The budget we present to the people of Pakistan on June 9 should be an honest discussion. He must point out that our chronic weakness in reforming incremental spending or repairing domestic resource mobility (DRM) leaves the fiscal framework in a vulnerable state.
The Budget 2023-24 should then make sense to take corrective action. It should lay the foundation for building a strong economy and a just society. This is not an easy task and requires a bold, smart and intellectually deep response from the government.
Pakistan’s 250 million people are eagerly looking to the authorities to show commitment to tackling the big budget challenges. Federal fiscal spending has spiraled out of control—expenditure growth in FY23 exceeded the 3 percent target of 25 percent.
Rationalizing expenses for financial savings has become imperative. Pakistan’s revenue collection is equally challenging. FBR’s tax-to-GDP ratio has come down to just 8.6% in FY23. This takes us back to where Pakistan stood a decade ago.
The severity of the financial crisis for FY24 is simply alarming. The federal government’s net receipts, estimated at around Rs 6,000 billion, are also significantly short of paying interest on our domestic and foreign debt.
Expected interest payments will exceed 7500 billion rupees. Pakistan will have to borrow for all other expenses including running the civil government, pensions, defence, development, subsidies and grants.
The authorities need to reduce the expenditure growth in all these budget heads to a very modest level. In order to cope with rising interest payments, we have to raise revenues from extraordinary profits in the financial sector.
We have allowed the country’s fiscal deficit to remain large—estimated at 7.9% in FY22 and 7.4% in FY23. This has had serious consequences. This has put financial and debt sustainability at risk. The need to finance large deficits has increased government borrowing from the financial sector and stifled private investment.
Frequent and large fiscal deficits are harmful to the economy as they fuel current account deficits and inflation in the country. Thus, the main tenet of Budget 2023-24 is to ensure a small fiscal deficit and achieve a zero primary deficit – a key condition set by the IMF.
The next budget cannot be another cycle. Given our dire situation, it should be a crossroads.
Let me outline how to address expenditure and revenue reforms for the formulation of Budget 2023-24. Expenditure reform principles should ideally focus on living at a reasonable cost, which is responsible and affordable and prioritizes those most in need.
This clearly includes an increase of Rs 250 billion in the Income Support Programme, a minimum wage of Rs 25,000 to Rs 32,000 and a 15 percent increase in pensions and salaries.
The private sector should also follow suit. Importantly, the budget should deliver historic reforms on spending – including a debt re-profiling framework, savings measures through better public financial management including the Treasury Single Account, subsidy targeting, contributory pension systems and housing and cars. Earning the benefits of
The budget should reduce federal spending by completing fiscal decentralization and reducing spending in provincial areas of responsibility. A recent World Bank study has highlighted potential savings of Rs 643 billion annually. The government should be bold enough to reduce expenditure on transferred areas which are the domain of provinces.
Provinces should step up to support the vulnerable, especially to curb food inflation. Cost-sharing arrangements should be developed for spending on income support.
Now more than ever, it is critical to capitalize on opportunities that favor disadvantaged communities, especially women, and to fund investments in agricultural research and development to increase productivity. Emphasize.
Emphasis should be placed on divesting state-owned enterprises (SOEs). The country needs to stop bleeding the exchequer to keep dysfunctional SOEs alive even if they are unviable. The country needs to invest in soft infrastructure.
This can only happen if we are prepared to re-prioritise the development budget and reduce expenditure by over Rs 12,000 billion. Overall, spending reforms should underpin growth through investment in state jobs, clean energy, and value-added industries, skills, technology, and small businesses.
DRM principles need to include both tax policy and tax administration measures. They need to incorporate equity and progressivity in taxes to ensure that the tax burden falls on people based on their earnings. This means a reduction in exemptions and preferential treatment which is estimated to be around Rs 1,483 billion in FY22.
All income (rent, interest, profit) needs to be brought under one head and taxed at marginal rate of income tax. Increasing the share of direct taxes in total tax revenue will make the existing tax system more equitable. We cannot expect serious revenue growth without bringing sectors like agriculture, real estate, traders and retailers into the tax net.
Also, capital gains tax, inheritance tax and e-commerce – which remain outside the ambit of mainstream taxation – should be brought to the central level.
This can have a significant impact on revenue growth, which is estimated to vary from Rs 700 billion to Rs 1000 billion depending on the estimated rates. Taxpayer compliance and enforcement are two of the weakest links for the Federal Board of Revenue (FBR), which still fully utilizes the data available through the Compliance Risk Management Framework to identify, prioritize and mitigate risks. But could not take advantage.
Requiring legislation to ensure data integration, digitization and increased use of new technologies can further enhance compliance and reduce the burden on taxpayers leading to a smoother and frictionless tax system. Can be presented.
The current tax gap is estimated to be at least 30 percent of the original tax. Thus increased compliance could take the tax estimate for Budget 2023-24 from Rs 9,500 billion to Rs 12,000 billion – a much-needed correction.
To fill the tax gap, the country will need to levy new taxes of around Rs 700 billion to reach Rs 9,500 billion. The budget should include a legal requirement to conduct regular tax gap studies for value-added tax, corporate income tax, and personal income tax to measure the amount of tax revenue lost through non-compliance and policy decisions. .
Therefore, I say with clear conviction that the above framework for budget reforms is indispensable for Pakistan. In the absence of fiscal reforms, we will be forced to maintain current account pressures by restricting imports through administrative controls.
It is unproductive and leads to increased inflationary pressures, disruption of industrial production, and poor export performance. The good news is that financial transformation is possible. We have tried to lay out the contours for such a turnaround from the citizen’s point of view. It is hoped that Budget 2023-24 will see some of the above agenda.
The author is an economist and former adviser to the Ministry of Finance.