NationalVOLUME 17 ISSUE # 8

Revenue shortage retarding SDGs progress

Pakistan is way behind the neighbouring countries in meeting the targets of Social Development Goals (SDG). Sad to note that the country’s level of progress is just above Afghanistan and far behind India, Iran, Sri Lanka and Bangladesh.

As in all countries, Pakistan uses annual development budgets for 90pc of the investment to meet the 2030 SDG targets in all 17 selected areas, including health, education, women empowerment and environment. In the next nine years, our government will have to earmark huge development budgets to meet SDG targets. If we fail to meet the 2030 targets, international financial institutions will give us lower priority as compared to countries that have a higher achievement rate.

One reason why we are not doing better in achieving the SDG targets is that we lack sufficient funds due to the unavailability of revenue in required quantities. Governments in Pakistan have consistently failed to generate enough revenue which leads to a fiscal deficit and to manage the deficit development expenses are cut which reduces our rate of progress. The level of seriousness of Pakistani governments about expansion in the revenue base seldom arises out of their sense of responsibility towards what is right for Pakistan’s economy. It is often shaped by their short-term need to balance fiscal books — and gain some political mileage by implementing politically gainful projects.

Economic decisions are not taken on merit which further worsens the situation. To boost the revenue, the previous Pakistan Muslim League-Nawaz (PML-N) government launched bearer bonds of high denominations — up to Rs40,000. The idea was to amass huge non-tax funds, and thus, increase the overall revenues. But this move resulted in further expanding the black economy with all its negative effects.

Amnesty schemes are also launched in order to bring in more revenue. Let us remember that they carry an opportunity cost higher than what they actually achieve. Austerity drives have been launched from time to time by successive governments. But the drives are not sustained and the situation returns soon to its old routine.

There are many loopholes in Pakistan’s taxation system. It is lopsided and is tilted in favour of the rich. The system is also riddled with corruption. As a result, the GDP-tax ratio in Pakistan is one of the lowest in the world. That is the reason when Pakistan turns to the International Monetary Fund (IMF) for borrowing, the Fund criticises the government’s revenue-boosting schemes and demands their reversal, such as in the case of the high-value bearer bonds or fundamental restructuring of the Pakistan Tehreek-i-Insaf (PTI)’s amnesty scheme or its incentives for builders and developers.

As per latest media reports, the IMF has demanded that the government cut its development spending for 2021-22, from Rs900 billion to Rs700b. It is not for the first time that the Fund has made such a demand. Whenever we enter into an IMF programme, Fund officials ask the government of the day to cut its development budget and rationalise subsidies with high opportunity costs to the economy.

The PTI government has done better than its predecessors in boosting the revenues. Taxes have been rationalized and the taxation machinery has been gingered up. Fortunately, Pakistan has come out of the vicious cycle of a high fiscal deficit demanding cuts in development spending which leads to slower economic growth, lower revenue collection, necessitating another round of cuts.

If we analyse the 50-year data of Pakistan’s GDP growth, we see that except for brief periods the country’s economy never grew consistently higher than 4-5 percent for even five years in a row. There are innumerable reasons for it. But lower development spending as a percentage of GDP is one of them.

Experts recommend that the State Bank of Pakistan (SBP) in collaboration with the government as well as economic think-tanks should consider undertaking a study to examine how revenues can be boosted to expand the space for development spending. This is a good idea and must be pursued vigorously. The government is trying its best to collect more taxes but more efforts are needed in this direction.

An important need is to keep budget and fiscal deficits within limits. This can be done by drastically reducing the administrative expenses for which there is enough scope. We all know that there is much waste in government spending. This should be taken care of by reducing the unlimited perks allowed to high-ranking officials.

At the same time, steps should be taken to cut the cost of debt servicing which takes away a large part of annual tax revenues. Brain-storming on these issues can go a long way to increase revenues and enable the government to avoid cuts in development spending. In the long-term perspective, this is the only way to ensure that Pakistan has enough development funds to achieve the targets set in the SDG goals.