Need to bring clarity

Government considers bringing a second mini-budget in a span of just four months

The finance minister’s statement that the government is considering bringing a second mini-budget in a span of just four months has raised questions about the government’s ability to manage the economy and undertake a right diagnosis. Having imposed Rs120 billion worth of taxes in September to bridge the fiscal deficit, the government can no more blame the PML-N for fiscal “follies”. The finance ministry’s internal assessment showed that the FBR would still not be able to meet the reduced tax collection target without additional revenue efforts equal to 0.5% of the GDP. This reflects serious lapse on the part of the finance ministry that could not analyse the institutional capacity of the FBR and also ignored early signs of anaemic economic growth.

The ministry has now assured the IMF of imposing Rs190 billion worth of additional taxes to restrict the budget deficit to Rs2.2 trillion. The kind of measures the government plans suggests that it does not have an out-of-box solution and is going to further overburden the existing taxpayers. New measures, coupled with the likely 7-8% currency depreciation in the short term, would adversely affect the purchasing power of the masses. Some of the measures being considered for additional revenues are increase in sales tax rates and petroleum development levy; and taxing beverages, non-filers, vehicles and local sales of textile products, surgical and sports goods, leather goods and carpets.

This may provide an easy short-term solution to the revenue problems but would not address the core issues that are keeping the tax collection far lower than in regional peers. There is a need to go after sectors that are not in the tax net. The finance minister should also live up to his words of increasing the collection of direct taxes, which means no new withholding tax measures. The government should also bring clarity in its strategy and come out of the denial mode. It is understood that the new measures are being taken to get the IMF loan. The denial mode is causing more damage and increasing burden on the citizens. Had the government taken fiscal, monetary and exchange rate measures after first reaching a staff-level agreement with the IMF, the pain and adjustment would have been less.

Published in The Express Tribune, December 21^st, 2018.

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