September 12, 2016
Informal affairs
While the federal government continues to boast rising tax revenues, the controversial strategy of using indirect taxes has received another unfavourable review. This time the criticism has come from the State Bank of Pakistan. The forced ‘broadening of the tax base’ – under IMF orders – has resulted in a decline in cash deposits in banks and an increase in currency circulation. This is according to the quarterly report by the SBP, which contrasts key figures from this year and the previous year to draw a rather bleak picture. Sure, tax collection has increased by over 10 percent, but the cost is the informalisation of the economy. The imposition of withholding tax resulted in a sharp increase in the purchase of prize bonds; to Rs94 billion from the Rs50 billion last year. The SBP seems to be saying that prize bonds might be used to conduct transactions instead of banking. The rise in bank deposits – Rs150 billion – is also low compared to the period between July 2015 and March 2016. The reason behind all this is simple: the 0.6 percent withholding tax on bank transactions, which exposed the government to the wrath of the trading community.
Experts had predicted that the outcome of such short-term measures would be an increase in the undocumented economy. Indirect taxes cannot be a long-term measure to secure the financial health of the country. While the finance secretary does not seem very worried about the negative data, there is an argument to be made for claims that people have been using cash and other mechanisms for trade since forever. It is banking that is the relatively new kid on the block. One must recall that it took a significant change in government policies towards banking in the late 1980s that made groups traditionally resistant to operating within the formal economy start using banks to store their wealth and conduct their businesses. The return to informal mechanisms of trade has clearly been faster and smoother than the government expected. The SBP has also criticised frequent changes in tax policy after the announcement of the annual budget. The use of regressive taxation measures, such as indirect and withholding taxes, indicates a failure to develop a long-term fiscal policy. Withholding taxes are 67 percent of all direct tax collection, a rather alarming number. The government must weigh the short-term benefit of withholding taxes against the long-term damage they cause to the process of formalising the economy. The SBP’s data must be considered seriously by policymakers to shift the focus of our tax policy to direct taxes.
Our ill health sector
A Supreme Court hearing last week into corruption in the public health sector showed once again that even this vital sector is not spared the incompetence, adhocism and neglect that befall most government departments. The Supreme Court found that recruitment has slowed to a crawl because the applicable laws for hiring have yet to be framed. Many public-sector hospitals are even operating without a permanent head and confusion prevails in hospitals around the country. Speaking specifically for Islamabad, the joint secretary for the Capital Administration and Development Division, Ayesha Farooq, said that primary health care was being taken care of by the interior ministry, an assertion which drew a stinging rebuke from the judges who wondered what authority that ministry had in the health sector. Part of the problem is that the centre and the provinces have been unable to figure out the lines of responsibility after the passage of the 18thamendment and the devolution of the health sector. Rather than clarifying jurisdiction, they seem to be making up the rules as they go along. The SC has now asked the attorney general to supervise the formulation of rules for recruitment and given the government two weeks to submit a response.
The court intervention is timely because the health sector is in a state of paralysis. The new National Health Vision, launched recently, was the first such document since devolution and only the fifth in our history. It wisely chose not to dictate to the provinces and instead tried to be more strategic. It was also the product of intensive collaboration with the provinces and the public and private health sectors, giving it more weight than previous such proposals. But, as the court hearing showed, there is much that has been ignored. Chief among the unanswered questions is how we plan on funding the health sector. The centre seems to have assumed that international organisations will cover whatever shortfalls we have. While that may be true for issues like polio which affect the whole world, we cannot expect outside help for primary and preventive care. Despite taking on board the views of the provinces, the centre is still to institute a forum for the federating units to formulate joint strategies and compare their performances. Ideally, devolution would allow provinces to adopt each other’s best practices but in reality it has been a race to the bottom. The National Health Vision must not only be endorsed by parliament, it must be accompanied by efforts to ensure there are sufficient doctors and nurses and that each province is getting the resources it needs to spend on health. A document – or even a Supreme Court instruction – alone will not get us there.