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Getting Out of the Woods

The government must practice austerity on the one hand but it must also widen the tax base.
It is unable to do so under its present tax collection arm and needs to introduce drastic
measures to reform the Federal Board of Revenue and other allied organizations.

By Khawaja Amer | October 2020

The PTI-led government, after it took power some two years ago, announced that it would practice austerity to steer the economy out of choppy waters. But the government was left with no choice but to bring in large amounts of foreign money in the form of aid and loans to inject some blood into Pakistan’s anaemic economy. Therefore, it is either difficult or premature to say how much of the austerity measures have helped the economy to come out of the woods. But then, can austerity measures really help in solving the economic crisis of that magnitude, further multiplied by the Covid-19 pandemic --- a crisis that will have long-term implications for Pakistan’s economy. But one thing is clear that austerity without measures to generate more revenue is of no use.

John Maynard Keynes, the well known British economist, said, “The boom, not the slump, is the right time for austerity at the Treasury. Paul Krugman, a noted American economist, argues that since a government is not like a household, reductions in government spending during economic downturns worsen the crisis. Imran Khan’s austerity measures can be termed as simple household solutions for big and complicated problems of a Third World country like Pakistan. His austerity measures kicked off with the auction of buffaloes and surplus luxury vehicles belonging to the PM house. The buffalos fetched over Rs2 million while the vehicles some Rs200 million. There are a number of other measures also which include cabinet meetings without refreshments, etc. These can be termed as misplaced priorities for positive change in revitalizing the economy and this can only come from sound GDP through active participation and meaningful contribution of the business community.

Economists believe that austerity implies a cut in government spending during a period of weak economic growth. It is a deflationary fiscal policy, associated with lower rates of economic growth and higher unemployment. This leads to lower tax revenue and can offset the improvement from spending cuts. As such what is needed is to restructure the economic foundations of the country and chart a new path forward. Imran Khan has always talked about transforming Pakistan and charting a new course ahead which can only be achieved by introducing creative and bold policy measures - not just taking small austerity measures. Hence, one can safely say that our finance managers have failed to come out with bolder and more creative approaches to take the economy out of the woods.

However, one must appreciate a major cut in the personal budget of the Prime Minister and his Secretariat. The budget documents show that the total budget of the Prime Minister including “internal and public” is Rs.863.00 million, down from the Rs1.04 billion expenses incurred in the outgoing fiscal year. There are also reductions under almost all the heads and the employees. The related expenditures of the Prime Minister House is Rs.686.84 million against Rs.752.81 million incurred in the last fiscal year, whereas the approved budget of pay and allowances of the Prime Minister’s Office for 2019-20 was Rs879.43 million. At the same time the operating expenses of the Prime Minister Office in the outgoing fiscal was Rs.212.49 million which has been reduced to Rs.127.89 million for 2020-21.

No doubt these measures show the sincerity and will of Prime Minister Imran Khan to take the country out of its economic crisis. Keeping in view the current economic scenario, there is a need to do something on a war footing. This is the time to seek assistance and suggestions to revitalize the economy from the Council of Business Leaders (CBL) which Imran Khan very rightly created within 100 days of his premiership and promised to personally chair its meetings. There is no news about this important forum and we really don’t know whether any meeting was held under the chairmanship of Imran Khan. Had he been regularly calling meetings of the CBL things would not have gone from bad to worse.

To find out if austerity can steer the economy out of the choppy waters, let’s compare Pakistan with Bangladesh where no austerity measures have been taken. The debt per capita for Bangladesh ($434) is less than half that for Pakistan ($974) but its foreign exchange reserves ($32 billion) are four times more than Pakistan’s ($8bn). The IMF calculates Bangladesh’s economic growth from $180bn at present to $322bn by 2021.

The economic situation in Pakistan today is indeed worrying. This year’s Pakistan Economic Survey, a government-issued report that precedes the annual budget presentation, has painted a dismal picture of the domestic economy. The provisional GDP growth rate for the fiscal year 2020 is estimated at - 0.38 percent as a result of a decline in the agricultural, industrial and services sectors respectively. The Economic Survey shows an inflation rate of over 11 percent, one of the factors that has hit the people of Pakistan.

Research carried out by the United Kingdom’s Office for Budget Responsibility indicates that the austerity policies enacted in the United Kingdom had the effects of reducing the economic growth in 2011-2012 by 1.4 percent. Therefore, even the toughest austerity measures will not serve the purpose. What required is to broaden the tax base. Unfortunately, the FBR has failed to broaden the income tax base that actually shrank 12per cent this year, while, on the other hand, it’s arm-twisting tactics against the taxpayers continued amid desperate efforts to enhance tax collection. As against 2.82 million income tax returns filed in tax year 2018, this year only 2.5 million fulfilled their legal obligation, which led to a 12 per cent contraction in the tax base.

Prime Minister Imran Khan was utterly dissatisfied with the performance of the FBR. Speaking at the 11th All Pakistan Chambers Presidents Conference on 7th March, 2019, he said that he may create a new tax authority if the FBR failed to achieve tax collection targets. Reforming the FBR is essential to meet the expenditures of the government. The Prime Minister also assured the business community that he would try his best to fix the FBR. “If our tax collection authority does not function properly, it could lead to a security risk. No nation that relies on loans can maintain its pride and independence,” he remarked and added that FBR should be a business-friendly institution.

Commenting on the current situation, the Prime Minister wondered, “How can it be that of the 210 million Pakistanis, only 72,000 individuals declare monthly income of Rs 200,000 or above?” He also appealed to people to come under the tax net and assured them that their tax payments would be spent with great caution and not wasted. In turn, the business community should tell the people that it was impossible for any country to succeed without paying their taxes. “I am ready to slash down taxes to widen the tax net but paying taxes should be considered a national duty,” the Prime Minister reiterated.

This shows that Imran Khan understands that the main thrust should not be on austerity but on generating income by introducing smart fiscal policies to adjust the spending levels and tax rates to monitor and influence the nation’s economy. His finance managers and FBR chief must work accordingly to take the country out of the choppy waters.

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