Predicting a budget

(This is the FOURTH and CONCLUDING article in the SERIES on the FEDERAL BUDGET).

V.A. Jafarey and A.G.N Kazi have been excellent economic managers, maintaining an austere fiscal policy till the inevitable, the neophyte Ministerial politicos getting control over their departments and losing control over their spending, the business of political survival straining the public exchequer. At the same time, impending war clouds have caused justifiable allocations for expenditures by the Defence Forces, the last quarter saw a fuel-hike, real inflation (not the one with the inordinate deflators) running slightly short of beyond control. The consumer got a jolt in his pocketbook, not yet painful enough to arouse widespread street protest. Everyone believes that because of the media hoopla more direct taxes are in the offing, one tends to believe that all this is an elaborate red herring act. Failing miserably over the years in collecting on direct taxes, the Federal Government may emphasise tightening of collection of direct taxes but will keep on going the indirect taxation route for its prime revenue source.

One did fantasise that one day someone like Ms Benazir will emerge on the national scene having the political clout and the inherent honesty to be free of vested interests and/or suffocating bureaucracy. From time to time, one glimpses a flash of the revolutionary in Ms Benazir but these exciting moments are few and becoming further in-between. Handicapped by uncontrolled avarice and greed around her she gets extremely bad political advice, either she is dangerously naive or she has chosen to ignore blatantly the corruption around her, in turn history may ignore her if she botches her destiny mainly because of apparent inaction at the endless greed of others. Despite the fact that Ms. Benazir commands, after the Quaid-e-Azam, the most vociferous political adulation in Pakistan’s history, she does not impress as the consummate politician that her late father was. Zulfikar Ali Bhutto could be terribly stubborn, in matter of politics he knew when to compromise to get his way, the passing of the 1973 Constitution is a case in point.

What the Budget is likely to be (Error margin 3% PLUS MINUS)?

The Federal Budget is likely to be around Rs.249.49 billion including Rs.184.15 billion in projected government revenues and an overall deficit of Rs.65.34 billion, down from 7.3% of GDP to 6.6% of GDP in keeping with IMF requirements (it was 8.6% of GDP in 1987-88). The Federal Government will justifiably argue that had it not been for increased defence spending, they could have brought it below 6% of GDP. The Federal expenditure is likely to be around Rs.199 billion, the balance of Rs.50.49 being the share given to the Provinces, up from Rs 44 billion. The largest outlay in the last Federal Budget 1990-91, Debt Servicing will amount to Rs.58.5 billion, Rs.34 billion in shape of domestic borrowings and Rs.23.5 billion in that of external debt, overtaken as the largest outlay by Defence Expenditures rising 18% from Rs.52 billion in 1989-90 to about Rs.61.5 billion in 1990-91, mainly because of the Indian threat perception. General Administration will be kept pegged down at Rs.11.5 billion, Subsidies at about Rs.11 billion despite savings in Railways due enhancement of fares on certain sections. Social Services should rise to Rs.31 billion, Miscellaneous Expenditures pegged at Rs 13 billion. The Development Budget has been announced at Rs.63 billion.

The Federal Revenues are projected by us at Rs.184.15 billion, Direct Taxes apportioned at Rs.22 billion, Indirect Taxes at Rs.162.15 billion. Direct Taxes includes Income Tax at Rs.21 billion and Property Tax at Rs.1 billion. Indirect Taxes would include Customs Revenues (Rs.60 billion). Excise Duty (Rs. 24 Billion), General Sales Tax (GST) at Rs.22.5 billion, Surcharges climbing to Rs.15.15 billion and Tax Revenues at Rs.40.5 billion, a grand total of Rs.162.15 billion.

Revenues figure of Rs.155.5 billion in 1989-90 would have to be enhanced by Rs 28.65 billion, Government taking certain additional measures, including probably (a) Defence Surcharge ranging from 7-10% (b) Additional Customs Duties on cars, jeeps over 1000 cc (c) raising of exemption limit on personal baggage i.e allowing more airconditioners, TV, VCRs etc but with enhanced customs duties on them, (d) Rise in gas, water and electricity rates on a proportionate escalated basis (e) Increases in customs duties across the board (f) Rationalization of GST and Excise Duties while tightening assessment/collection procedures, though the Business and Industry concern about GST is much ado about nothing (g) Enhanced measures for avoiding direct tax evasion including possible withdrawal of certain duty exemptions (h) Institution of enhanced surcharges on Corporate taxes (i) Rate of Ushr on agriculture income to be increased, thus putting pressure on Punjab having the largest agriculture area (j) Land Holding tax in lieu of agriculture income will be proposed (k) Privatising shares of nationalised sectors (l) Increasing stamp duties, telecommunication rates etc and (m) Expensive cigarettes are likely to become a bigger luxury. (The aforementioned figures are at best an educated guess, within 3% plus/minus of actual figures of the Annual Budget to be announced on June 7).

What the Federal Budget should be ?

