The next year’s budget is around the corner, and the fear is that instead of bringing some relief it will further burden the public with new taxes.
There are many hurdles in the way of budget making, the major one being the undue delay in the restart of the International Monetary Fund (IMF) programme although the government has implemented virtually all the prescribed conditionalities. Another big challenge is meeting the debt repayment requirements beyond June as the picture regarding financing/rollover support is not yet clear.
Economic experts and representatives of business and industry have come out with their suggestions about how the next budget can be made growth-oriented without imposing unnecessary fiscal pain on the common people. A major objective should be to control inflation which calls for extending suitable incentives to stimulate industrial and agricultural production for domestic consumption and export. Equally important in this connection is the need to readjust monetary and fiscal policies to take care of the supply side squeeze which is driving price increase.
In this context it has been suggested that both the ministry of finance and State Bank of Pakistan should jointly evolve a well balanced mix of monetary and fiscal policies to deliver a non-austerity, sustainable and counter-cyclical budget .
To this end it is important to decrease the policy rate to bring down the cost of production. At the same time the government should plan to meet its financing needs through a broad-based, and progressive taxation policy, and not from private savings or in other words, bank/non-bank borrowing/loanable funds.
At present, the government is the biggest borrower. If this tendency is curbed, it will lead to a significant reduction in policy rate, which, in turn, would also lower domestic debt borrowing. Needless to say, reduced policy rate will provide the government greater fiscal space to make counter-cyclical development expenditure, while less government borrowing will result in greater private sector lending. These measures will result in a spike in public and private investment and boost economic growth. It has been found that raising policy rate for the specific purpose of attracting highly volatile Foreign Portfolio Investment has been counterproductive with a negative impact on macroeconomic stability and economic growth. A higher cost of borrowed capital for production makes our exports less competitive in the international market and thus reduces our capacity for foreign exchange earnings.
As pointed out by many eminent economists, reducing the external debt burden for the country should be an important focus area for the upcoming budget, as Pakistan has to pay huge external debt liabilities over the next few years. To this end the government will have to hold negotiations with both bilateral and multilateral lenders to reschedule or restructure our debt repayment and servicing liabilities.
Another budgetary challenge is to build up reserves in order to strengthen the rupee against the US dollar, which in turn will give relief on the import payments, and also help reduce imported inflationary pressure, particularly in respect of food and energy.
Resource mobilization is another priority needed for the next fiscal year. Instead of borrowing locally and internationally, an effort should be made for greater resource mobilization through progressive taxation with more emphasis on direct tax. Our income distribution policy is skewed in favour of the rich and the powerful. Over the last few decades, wealth has been concentrated in fewer and fewer hands, with the vast majority of people trapped in a vicious cycle of poverty and deprivation. To narrow the widening rich-poor gap and discourage ostentation and conspicuous consumption, luxury villas and buildings should be more heavily taxed and import of luxury vehicles and non-essential goods should be totally banned.
There is too much wasteful expenditure in the government. The upcoming budget should propose drastic cuts in the open ended perks and privileges of high officials, including free petrol, free electricity, gas, travel, etc. The number of vehicles in official use should also be reduced by more than half. All this will result in savings of billions of rupees, obviating the need for putting more tax burden on the poor.
The new budget should also roll out innovative solutions to attract foreign direct investment which is a proven method to boost the pace of economic growth and build up reserves. Following the example of Dubai, Singapore and other countries, a string of tax-free export processing zones should be established all along the coastal region which will also generate employment opportunities for Pakistani youth.
Last but not the least, the upcoming budget should allocate more funds for the neglected social sector. Our education and health allocations are among the lowest in the world which has resulted in low quality of our human capital. Cutting corners, the next budget should substantially increase funds for the health and education sectors.