Pro-growth budget: handle with care

Published in Business Recorder on June 13, 2021

The Budget 2021-22 is certainly a consumption led budget but it is also directional. There are signs of medium- to long-term thinking along with some traditional fourth year budget nuggets. The fiscal is in expansionary mood within its limited space. The key to safeguarding the attained stability and to convert that into long-term stability is the government’s reliance on SBP’s independence in monetary and exchange rate policies. Nonetheless, many steps taken in the budget are eying long-term sustainability.

The idea is to churn economic growth to boost revenues which will take time. Meanwhile, the government will have to live with fiscal slippages. It is of utmost importance that there is a balance of payment (BoP) stability where imports growth is complemented with exports – goods and more importantly services growth, upbeat momentum in remittances and foreign direct investment in exporting sectors.

In this budget, in continuation with earlier efforts, the government did all what it could within the limited space of IMF’s programme to ease taxation complications – both in terms of rates and compliance. There is a purposeful retreat from the over-reliance on indirect form of direct taxes to generate revenue by abolishing as many as 12 WHT taxes. The import tariffs and industrial taxes and duties are also in line with the thinking of relevant ministries. Digitization and promoting digital transactions is a major pivot to increase the documentation footprint.

Having said that, the government has largely given concessions to anyone and everyone who was demanding. In some places, perhaps merit may have been put on the backburner with political economic considerations taking the front seat. There is no doubt it is a confidence boosting budget. But in the process, economy could over-heat. Not all the decisions will be taken well by the International Monetary Fund (IMF) and in case of shortfalls, government must give something.

With growing global commodity prices and possible spur of demand due to the budget relief measures, inflation can come home quicker. The government cannot push the can further down the road indefinitely. It must pick its battles. It is not prudent to tax further on limited base. It is not feasible to increase electricity prices further. The fiscal deficit may widen. Tax base cannot expand and yield results in a year.

Tax revenue targets are elusive from day one. In non-tax revenues, the critical element is petroleum levy (PL). Rs610 billion is budgeted on it at an average of Rs25-30 per liter PL on both petrol and diesel. Right now, it is less than Rs5/liter and the way oil prices are moving, soon this will be zero. And the way oil trajectory is predicted, time is not far when the government is giving subsidy to keep prices unchanged.

That is a dangerous path. Don’t go there and destroy the stability. It is better to start increasing petroleum prices and churn revenues here to create room for other areas. Else, the government must compromise its public sector development budgeted growth of around 40 percent. There could be pressure for other forms of taxes.

The directional steps do not yield results in one year or a term. The economic expansion will take time which would reflect in tax revenues within existing base. But how to ensure stability in that time? That is why it is imperative to work harder for broadening of taxes. Some good steps are taken. There is a law against smuggling now where retailers are to be held responsible for keeping legitimately imported goods. The self-assessment scheme is improved and encouraged. SMEs compliance is becoming easier.

The government has taken right steps, but much more is required to stick to them and widen the scope. For example, in digital payments and linking it to Federal Board of Revenue (FBR), the emphasis is on Point of Sales (POS) machines and overall electronic fiscal device. Here the good thing is that the finance minister is keeping Pakistan Fintech Association on board. The linkage at this moment is with textile and leather retail. In the backdrop, work is in progress where other retailers will be in the loop. The next in line must be to catch the elephants – wholesaler and distributor in the supply chain. Having provinces on board is imperative as services sales tax falls in their domain.

The government has reduced the turnover taxes across the board and decline is higher in some cases. That is good for the formal industry and consumers as turnover tax is usually passed on and the incidence of tax is higher for low margin industries. The key is for businesses to pay their due share of income tax. For that, track and trace system is imperative – especially in four industries.

All these elements along with abolishing WHT on banking transactions will help bring economy on the documented track. As of today, a one-third of money supply (M2) is in cash. For an immediate booster and enticing interest in capital markets, capital gain tax on stocks has been lowered. This with better steps for listed sectors, bulls are in the game. The catch is to attract foreign portfolio investment. Once that starts coming in, the next step is FDI. Not to mention, having IMF on board and clearance of FATF is also vital. Geopolitics is seemingly in Pakistan’s favour. The plot of getting foreign flows is thickening. It better works; or else the party is short-lived.

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