Some of the gravest economic issues inherited by the elected government include inflation in general and food inflation in particular, rising oil prices, rising poverty, unemployment, energy deficit, current account deficit, and deprivation related issues of rising crime and terror, to name a few. While there is an attempt to solve them sooner rather than later, some of the proposed remedies are more symptomatic instead of a jab at the sources and causes.

For example, an IFI’s suggestion to withdraw subsidy on oil prices to favourably affect fiscal deficit might temporarily serve the purpose somewhat. It will, however, have a ratchet effect on the prices of all manufactured goods as not only will the cost of materials and distribution go up, the wage bill will also rise as higher salaries will be demanded. Farm input prices will also rise making farm products dearer than before. The withdrawal of subsidies will set off another price spiral that will impact exports adversely, swelling up the current account deficit even further.

We will be caught in the dog catching its own tail syndrome as burdened manufacturers’ ability to pay taxes will be further impaired that will, in turn, impact the fiscal deficit adversely. So, what looks like a solution is a stop-gap arrangement likely to make the fiscal deficit look good only in the interim following which we will find ourselves grappling with the ramifications of this ill-advised symptomatic measure.

The entire focus is on making the system “efficient” through withdrawal of oil price subsidies in utter disregard of the issue of equity. Same outlook is demonstrated in the increase in support prices of wheat and other farm food products, the political considerations notwithstanding. The trade-off consideration between efficiency and equity appears to be getting more and more permanently shelved.

We could live with the IFIs’ advised accounting approach only if it would show the desired results. That it would not is evident from the complex web of relationships between various economic variables that together create hardships for all alike. A holistic view is required that would show the sources and causes all of which need to be tackled together to produce the results we want to see on a permanent basis.

Government borrowings must be stemmed so as to control inflation. So, fiscal deficit must be reduced. How?.....through the withdrawal of oil price subsidies. But, this too will lead to cost-push inflation as discussed. So, where is the solution for inflation in this? Fiscal deficits must be controlled regardless. Must this deficit be controlled through a measure that will generate a price spiral? And, why are such measures being suggested? Has the government and the IFIs put together given up on the issue of tax collection which system should be made vertically and horizontally equitous on war footing?

Pakistan’s central government revenues have declined from 17.2 of GDP in 1995 to 13.5 per cent of GDP in 2006 (World Development Indicators, 2008). The share of taxes on income, profits, and capital gains increased by only two percentage points in 11 years to 20 per cent of revenues in 2006 in the case of Pakistan (World Development Indicators, 2008). India gained by 16 percentage points on the same score during the same period to 39 per cent of revenues in 2006 (World Development Indicators, 2008). The upshot is a budget deficit of India that has been lower than Pakistan’s.

Fiscal deficit is an issue that requires resolute tax legislation, collection, and enforcement measures on the part of the government. Equals must be taxed equally whether in the agricultural or urban industrial sector. Otherwise, the urban industrial sector will have reason to evade taxes if the agricultural sector is left virtually and actually tax exempt. Tax collection necessitates fairness and justice failing which people develop their own morality criteria. A hapless government becomes more so unless it resolves to introduce an even-handed tax management and administration system.

These are some of the issues that need to be dealt with headlong if a lasting solution to the issue of fiscal deficit is to be found. Otherwise, we will only be applying band aids that will provide temporary relief, if at all, to a variable or two in isolation. The wound will get bigger and deeper and that much more difficult to heal with the passage of time passed through ad hoc measures.

Temporary relief policy measures are proposed to be coupled with equally temporary relief measures for the poor. It is important to realise that when prices go up indiscriminately, some 60 per cent of the population is affected as it feels poorer. This 60 per cent of the population gets only 40 per cent of the income as 60 per cent of income goes to the top 40 per cent. Not all of the bottom 60 per cent qualify for government’s hard-to-get income support programmes. Bulk of the population lives hand-to-mouth and have enormous difficulty coping with price pressures whether or not they fall in the abject poverty category.

Wheat price increase is burdensome for all and sundry of the bottom 60 per cent. The middle and low-middle income groups have difficulty choosing between food and education or quality education and healthcare and housing. The quality of life of this bottom 60 per cent is adversely affected as prices of food and petroleum prices rise since both of these feed significantly into the overall price level no matter how much the monetary policy is tightened by the SBP.

Farm product prices require good management also. The farm product supplies must be ensured. Exports and imports must be carefully planned. Buffer stocks must be created to stabilise market prices. Smuggling and hoarding must be controlled and these must be dealt with tough measures. This issue has a whole bunch of Pakistan-specific determinants that need to be heeded. For, this issue cannot be explained away by the international food crisis since our market has its own dynamics that must be appreciated. Increase in farm product prices will only make the landowners better off with the top 40 per cent population segment unaffected as they grab 60 per cent of the income anyway. The bottom 60 per cent will be worse off.

There are huge issues of equity for not just the poor but for the bottom 60 per cent population segment as well. Definite action is, therefore, required on the price front instead of shifting the burden on this segment to make some economic indicators look good for some time and to placate the all-time power base. Unless a new approach develops, we will not see a break from the outlook of the previous Shaukat Aziz government.