Budgetary policies in times of virus

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Pakistan’s policymakers are in an unenviable position while formulating the upcoming fiscal year’s budget

Everyone from small and medium enterprises to large-scale manufacturing industries is looking for relief measures to cope with the Covid-19 crisis. Even without the pandemic, many would expect some relief in the existing taxation regime as the government is reaching the halfway point of its tenure.

Unfortunately, there may not be much room for any major tax reductions. Already this year, the country would be fortunate even to achieve 70% of the original tax collection target of Rs5.5 trillion (which has been revised downwards several times).

While some blame lies with Covid-19, it was apparent from the beginning that the original target was almost impossible. One key lesson is that there should be some realism in setting the revenue target as that is the foundation of the whole budgetary exercise.

It should not be too difficult to estimate a ballpark revenue figure as the size of gross domestic product (GDP) and the growth rate are relatively better estimated, and the tax-to-GDP ratio does not change much.

Given historical trends, expenses almost always surpass estimates, while revenues are often much lower than the set objective. Notwithstanding these realities, according to press speculations, the IMF is pushing for a significant rise of 34% in overall revenues next year.

As the economy is likely to contract into negative territory, any tax increases will be self-defeating and not likely yield any additional revenues. It would be in everyone’s interest to have a realistic tax target – say about 15% higher than the anticipated receipt this year.

Having an achievable revenue target will result in more credibility on the expenditure side. Also, major stakeholders on the expenditure side will realise the seriousness of the situation and limit their demands.

Next fiscal year’s priority should be to curtail non-development expenditure and focus on such budgetary expenses, which can create employment. Thus, keeping a reasonable level of Public Sector Development Programme (PSDP) would be valuable.

At the same time, tax reforms can facilitate the business environment and often bring more revenues. It is particularly vital that the industry, especially the small and medium enterprises, can restore its activity so that some of the job losses could be recovered.

Tariff board

The budgetary measures, which are also the main channel for determining the trade policy, will be the first test of the new Tariff Policy Board, headed by the prime minister’s adviser on commerce. The initial milestone will be whether the new tariff policy can change the direction to support Pakistan’s industrial growth, international trade and other public interests.

Even if the tariff rates cannot be seriously rationalised to give much-needed relief to the local industry with cheaper inputs and reduce rampant smuggling, at the very least, the Tariff Policy Board can simplify the tariff.

Every government intended to provide a level playing field for various industries by reducing the number of Statutory Regulatory Orders (SROs) and tariff slabs to reduce tariff dispersions. Still, for more than a decade, it had been mostly lip service with no real reforms.

The Tariff Policy Board can change it. In addition to the simplification of tariff, there is an urgent need for budgetary measures to cope with the Covid-19 health emergency.

The minimum concessions for coping with Covid-19 should include an extension of the temporary exemption for medical and other healthcare equipment from import taxes till the pandemic is over.

A recent study by World Bank economists, giving the comparison of applied tariffs in 20 developing countries, showed that Pakistan is one of the three countries which have the highest import taxes on Covid-19 products. It is unfair to not prefer people’s health and welfare for the sake of minor revenue.

Malnutrition

Another linked issue is that of malnutrition, which is already affecting almost half of the Pakistani children and women but will become worse with the impact of Covid-19.

Prime Minister Imran Khan highlighted stunting in his inaugural address. According to a recent study, the consequences of malnutrition cost Pakistan’s economy $7.6 billion every year.

With the help of the World Food Programme, the government has been working on increasing access to food supplements for the vulnerable section of society. But the high incidence of import taxes on the ingredients of food supplements makes it difficult to manufacture them locally. In this Covid-19 period, malnutrition must not increase.

The budget may not be able to set any lofty goals but it should at least save common people from further economic losses and protect the poor from falling into destitution.

The writer is a senior fellow with the Pakistan Institute of Development Economics and has served as Pakistan’s ambassador to WTO

Published in The Express Tribune, May 18th, 2020.

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Policy Research Institute of Market Economy

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