Debt and fiscal policy statements 2012-13

Two important documents, namely, Fiscal Policy Statement and Debt Policy Statement for 2012-13, released on 4th February 2013 by the Debt Policy Co-ordination Office of Ministry of Finance, while expressing grave concerns about overall fiscal scene, have expressed deep dissatisfaction over failures of provinces in meeting the tax targets. According to details, the efforts of provinces towards the collection of taxes are not in line with the understanding reached during the 7th National Finance Commission (NFC) Award. It is revealed that all the four provinces registered a deficit of Rs 39.1 billion against targeted surplus of Rs 125 billion, leaving a significant shortfall in non-tax revenues for the fiscal year 2011-12. The absence of prudent fiscal policy coupled with a serious lack of implementation and accountability has destroyed macroeconomic stability during the last five years – the last year of the federal government has proved to be the worst, rather disastrous. At provincial level as well, the performance of all the four governments has been equally appalling.

Despite transferring the functions of 17 ministries to provinces, federal expenditure did not register any reduction because majority of the employees of the devolved ministries preferred to stay on the federal payroll rather than opting for the provinces. The second reason for increase in expenditure at federal level was the creation of some new ministries and up-gradation of some divisions. Since the federal government agreed to finance the vertical programmes under the NFC accord, the pressure on its fiscal balance continued. According to official documents, “the provinces were unable to support the federal government as had been envisaged in the fiscal devolution process.” More specifically, it is observed, “the provinces’ share in total expenditure increased from 31.5% in 2011 to 34.5% in 2011-12, whereas their share in revenue generation remained almost the same at 6.0% of the total (federal plus provincial) revenues”.

It is revealed that the provinces posted a surplus of Rs 134 billion in 2010-11 mainly due to an upward revision in their share (56%) in divisible pool under 7th NFC Award. It is, however, disturbing to note that in 2011-12, they registered a deficit of Rs 39 billion. They did not make any meaningful efforts to raise their own revenues and reduce unproductive expenditure. The deficit in 2011-12 was driven by a sharp rise in provincial expenditures.

Huge opportunities accrued to the provinces in the wake of 7th NFC Award and 18th Constitutional Amendment – right steps towards fiscal independence, accountability and efficient decision making for the provision of local services and financing thereof – but they failed to convert them for the well-being of masses. It is high time that the provinces should stop blaming the federal government for all their ills and fiscal mismanagements. They should put their own house in order, exploit great opportunities available to them, exploit natural and human resources to the optimal level, tax the rich for the benefit of the poor, reduce expenditure, go for long-term projects yielding more and more employments and ensure sustainable economic growth with social justice for all. So far their performances in the wake of 7th NFC Award are not satisfactory at all.

The documents released by the Debt Policy Co-ordination Office shows that “among the provinces, Punjab has a share of 44.5%, both in total provincial revenues and total provincial expenditures. It is followed by Sindh with a 28.8% share in total provincial revenue and a 30.4% share in total expenditures. These two provinces drive the whole outcome of provincial fiscal operations. This is why, despite a budget surplus of Rs 19.1 billion in Balochistan, the overall provincial balance was in deficit because of Sindh and Punjab. Although both Sindh and Punjab made efforts to increase revenue, they could not control expenditure. Sindh had to face extra outlays to rehabilitate flood-affected people in a large part of the province, while Punjab spent on infrastructure, health, education and food subsidies. Khyber Pakhtunkhwa witnessed a budget deficit of Rs 3.7 billon during 2011-12, despite being the largest recipient of federal loans and grants (Rs 34.5 billion)”.

The documents further state that “the province’s own resources (other than grants and transfers from the divisible pool) shrank (-69.7%), while its expenditure growth was 30.2% during the year. The performance of Balochistan did not differ from that of Khyber Pakhtunkhwa in revenue mobilisation; however, its expenditures were well contained. While all other provinces spent on development programmes, Balochistan could not keep pace, and therefore witnessed a budget surplus of Rs 19.1 billion”.

The picture that emerges from the documents is very bleak. The total debt, it is admitted, breached the limit of 60% of GDP envisaged under Fiscal Responsibility and Debt Limitation Act of 2005. Our total debt – internal and external – is increasing at an alarming rate and becoming unmanageable due to sheer callousness of the rulers. The government since 2008 has been borrowing recklessly to meet burgeoning budgetary deficits. Today’s Pakistan represents a state where ruling elites – militro-civil-judicial bureaucracy, landed aristocracy, industrialist-cum-politicians, oligarchy of religious and spiritual leaders – are very affluent, but the country is on the brink of bankruptcy. This state of affairs is the direct outcome of policies of successive governments – military and civil alike – allowing a free hand to forces of loot and corruption.

