Over the past two years, tax revenue has shown steep decline from 9.9 percent to 9.5 percent, whereas it remained stable at 11 percent during the last three years of previous government, although it was not an appreciable achievement. Moreover, stagnant revenue collection of the past government was understandable as the leadership of ruling PML-N had not shown interest to expand the tax base through direct taxes. On the contrary, bringing all wealthy people in the tax net and significant reduction in public debt were major election slogans of PTI leadership. Sliding of tax-to-GDP ratio from double digit to single digit is flabbergasting phenomenon.
Previous government had no intention of tax reforms and documentation of economy and present one caved in to traders’ strike supported by the opposition. The halfhearted drive of bringing wealth people into the tax net was defeated by the top tax bureaucracy of Inland Revenue Services Department. Contribution to income tax was mainly from the salaried class. Leakages in custom duty by way of under invoicing could not be plugged.
A major budget proposal was on the table to integrate National Database Registration Authority (NADRA) with Federal Board of Revenue (FBR) to unearth the hidden assets of citizens to increase the number of potential tax payers for enhancing revenue collection. The multilateral donor agencies have been suggesting for the same since, 2010. This also included real-time access to data of provincial land and tax authorities, housing societies and telecommunication companies. FBR had suggested the inclusion of new sections in the Income Tax Ordinance 2001 and Sales Tax Act 1990 to legalize access to NADRA database. Had the proposal been approved by the Federal Cabinet for inclusion in the Finance Bill, it would have difficult for the opposition to oppose it in debate over budget. However, it was dropped discretely, which implies that pressure group within the ruling party may have put resistance to its approval.
The sagging revenues and rigidity of current expenditure is keeping fiscal deficit high. The financing of budget deficit necessitates excessive borrowing by the government. Notwithstanding the critique of the Prime Minister on the previous government to have piled unsustainable public debt, the present government is adding to it in a big way. In the outgone fiscal year during July-May public debt rose by 8.5 percent to Rs.34.5 trillion. In the current fiscal year, too, there will be greater reliance on massive borrowing to finance budget deficit. Does this justify retention of two dozen unelected advisors and special assistants in the unwieldy and cumbersome federal cabinet? Is it not the negation of Prime Minister’s resolve for austerity, which he had shown after assuming office in August 2018?
The logic of zero borrowing from the central Bank and excessive borrowing from commercial banks and National Savings Organisation is not understandable. The source of borrowing from National Saving Schemes will get choked as policy rate has been reduced by 625 basis points. When the first interest rate cut of 2 percent came, foreign investors withdrew their investment T-Bills and National Saving Products. It explains the flight of hot money, which was portrayed as foreign direct investment in productive assets. The National Saving Schemes for pensioners and senior citizens such as Behbood Certificates and regular monthly income certificates are no longer attractive. The diminished rate of return on such schemes will certainly impact the ratio of domestic savings. It merits mention that it was the most attractive rate of profit on various National Saving Products, which had increased domestic saving-GDP ratio to 17 percent in 1980-88. The reduction in rate of return in 2004 had significantly lowered this ratio and had diverted domestic savings for investment in real estate business.
Increase in public debt itself boosts economic growth, if it is spent on productive development schemes like building of storage dams and low cost energy projects. On the other hand, if it is diverted to spending on grandiose less productive mega projects like motorways, then it becomes unsustainable. The present government is just repeating the history.