FeaturedNationalVOLUME 19 ISSUE # 32

An IMF-dictated and inflationary budget

The new federal budget has come as a big disappointment for both the common man and major sectors of the economy. It has put a heavier tax burden on the poor while not touching the privileges of the rich and the powerful sections of the population. Some analysts have called the budget unimaginative and lacking any coherence and vision for the future.
The total size of the proposed budget is Rs 18,877 billion that projects Rs 12,970 billion as the total revenue to be collected by the FBR for the federal Consolidated Fund and non-tax revenue of Rs4,845 billion. After adjusting for the provincial transfers from the Consolidated Fund, the net revenue receipts of the federal government would be of Rs 10,377 billion. A sum of Rs 8,500 billion is projected to be generated through bank and non-bank borrowings, net external receipts and privatisation proceeds of Rs 30 billion.
As against these resources, the federal government’s current expenditure alone would be of Rs17,203 billion. Instead of curtailing the runaway current expenditure, this budget has proposed an increase of around 20 percent in the salaries and pensions of government employees, which would lay the justification for a similar increase in the salaries of personnel belonging to semi-government organisations and autonomous bodies setting in a round of inflation that has just begun to ease.
The budget has thus given a loud message of ‘living beyond means’, as has always been the case in Pakistan. Sales tax is the largest contributor to the pool of federal taxes projected at Rs 4,919 billion followed by income tax at Rs 5,512 billion. The latter is expected to grow the most with more than 50 percent increase over last year’s revised estimates of Rs 3,721 billion. This is based on a wide range of upward revisions in rates of taxes, introduction of new categories of taxpayers, besides the existing categories of filers and non-filers and a change in tax treatment for certain categories of taxpayers.
In general, businessmen and industrialists all over the country have expressed dissatisfaction with the budgetary measures proposed for 2024-25, which for them are anti-industry and brazenly IMF-friendly. The leaders of trade and industry have termed the budget a burden on the existing taxpayers, as no serious efforts have been made to broaden the tax base or promote industrial production and commerce in the country.
According to them, instead of broadening the tax net, the government has fixed an ambitious tax target of Rs12.97 trillion, which would increase the burden on existing taxpayers. On the other hand, new taxation measures will greatly increase the cost of doing business and fuel inflation. A large part of the additional revenue measures target the same two segments — the salaried classes and documented businesses — which already pay the bulk of personal and direct taxes. No effort has been made in the budget to correct the structural imbalance in the economy. Thus the budget is silent on measures to bring agriculture income and real estate firms into the tax net and incentivise manufacturing and employment.
The Lahore Chamber of Commerce and Industry has expressed concerns about some taxation steps, which it said are bound to raise the cost of doing business and discourage and decelerate economic activity. The LCCI has emphasised the need to consult the stakeholders before implementing the budgetary measures, stating that the budget would not provide the necessary impetus for the manufacturing and export sectors of the economy.
The revenue target of Rs12.9tr and GDP growth of 3.6pc are said to be overly ambitious, reflecting a disconnect from the ground realities. According to a well-known economist, the budget was expected to contain inflation, revive investment, and provide a level playing field for both formal and informal sectors, thus generating higher taxable profits and tax revenue. Similarly, exports are the only sustainable way to balance the external account, exports and exporters need to be supported. But the budget has failed to adopt the requisite measures for any of the above.
All in all, , the federal budget, while optimistic in its projections, falls short of addressing critical issues such as broadening the tax base, and strengthens measures that are inflationary in nature. By continuing to target existing taxpayers and failing to incentivise compliance among non-filers, it indirectly promotes the transition from the formal to the informal economy. The inflationary nature of indirect taxes further complicates the economic landscape, potentially undermining efforts to achieve sustainable growth.
Needless to say, without significant reforms, the economy cannot carve a path for sustainable growth. The prime need is to end the elite capture of our economy but no government, including the recent one, has mustered enough courage to take the bold step. The result is that while a few are getting richer and richer, the economy keeps sinking and poverty levels rising. Foreign debt is back breaking and growing all the time. Unless we cut corners and drastically reduce government expenditure, the economy cannot come out of the black hole it is stuck into.