- Missed tax revenue targets with low GDP growth is a recipe for disaster
When the PTI completed its first financial year in office it was the first time in over a decade that tax collection by the FBR was, in reality, less than last year’s with Rs 3.842 trillion collected in FY 2017-18 as compared to Rs 3.829 trillion in Year 2018-19. Current financial year predictions of already a Rs 1 trillion shortfall from the original target of Rs 5.55 trillion are being revised upwards to Rs 1.5 Trillion shortfall due to the impact of the Coronavirus. In such a situation FBR will collect a figure close to about Rs 4 trillion which implies that in the last three financial years tax collection will have remained stagnant, a feat, maybe unseen since the creation of Pakistan. Now only for examination convert this revenue to dollars as per the existing rates at the time of collection and the results will be horrific. We will collect almost USD 10 Billion less in FY20 than a collection of approx USD 32 Billion in FY18. Appropriate to the legitimate facts discussed above and taking into the account that we are an import based economy, devaluation of rupee results in inflationary pressure which resultantly brings about decrease in buying power. This would not have been an issue if our expenses would have remained stagnant too but alas; the expense side has really been expanding rapidly as well.
Expense will stand out enough to be noticed that markup payments of the Federal Government which increased from Rs 1.15 Trillion to Rs 1.5 Trillion from FY 2013-18 during PML-N tenure will increase to the new revised figure of Rs 3.3 Trillion in FY20, nearly more than doubling by the end of this Financial year mainly due to increment in interest rates, devaluation of rupee and record domestic/external borrowing in the last 18 months. Public debt and liabilities which stood at Rs 30 trillion at the end of FY 18 had risen to Rs 41 Trillion by December 2019.
On the contrary, reduction in exports, remittances, suppression of demand internationally and domestically for commercial products, and joblessness do not indicate an easy road ahead. These uncertain times need strong leadership with a competent team otherwise the future may not have much to offer.
Fiscal Deficit which hovered between Rs 1.7 trillion to Rs 2.2 Trillion in FY2013-18 will most likely cross Rs 4 trillion in FY 20. The ratio of Federal Governments Revenue to Expense which remained between 1 to 1.9 may cross 1 to 3 by year end causing an imbalance resulting in a record fiscal deficit. The situation is so dire that after transferring funds to the provinces as per the NFC Award the net federal receipts do not cover the markup payments, whereas the budget to run the federal government, defense budget and PSDP is being financed with domestic and external borrowing.
Tax collection remained the focus of the Government but regrettably, with policies where GDP growth has dropped to 3.3% in FY19 and less than 2% in FY20 to even reports of a possible further contraction with the Covid-19, policies to increase tax collection has been extremely disappointing even after the PTI government had taken a strict stance with taxpayers. This proves that you cannot beat the tax out of the economy, rather tax collection will grow if the tax base is motivated and the economy grows.
PML-N in its 5-year term doubled tax collection from Rs 1.9 trillion in 2013 to Rs 3.842 trillion when they left office, increasing almost Rs 400 billion per annum on average. This was mainly possible as GDP grew from USD 231 Billion in FY13 to USD 315 Billion in FY18.
The PTI government cannot even sustain a Chairman of the FBR beyond a few months resulting in inconsistent policy. At the end of the day, it can only perform well when there is efficient spending on public welfare and development. PML-N doubled the defense budget from Rs 540 Billion to Rs 1030 Billion in its 5-year term equipping the armed forces to fight terrorism whereas the budget remains stagnant in PTI’s tenure. Share of provinces almost doubled from Rs 1,215 billion in FY13 to Rs 2,217 billion in FY18 allowing them to spend on public welfare whereas it only increased to Rs 2,397 billi0on in FY19. Federal PSDP increased from Rs 348 Billion in FY13 to Rs 660 in FY18 and stood at Rs 560 Billion in FY19.
State Bank of Pakistan has announced many packages for soft loans for industries and a construction sector package but at a time when everything is uncertain and the country is in a lockdown, these measures might be too little too late. Stabilizing the rupee against dollar is of foremost importance where the government has failed tremendously as without it no new businesses or industries can be planned due to variation in costing. Tax collection has to be increased otherwise the PTI Government will further pile up debt at a speed which is already unprecedented and unsustainable.
Increase in tax collection will possibly occur if we grow our GDP for which the government needs to secure the trust of the business community in that the former can deliver, bring policies which will encourage growth and come up with a development package to kick start the economy. But the government has failed on all three counts. Due to the current situation of COVID-19 pandemic, decline in crude oil prices, IMF’s $ 1.4 billion, deferment of external loan repayments and further assistance from international lender should be enough to stabilize the foreign exchange reserves of Pakistan, trade balance and the rupee against the dollar. On the contrary, reduction in exports, remittances, suppression of demand internationally and domestically for commercial products, and joblessness do not indicate an easy road ahead. These uncertain times need strong leadership with a competent team otherwise the future may not have much to offer.
