FeaturedNationalVOLUME 19 ISSUE # 33

A budget without a sense of direction

Amid a cacophony of voices and heated debate, the National Assembly passed the budget for the next fiscal year with some amendments. The budget, introduced by the finance minister, was strongly criticized by members of the opposition, who described the document as anti-people, anti-industry, and anti-agriculture.

Opposition lawmakers belonging to the PTI charged that it was now an open secret that the budget was dictated by the IMF. They said a government which had come to power through electoral fraud had no right to add to the miseries of the people. Leader of the Opposition Omar Ayub Khan denounced the budget as “economic terrorism against the people”. According to him, inflation will increase and there would be no economic growth with this budget and electricity prices would go up to Rs100 per unit.

Responding to the criticism, the finance minister pointed out that tax exemptions on medical surgery equipment, educational materials, cardiology stents, and items for the erstwhile Fata and Pata would continue to provide relief to the people. He also claimed that the economy had achieved macroeconomic stability, adding, “We will lead the country towards sustainable economic growth by continued stability.”

But the ground realities tell a different story. Inflation is an all-time high and poverty is rising. There is a consensus of opinion among economic experts that it is a tax-heavy budget that will make the life of average Pakistanis even harder and further deepen the trust deficit between the ruled and the rulers. This is so because the government, instead of cutting its own expenditure, has imposed an array of additional taxes that will directly hit low and middle income households. The additional taxes of Rs1.7tr are designed to meet its ambitious tax revenue target of Rs13tr, up by over 40pc from the outgoing fiscal year, to finance its growing expenditure and secure a new, larger bailout deal from the IMF.

All economic experts agree that the government will not be able to achieve its tax collection target. The irony is that the budget has increased direct tax collection by 48pc without actually expanding the existing narrow tax base. Worse, the budget lets off the hook those not in the tax net by preserving the so-called category of non-filers, a term used by Ishaq Dar to keep various categories of tax evaders, including traders, realtors, property developers, etc, out of the income tax net. Experts also believe the estimates of a 35pc hike in indirect taxes next year are exaggerated, given the current economic slowdown and reduced purchasing power of the majority.

The finance minister has repeatedly said that the present budget aims to reduce the budget deficit and raise the tax-to-GDP ratio from the existing 9.5pc to 13pc in the next three years. But the measures introduced are just the opposite of what the government spokesmen have been claiming. The budget is also defective so far as structural reforms are concerned. An example is its failure to introduce any measures to reduce its own wasteful expenditure, curtail the lavish privileges of ministers and officials and bring retail, agriculture and real estate into the tax net.

As things stand, the government currently faces two major challenges: increasing revenue and reducing expenses. Raising revenue is important because 94 per cent of the Federal Board of Revenue (FBR) income is allocated for debt servicing. This means the government must borrow funds for current and development expenditures, including the defence budget.

According to well-known economist Dr Ashfaq H. Khan the IMF provided this budget to the Ministry of Finance with the condition that it must be included if Pakistan wants to enter a new loan programme. Dr Khan has expressed the view that the budget’s primary goal is to create social upheaval and industrial shutdowns, arguing that none of the budgetary targets are realistic in the current economic environment. He has predicted additional slippages in deficits, leading to more borrowing and debt accumulation. Dr Khan has highlighted that this approach conceals the FBR’s failure to manage or develop alternative tax plans to help the most disadvantaged.

According to another observer of the economic scene, a major issue with the 2024-25 budget is lack of a clear direction. The budget reflects no long-term visionary approach and, instead, relies on tax enhancement strategies that have failed in the past. According to Laffer curve theory, increasing tax rates beyond a certain point can hinder revenue generation. Sectoral analysis shows that high taxation has led to a decline in revenue collection from these sectors. Increasing tax rates for those already in the tax net while failing to include those who should be taxed is unsustainable.

All in all, Pakistan’s new budget which relies heavily on indirect taxes will exacerbate economic inequality, leading to social unrest. By burdening the middle classes with maximum taxes and levies, without cutting its own expenditure, the government is further widening the gulf between itself and the people.