Budget 2010 has been received with the usual cacophony of complaints. Everyone wants a bigger slice of the cake without contributing sufficiently to it. Workers want higher wages and low prices for food. But farmers want high prices for food and low prices for fertilizer, electricity and seeds. Neither sector is able or willing to give higher productivity or raise yields, increase output or change the social relations of production that lead to inequities and inefficiencies in their sector. Similarly, businessmen want a range of incentives, including low interest rates, high political stability, a cost-efficient infrastructure of communication and energy, and zero government regulation, but refuse to pay their share of taxes that go into the provision of such services. The army wants “more” money for defense every year but the level of national security – internal and external – that it is supposed to provide in exchange has been progressively falling and scaring away foreign investment. At the heart of the issue lies the “social contract” between the state and the people that is expected to make a nation vibrant and secure. The Pakistani state is corrupt and inefficient, Pakistanis are not paying their taxes and everyone is disgruntled.
There are several core issues over which a national consensus is missing. On the size of the cake, taxes are a core issue. Pakistan’s Tax:GDP ratio at 9.8 % is among the lowest in the world. We need to raise this to over 20%, at par with world standards. This can be done by getting rid of tax exemptions on agriculture and services, opting for progressive taxation as in Europe and compelling accurate documentation of the economy. The Federal Board of Revenue must be more efficient and ruthless than even the National Accountability Bureau, as are the CBR and INR in India and US respectively. If 100 of the wealthiest persons in each sector of the economy – manufacturing, trade or services – were to be made tax-accountable, half the problem would be solved overnight because the lesser fry will fall in line out of fear. A first step in this direction would be imposition of VAT across the economy, regardless of opposition from vested or ignorant quarters. Therefore the PPP government’s decision to postpone this step is a condemnable sign of political opportunism.
The second factor is foreign aid, foreign investment and foreign loans. We must neither beg for these nor spurn them out of hand. Foreign investors should be welcomed. That is the way of the world. We must create a suitable environment of national arbitration and sovereign guarantees instead of cheering ill-considered and “populist” interventions by the courts. Foreign investors should, in particular, be encouraged to buy public sector enterprises that are draining the economy with their losses and inefficiencies. If corruption is an issue, it should be tackled through transparent auctions in which credible media representatives and trained judges are brought into the overseer loop. Similarly, making a clenched fist with one hand about “sovereignty” regarding IMF and World Bank conditions and a begging bowl in the other hand is misplaced nationalism. If we want to use their cheap money, then we must get ready to rationalise our economic and financial system so that it is capable of generating growth and repaying its debts. In fact, all this criticism over the rising Debt:GDP ratio is relevant only if the economy is progressively unable to service its debts. Pakistan’s ratio is less than the 80% + in G-20 countries, (100% + in advanced G-20 countries and nearly 90% in India). Therefore it is not how much one borrows but how one spends the borrowed money (on consumption or production) that matters. If borrowing is for an infrastructure of ports, roads, dams, education and health which buttress the economy, then that is good. But if it is for weapons, wars, corruption and wasteful government expenditures, then that is bad.
The other side of the equation is government expenditures. The Pakistani state is subsidizing a clutch of inefficient and corrupt public sector corporations to the tune of Rs 250 billion every year. These must be privatized. Defense related matters take up over Rs 500 billion or about 30% of our current tax revenues. This ratio must be brought down by half at least, yielding another Rs 250 billion. But this will require a public reassessment of national security, including the requirement for a strong economy. Pakistan’s “India-centric paradigm” military is based on an internally weak economy while India’s runaway military capability is based on high economic growth. The arms race hurts Pakistan enormously.
Let us not lose sight of the wood for the trees. Of course, salary increments of government servants, retention of Benazir Income Support Program, a rise in the ceiling of income tax exemption on salaries, etc., and an increase in the revenue share of provinces under the new National Finance Commission Award are all welcome. But we must focus on the big existential issues like tax collection, energy theft, corporate subsidies, foreign assistance, privatization, national security and political stability to get out of the long term economic crisis. Unfortunately, the PPP government, like its predecessors, has demonstrated neither the courage nor vision to address these issues.