A Budget with Substance
The knowledgeable are usually convinced by substance, form is for public consumption. The Federal Budget can only be eulogized when considered in the light of circumstances prevailing that caused the GDP to register a lowly 3% growth rate, in the sense that it comes out better than anticipated by the public at large and the intelligentsia in particular. A complete package of direct and indirect taxes was predicted but the relief on being spared draconian measures makes the proposals look comparatively rosy. While the Budget contains much of substance in keeping with the existing economic realities, on few crucial issues it was terribly short on form, that which influences public perception. One cannot defend the indefensible but showing flexibility and dexterity on these issues, the Finance Minister moved quickly to defuse such anomalies before they became politically volatile and contentious much out of proportion to the main thrust of the Budgetary proposals.
The unenviable task before the Finance Minister was to restore the momentum of the government’s liberalisation programme as well as the confidence of free enterprise because these form the main fuel for the IJI’s economic strategy. In order to do this, he had to continue with emphasis on development while reducing tariffs across the board, a veritable Catch-22. By giving further incentives to industry, he signals his commitment to generate employment, he also had to shuffle with alacrity to keep his indirect taxation proposals from adding to the inflationary pressures. The Opposition in the National Assembly was quick to level the accusation that the Finance Minister had fudged the statistics, particularly covering up the deficit, which they claimed was more in the region of Rs 110 billion in comparison to the stated Rs 85 billion. We may be in an imperfect world and if the Honourable Senator has under-estimated the actual deficit, we believe that the Honourable Opposition has rather exaggerated it. In either case, the deficit is too large by half and the Administration would do well to keep it within reasonable limits or we may have to use wheelbarrows to carry the volume of cash required to bring back a loaf of bread a la Germany circa 1928. There are certainly severe inflationary pressures, some due to circumstances beyond the Government’s control but some that could have been avoided by correct prioritization after a deliberate analysis.
The incentives given to industry and finance are real, the reductions of tariffs across the board are a great shot in the arm and focuses on the prime need of the hour, the generating of employment by giving broad relief to industry. In an economic environment where unemployment has been gaining ground and we are still in a transition stage, we have become vulnerable to downstream side-effects leading to anarchy. The political confusion over the last few months has added to the problems. The government would do well by giving the Services Sector a major boost, in developed economies this makes up as much as 40% of the whole. Nobody asks that there should be a marked increase in the emphasis on the Services Sector at the cost of the industrial sector but it should not be ignored in the benign fashion it is being now.
The total Budgetary outlay is Rs 332.5 billion, about 9% higher than last year’s revised figure of Rs 305 billion. The largest slice is taken away by Debt Servicing Rs 121.39 billion, about 36.5% of the whole followed by the Defence Services allocation of Rs 89.01 billion representing 28.6%, the two between them consuming 65% of the Budget. In fact together (Rs 210.40 billion) they exceed the Net Federal Revenues (Rs 195.14 billion) by Rs 15.26 billion, an amazing situation given the fact that we have registered the smallest possible increase in Defence allocations in the face of a grave, constantly unfolding geo-political situation. Law and order has been allocated Rs 4.68 billion, Community Services Rs 3.85 billion, Social Services Rs 6.96 billion, Economic Services Rs 1.77 billion, Subsidies Rs 4.87 billion and various grants (to AJK, Railways and others) Rs 9.54 billion, a total of Rs 31.67 billion or less than 10% of the entire Budget. The development expenditure has been allocated Rs 74.75 billion (22.5% of the Budget), the quota of the Federal Ministries/Divisions being Rs 24.29 billion while that of the Federal Government is Rs 52.96 billion. It is pathetic that the total aid expected from External Resources (about Rs 60 billion) is less than half of Debt Servicing, a legacy of the Ghulam Ishaq years as Economic Czar where forced and compulsive sustenance of a large public sector without any public accountability whatsoever saw it function as a Black Hole for External Resources, the compound interest now makes Debt Servicing as our largest outlay by far. This has been only kept in control over the past several years as successive elected governments felt the need to cut back upon outside dependence and focussed the available funds on development rather than purchase of commodities and consumer items. Our bureaucracy is shy about asking for Debt Moratorium but a three-year hiatus would do us a world of economic good.
