So the PM sang

During the election campaign – and immediately after – Prime Minister Nawaz Sharif had repeatedly stated that proper management of the economy would be the top priority of his government. There was a great deal of anticipation that he would lay out a specific economic policy agenda for the five-year tenure of his government to systematically and professionally address the daunting economic problems that are faced by the country and experienced by people in their daily lives.

However, except his substantive proposals in the beginning of his speech to handle the loadshedding crisis, the thrust of the rest of the economic part of his address was, as usual, to blame the past two governments for the current economic problems, to promise a hopeful economic future without any specificity under his government, and make no mention of the difficult policy decisions that his government will have to take to address the deep-rooted structural problems.

In his speech he indeed mentioned that the country was faced with (a) a loadshedding crisis (b) a huge public debt problem (c) lack of investment (d) youth unemployment and housing problems of the poor and (e) the financial burden of the loss-making public sector enterprises. Lack of good economic governance, a non-functional civil service and widespread corruption were also mentioned as impediments to economic development.

At the same time, he glossed over the equally urgent problems of high inflation, balance of payments vulnerabilities, glaring income inequality and dire poverty, and made no reference to the loan being sought by his government from the IMF in order to avoid the potential external debt default.

There was no mention of the enormous budget deficit, excessive money creation, the urgent need for tax reforms and improvement in tax collection, and the necessity to stop excessive reliance on Internal and external borrowing to finance public sector operations.

Without giving any specifics, he made the commitment to build a highway from Karachi to Lahore and from Gwadar to China, to inaugurate an underground train system for Karachi – and perhaps for other big cities – launch new housing schemes for the poor and an employment programme for the youth, most probably through provision of low-interest loans to them. These are all soothing songs and pleasant dreams but need resources to back them up.

He mentioned nowhere during his speech what the revenue resources of the country are at present and how his government will increase them to finance his economic vision for the future. He conveniently forgot to mention that even the floating debt that has been cleared by his government with great deal of fanfare was financed by printing of notes, which is an implicit tax to be collected from the poor through a high rate of inflation.

The execution of all his projects will require financing. The PM has made many statements in the recent past that his government will break the begging bowel and will not add to debt burden. A strategy of self-reliance in managing the economy is needed not only to achieve economic independence in the foreseeable future but also to rescue the foreign policy and national defence from being hostage to the multilateral and bilateral creditors.

If more public sector expenditure was to be incurred on development, highways and high speed or underground trains, education, health, housing and youth employment programmes, without adding to the already heavy burden of debt servicing, then the primary task is not the identification of viable and visible projects for economic and social development but to find ways to raise revenue to finance them.

The PM made no mention as to how his government will increase the currently low tax-to-GDP ratio, and where and how expenditure economies will be effected to create a fiscal space to undertake all the projects mentioned by him.

A restructuring of the taxation system is the first step to move in that direction. It will require taxation of the landed aristocracy, land mafia, real-estate tycoons, stock-market speculators, smugglers and black marketers. Additionally, it will require inclusion of the service sector in the income tax net, elimination of income tax concessions to several vested interest groups, introduction of a mass consumption tax of the VAT variety, documentation of all transactions, dismantling of the underground economy and a total revamping the of taxation machinery and the finance ministry. By now powerful vested interest groups have surfaced in all these places and have made inroads in the political system. Tackling them will require more than a speech.

The sequence with which the PM should move on the economic front is from revenue generation to expenditure planning rather than from compiling a list of large projects without mentioning the need for tax reforms.

The first commitment should be that the total amount of public debt would be frozen at the existing level. In other words, the government will borrow internally or from abroad no more than what it pays back in a year. This commitment will make the PM aware that the current revenue is hardly enough to meet the obligations of debt servicing and finance the inflexible defence expenditure.

For all other public sector expenditure, the government would need to mobilise additional real revenue resources – and the creation of such a fiscal space would depend on tax reforms. Depending on how much fiscal space is created, the government could then lay out its spending priorities. The present practice of announcing prestige projects and making false promises, regardless of the resource situation, should be abandoned if good economic governance is to be introduced.

The task of increasing investment and accelerating growth should be left to the private sector by providing it with a safe and secure environment and adherence to rule of law by all regardless of their economic, social or political status.

In other words, the government should take care of the security situation, dismantle incentives for underground business, guarantee property rights, leave the banking system free from government exploitation to do its financial intermediation function, make the SBP an autonomous and professional central bank, create a strong regulatory framework for the corporate sector and the stock exchanges and then leave the driving of the economy to the private sector.

Without revamping taxation, renewing efforts to mobilise real resource, ensuring the security and safety of the citizenry, enforcing rule of law, and creating an even playing field for all, economic management will remain business as usual with no real improvement in the foreseeable future.

The writer is a former governor of the State Bank of Pakistan.Email: doctoryaqub@hotmail.com