Fully 80% of the Federal revenues collected via Income Tax (Rs 16 billion) is borne by a captive Corporate Sector i.e. Rs. 12.8 billion (Rs 10.24 billion Multi-National Companies (MNCs) and Federal State Enterprises, only Rs 2.56 billion by private industry and commerce), the balance Rs. 3.2 billion being paid by the salaried class and the self-employed. 500,000 persons belong to the salaried class, 500,000 are self-employed, each category contributes approximately Rs 1.6 billion. The Provincial Governments have been avoiding imposing tax on agriculture income despite the fact that the late Zulfikar Ali Bhutto tried to run through such a tax in January 1977 based on Produce Index Units (PIU), the idea being to get retrospective approval later in 1977 when Parliament commenced, events being overtaken by Martial Law. Ms Benazir will be neatly passing on the Ushr baby to the Provincial Governments, showing them the way by a possible Land Holding Tax.

Decentralisation of assessment and collection of direct taxes (except for the Multinational Companies (MNCs) and Federal State Enterprises) should be at the grass roots democratic level under the aegis of the Provincial governments. Individual income taxes on the Salaried class and Self-employed amounting to Rs. 3.2 billion should be ABOLISHED forthwith, the Federal Government losing only 2.5% of its revenues as well as the “BIG BROTHER is watching you” attitude of its bureaucrats. A Community tax and a Wealth tax, the quantum at the discretion of the respective provincial governments, should be imposed, the assessment and collection and expenditure thereof being the responsibility of the elected representatives at the Council level, a direct relationship between taxation and spending. At every level there should be the 50%-25% formula for withholding, i.e 50% at the first stage, 25% at later stages, for example the Local Council withholds 50% for its own social infrastructure facilities. The Sub-division gets the balance and withholds 25%, passing the new balance to the District and so on.

At this time the Provincial Budgets total about Rs.53.6 billion but the taxes collected by the Provinces amounts to Rs.9 billion only, the shortfall of Rs.44 billion is met by the Federal Government. Going by the aforementioned formula, Punjab should collect about Rs.16 billion, Sindh about Rs.10 billion (mainly because of Karachi), Frontier about Rs. 5 billion and Balochistan about Rs. 3 billion (including royalties from Sui gas), grand total of Rs. 34 billion. Given the incentive of matching federal funds of Rs. 34 billion this would make a total of Rs. 68 billion, more than what the Provinces will budget for 1990-91. The Provinces share of Federal revenues would go down to Rs. 34 billion instead of the projected Rs. 50 billion, a difference of Rs 16 billion. Looking on Rs. 990 billion as the GDP, the Budget Deficit acceptable to IMF this year should be 6.6% or Rs. 66 billion. With the Federal Corporate taxes at Rs 12.8 billion (Rs 16 billion minus Rs 3.2 billion) only it would mean that the saving would be Rs 12.80 billion, the budget deficit would come down to Rs. 53.2 billion or roughly 5.3% of the GDP, lesser than the IMF prescription of 5.5% at this stage of the Four Year Standby credit. Lesser borrowings would mean lesser Debt Servicing. Ms. Benazir cannot act like Atlas anymore, she should shrug. Let the Provinces share and bear the responsibilities, the deficit coming down progressively.

The overall Budget for 1990-91 should be Rs. 260 billion with a deficit of Rs. 53.2 billion, government revenues being Rs.206.8 billion. The outlay would be (1) Debt Servicing Rs. 59.2 billion, Defence expenditures Rs. 65 billion, General Administration (Rs. 11.5 billion) and Subsidies (Rs. 11 billion). Expenditure on Social Services would rise to Rs. 35 billion. Miscellaneous expenditures would be Rs 13 billion while the Development Budget would be Rs. 65 billion.

To meet the increased revenues of Rs 51.3 billion (1) Defence Surcharge of 10% imposed on all imported items (2) income tax on all salaried and self-employed persons withdrawn (3) all credit except for MNCs and Federal State Enterprises taxed at source in the bank at time of disbursement (4) electricity, water, gas and telephone rates proportionately escalated, those who use more should pay more on a graduated scale (5) Provinces to meet all expenses from the Council level upto the Province by direct relation between taxation and expenditures ie. at least 50% being spent directly on the Community the person resides in, 25% being passed on (6) Fuel to be taxed on an escalated basis and Provinces encouraged to impose greater Motor Vehicle Tax annually, basis being engine size and use of vehicle (personal or commercial) (7) Import of all cars above 1300 cc and luxury goods, air-conditioners, refrigerators, freezers, TV, VCR, cosmetics etc banned (8) Customs duties to be independently verified by private sector agencies (9) Wage Earner scheme as compensation for our expatriates (10) Bearer Bonds to be taxed at time of encashment (11) Exporters given further incentives on pattern of Bonus Vouchers and (12) All nationalised industries to be sold out retaining only 30% of each industry for the workers.

All the measures would envisage reduction of gap in the balance of payments besides bringing the Budget Deficit down in the first year. In subsequent years further changes can take place. Anyone can go along with a system, it requires courage and conviction to change it.

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