During the last five years, neither at federal nor at provincial levels, any concrete efforts were made to impose fiscal discipline, reduce inflation and induce economic growth. There was no strategy made to mitigate risks of falling foreign reserves and debt burden. According to latest estimates issued by International Monetary Fund (IMF), “considering the size and magnitude of Pakistan’s public debt, a high fiscal deficit is inevitable, as the country’s total debt and liabilities have increased to Rs 15.1 trillion, or 68.4%, of GDP in the first quarter of the current fiscal year, while debt alone stood at Rs 14.4 trillion, or 65.3% of GDP during the same period.” IMF claims that fiscal deficit reached 8.5% of GDP in 2011-12, against the original budget target of 4%, reflecting both revenue and expenditure slippages, including higher subsidies mainly to clear arrears in the power sector – the situation is worsening in the current fiscal year.

While Pakistan is caught in a deadly debt trap, the rulers are not inclined to impose fiscal discipline and government continues to borrow recklessly from banks to pay off liabilities of the corruption-ridden inefficient public sector enterprises (PSEs). According to SBP, “this has inflicted economy heavily and resulted in billions of rupees increase in the stock of total debt & liabilities (TDL). Accumulated loss of PIA alone has reached the figure of Rs 125 billion by the end of 2012.”

How rulers make mockery of the laws made by the Parliament is best exemplified in Debt Policy Co-ordination Office, established under the Fiscal Responsibility and Debt Limitation Act of 2005. Under the Fiscal Responsibility and Debt Limitation Act of 2005, it was the duty of the Debt Policy Office to ensure effective management of debt control by formulating a strategy for reducing it. On the contrary, this office has allowed public debt to grow by 88% in last five years.

The government’s unabated borrowing to meet burgeoning budgetary deficit is sinking the economy. One of the major weaknesses of economic governance is unchecked wasteful spending on monstrous government machinery and inefficient PSEs. Unwillingness to collect taxes from the rich and mighty is accentuating the plight of the poor. There is no scarcity of resources – as propagated by the rulers to shift blame on others – but issues are related to lack of management on the part of political leadership and bureaucracy. Failure to harness the real potential of Rs 8 trillion by taxing the rich is playing havoc with socio-economic fabric of society. Behind the present chaotic situation in Pakistan, amongst other factors, is an ever widening gulf between the rich and the poor. It is shocking that with every passing day more and more people are being pushed below the poverty line – their total number is now not less than 60 million in a country where rulers unashamedly waste billions of rupees on their personal comfort and security.

Our foreign debt is going to be US $75 billion in 2015 and that of domestic debt Rs 20 trillion if curative measures and tough decisions are not taken. The policy of appeasement towards tax evaders, money launderers and plunderers of national wealth, if not discontinued, will push the country to complete disaster. The shameless indulgence of rulers and bureaucrats in wasteful expenditure – when half of the population of the country is facing malnutrition – is simply criminal. Adding insult to injury they are not ready to pay taxes or collect the same from the rich and mighty.

Pakistan can easily collect taxes of Rs 8 trillion to eliminate fiscal deficit. If we tax 10 million individuals having annual taxable income of Rs 1.5 million (a very conservative estimate), total income tax collection at the prevalent tax rates comes to Rs 3,750 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000, the gross figure would be nearly Rs 5,000 billion. FBR collected only Rs 716 billion as income tax in last fiscal year. Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is not more than 30% of actual potential. In fiscal year 2011-12, FBR collected Rs 804.8 billion under the head sales tax, Rs 122.5 billion under federal excise duty and only Rs 216.9 billion under custom duties. The total indirect collection of just Rs 1,148.2 billion is pathetically low. It should have been at least Rs 3,500 billion. If prevalent tax gap of billions is bridged, the total revenue collection cannot be less than Rs 8,500 billion without imposing any new taxes or raising the tax rates. It will change the entire fiscal scene of Pakistan. Instead of deficit we will have surplus funds to retire our debts – internal and external.

We can never come out of the debt trap unless the mighty sections of society are taxed and tax policy is used as tool for industrialisation – taxing the unproductive sector to divert money to productive sectors. At the same time, it is necessary to ensure redistribution of income and wealth through progressive taxation – taxing the rich for the benefit of the poor. At present, we are taxing the poor for the benefit of the rich. Debt-enslavement is the main cause of our economic and political subjugation – we can never break these shackles unless we become a self-reliant economy. For this, the President, Prime Minister, ministers, parliamentarians, heads of political parties and high-ranking government officials would have to take the first step by living modestly, start paying their taxes, repatriate all their foreign assets, ensure socio-economic justice for the weak and needy, give basic facilities to all, and mobilise the masses for discharging their tax obligations diligently. Unless the people see and enjoy the benefits of paying taxes no matter how much sermonising we do it is not going to work at all. Change in political culture and mindset alone can resolve this issue – it is better for the ruling elites to go for this as early as possible or be ready to face bloodshed, sooner or later.

(The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences (LUMS)