Petroleum prices have been increased by 10%, this after a gap of three years. The prices have been indexed to the quarterly depreciation of the US dollar, this could have been done earlier when the unprecedented floods hit us, by reacting late the Finance Ministry is liable to justifiable criticism by the intelligentsia and the masses. While this will certainly hurt, there is no way that Senator Sartaj Aziz was going to make up the Budgetary gap of Rs 34.5 billion except by imposing indirect taxes on something like petroleum. To delay it further would have meant a much greater rise in the future with much more pronounced inflationary pressures. Budget Time is as good a time to bite the bullet. Whereas Sales Taxes have also registered an across the board 2.5% increase from 12.5% to 15%, this could have been avoided. As everyone and his uncle knows, this increase will be passed onto the consumers but the industrialists will certainly not pay the government. This will be shared between them and the Excise Staff. Some of the shenanigans of the Excise department to extort money for their own pockets are ridiculous. Items of daily consumer will be more expensive to the public but it does not give government any substantial revenues. This is tailor-made for exploitation by the Opposition who are on firmer ground here than the increase in petroleum prices though both generate acute public interest. One feels that while we cannot altogether avoid certain inflationary pressures because of petroleum prices being kept stagnant for quite some time, the increase in Sales taxes was not well thought through, it should have been avoided. Why make soap and toothpaste more expensive for the common man? Our revenue collection staff will have a personal windfall at the cost of government credibility on a point of small revenue consequence. In one documented case, one recalcitrant restaurant in Karachi fell afoul of an Assistant Commissioner and has been fined a grand total of Rs 79 in as many as 30 cases, less than a ridiculous Rs 3 per case. Since they could not catch the Restaurant the object is to browbeat them into paying the Excise Staff under-the-table dues.
In the present political situation, the Finance Minister may not have the required room for manoeuvre for doing innovative changes, one feels that the Provinces should have been encouraged to become more responsible with respect to tax collection. Wealth and income tax revenues are estimated at Rs 41 billion approximately while the Provinces share of taxes at Rs 72 billion. Of the Rs 41 billion, about Rs 24 billion is from Corporate taxes, Rs 7-8 billion from Income Tax and about 6-8 billion from Wealth Tax. Income Tax comes out 20% of direct taxation and only 3-4% of our total revenue resources whereas 85-90% of our IT officials are engaged in this exercise. We should do away with individual Income Tax completely as it is no use putting a burden on the shoulders of only an odd ONE million people (out of the total population of 120 million) belonging almost equally to the salaried and self-employed class. Let the Provinces impose Wealth Tax on individuals according to a graded formula for affluence in a particular area, for agriculture Produce Index Units (PIU) can be used. Corporate Tax would remain the purview of the Federal Government. The Provinces would be told that while they would benefit from the overall Federal Development Programme, they would not get any share from the Federal Revenues. In this way, the burden of financial responsibility will be shifted to the Provinces while doing away with the Federal deficit, in fact the Feds would be left with a surplus. Provinces would do well by bringing in private sector revenue information gathering agencies to monitor wealth.
The reduction of Customs Duties on vehicles across the board was extremely badly advised. To the extremely rich it hardly makes any difference paying Rs 1.8 million or Rs 3.6 million for a car but at the lower end of the scale even Rs 10,000 makes a difference. Duties could have been reduced upto 1000 cc and even 1300 cc but above this they should have been increased. As it is, the Finance Minister has withdrawn his earlier proposals and duties have gone up again but not enough. It opens up the PM to charges of cronyism which could have been avoided. This is being exploited by the Opposition through lurid stories, these may not be true but is accepted as such by mass perception and is thus damaging to the image of the PM.
Senator Sartaj Aziz may be the target of a coordinated campaign, as much as his detractors may fulminate nobody can challenge his honesty and integrity. In a bad economic and political climate, he has done a commendable job. He has not tried innovative changes because of the existing environment but neither has he been unfeeling of the problems of the masses. Certain changes will have to be made and he would do well to listen to the financial experts of the Opposition where they make useful suggestions. Like the role of IMF as defined by its Chairman Camdessus he has tried Battlefield Surgery. Unfortunately we are headed for a major surgical exercise in the future if the current Budget deficit continues to multiply. Before that happens Senator Sartaj Aziz would do well to listen to the Doomsday soothsayers about the projected health of our economic climate and take necessary prevention measures.
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