay taxes and approximately 80 per cent of the economy is untaxed. Debt servicing consumed about 43 per cent of meagre revenues last year.
What is even worse is that the situation is gradually deteriorating. In 1990s, the tax- to- GDP ratio was around 13 per cent. The tax collection simply could not keep pace with the post 9/11 economic boost. During that same period India doubled its
tax-to-GDP ratio from an average of around 10 in 1990s to 18 per cent in 2011.
In recent years, all focus has been placed on indirect taxes which are regressive, inflationary and unjust for the poor who bear a disproportionate burden.
There has not been any substantial effort to increase the tax base and direct tax collection in recent years. Backed by a strong political will, the tax regime requires an overhaul so that income and not consumption is the basis of taxation.
Real and credible change has to be based on self-sustenance. The governments have to start with borrowing only for development purposes and meeting current expenditures through appropriate revenue generation. The country needs leadership with willingness to tax income across the board and people with the willingness to contribute financially to the social well-being. If we keep on borrowing from the future to sustain our present, sooner rather than later, the future will have nothing more to give.
Tahir Akbar works for the Islamic Development Bank and Masroor Hamid is an executive in a telecom company.