The finance ministers and the central bank governors of the Group of 20 nations (G20) met in Moscow on July 20) to review the global economy. They agreed to take measures to put their economies back on the job-rich growth path. In their opinion, the global economy remains too weak and its recovery is still fragile and uneven with some eurozone countries battling youth unemployment of 60 percent. In this perspective, the G20 pledged to put growth before austerity.
The debate over growth and stability seems to have come to an end if we carefully read the communiqué issued by the G20 at the end of their meeting. Boosting demand and combating unemployment have emerged as the top priority of the G20. Budget consolidation (stability) is necessary in the medium term but growth promotion is absolutely necessary in the short term – this was an area in which consensus was developed in the meeting in Moscow.
Readers will recall that in a series of articles (April 23, April 30, May 7 and so on) I talked about striking a balance between stabilisation and the developmental roles of macroeconomic policies. The conventional macroeconomic policies advocated by the IMF have always focused on stabilisation first (that is, reducing budget deficit, bringing public debt under control and keeping inflation low) to create the conditions for growth and employment.
The post-2008/09 global economic meltdown, the protracted European debt crisis leading to economic recession in many eurozone countries and the associated human suffering have forced the world leaders to rethink their macroeconomic policies. Sharp fiscal adjustment in Greece, Spain and other eurozone economies caused heavy social costs and human sufferings arising out of austerity programmes. The general consensus that began to emerge in the G20 Summit in Brazil last year, which was reinforced by G20 leaders in their various meetings (the last one in Moscow), was that there is a need to strike a balance between stabilisation and the developmental roles of macroeconomic policies.
World leaders have now recognised the importance of growth, job creation, equality, social development and environment. This can be achieved by pursuing a forward-looking macroeconomic policy that promotes sustainable development leading to inclusive and equitable economic growth on the one hand, and stabilisation on the other.
I have been advocating the same approach for the past six months in the context of Pakistan – that instead of stabilisation in the traditional sense, the country should strike a balance between stabilisation and growth. I have also warned that such macroeconomic policies do not in any way advocate lax fiscal policy or encourage fiscal indiscipline. Rather, they place greater emphasis on domestic resource mobilisation on the one hand, and quality and composition of public expenditure on the other.
I have always emphasised mobilising resources through the tax system and tax administration reforms as well as prioritising quality and composition of expenditure by allocating more resources towards education, health, social protection and infrastructure as being the key to achieving developmental goals of macroeconomic policies. This is now the new received wisdom as propounded by the global leaders to achieve robust and job-rich growth.
The new government has presented its first budget and also come to an agreement at the staff level for an IMF programme. The policy direction appears to be right but methods to achieve the developmental goals of macroeconomic policies leave much to be desired. The capacity of tax administration and the revenue target fixed for the current fiscal year (Rs2475 billion) are inconsistent with each other. Such a revenue target with the existing tax base appears highly ambitious and unachievable.
Pakistan needed to bring all economic activities, which have either remained untaxed or under-taxed thus far, under the tax net. Everybody was expecting income originating from agriculture to be included in the direct tax net but their expectations were met with disappointment. Many services that have hitherto remained untaxed or under-taxed also remained out of the direct tax net.
No efforts appear to have been made to improve the withholding tax regime. The finance minister has not mentioned a single word thus far on improving this tax. This is a major source of revenue and would go a long way in achieving the otherwise unrealistic revenue target. This is an issue of taxes being collected but not deposited in the government treasury. Bridging the gap between taxes collected and tax deposited may generate Rs250-300 billion in three years’ time.
The government has relied on raising tax rates rather than broadening the tax base. In other words, the government has raised the tax burden of those who were already paying taxes. Those who are influential have never paid taxes, and have once again remained out of the tax net. In an act of desperation, the government has taxed even the clothing of the poor (second hand clothing) and placed a heavy burden on cell-phone users. Such measures have not gone well with those segments of society who influence the minds of the people either through their writings or appearances on TV talk shows. Such tax measures were politically incorrect as well.
If everything goes well, Pakistan will be in an IMF programme from September 2013. There will be quarterly targets for tax collection. The quarterly mission of the IMF will force the government to take additional tax measures in the event of shortfall. This may happen in October, January and April. The ad hoc measures will have the risk of creating enormous tax anomalies, thus creating havoc for industries. We may see the re-emergence of mini-budgets.
I would urge the finance minister to review the FBR tax target since it is beyond the current strength of the tax administration to achieve. Or it should come up with credible measures or be ready to take a series of additional tax measures to achieve the revenue target.
The writer is principal and dean of NUST Business School, Islamabad.
Email: ahkhan @nbs.edu.pk

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