Economic growth is like magic potion
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The gross domestic product (GDP) growth in Pakistan has consistently underperformed growth in the region as well as in the rest of the world.
The magnitude of the discrepancy (ie, the difference between real GDP per capita elsewhere and in Pakistan) has not only been increasing but is also extraordinarily consequential when combined with the explosive population growth.
Pakistan’s standard of living is on the wane. Putting population and US dollar GDP together as of 2019, Pakistan ranked 183rd in prosperity (standard of living) out of 215 countries in the world.
GDP growth has been shown to be very powerful in improving lives of all classes of citizens. Pakistan needs to grow at a sustainable rate of 7-9% per annum over the next decade in order to get out of its current morass.
The answer to Pakistan’s underperformance is a simple, straightforward set of supply-side economic policies. Pakistan needs to adopt pro-growth policies such as tax cuts, sound money, freer trade, spending restraint, minimal regulations and privatisation.
A total rationalisation of the tax system should be prioritised above all six pillars of supply-side economic policies. There should be fewer taxes, where those taxes that are chosen to remain have low rates on broad tax bases. Exemptions, deductions, exclusions, credits and write-offs should be kept to a bare minimum. Low tax rates provide the least incentive for people and business to evade, avoid or otherwise not report taxable income.
People earn income after tax to save and consume. The lower the tax rate, the more willing the people are to work. After-tax income is the return on labour for the rich and poor alike.
Evidence shows that taxes which are inherently excessive are not paid. High rates inevitably put pressure on the taxpayer to withdraw his capital from productive business and invest in other non-productive assets (ie, property, etc).
The more taxes increase, the more they undermine the market economy. Every specific tax as well as a nation’s whole tax system becomes self-defeating above a certain height of rates.
Countries where supply-side economics were practiced, real GDP growth has shown to be high and during anti-growth policies, real GDP growth has shown to be low.
Unfortunately, Pakistan being subjugated by the umpteenth anti-growth IMF programmes centered on raising taxes, devaluations and balancing the budget at all costs to “stabilise” the economy, has never seen the way forward. No serious economist would consider these measures to attain rapid GDP growth.
Economics is all about incentives and taxes have consequences. The history of income tax has lessons. High tax rates can bring the economy to heels, while low or reduced tax rates can yield phenomenal bursts of economic productivity and prosperity – these findings comport with common sense.
There is no economic theory, be it classical, neoclassical, Keynesian, supply-side or Marxist, that promotes higher taxes as a stimulus to economic activity. Thus, under a tax increase, the numerator, revenues, will rise less than forecast, and GDP, the denominator, will also advance less than forecast – but quotient, the percentage collected, will be the same.
Pakistan is a perfect example of this paradox. Its tax-to-GDP has remained constant at around 9% per annum with a GDP growth rate of less than 5% per annum over the last two decades.
To make matters worse, federal expenditures, dangerously, keep on increasing year-on-year. Currently, they stand at a shocking 22% of GDP.
Persistent higher deficits, excessive borrowing and overstretched debt service payments have led to higher and higher tax burden on citizens. No nation on earth has taxed itself to prosperity and Pakistan is no exception.
Pakistan is suffocating. The World Bank recently warned in its Global Economic Prospects report, published in January, that high borrowing costs have “changed dramatically” the need for developing nations to boost sluggish economic growth aimed at speeding up the process of getting overstretched debt-distressed countries back on their feet.
If Pakistan’s growth remains weak and financing conditions worsen, it will not see an easy path out of this problem.
Pakistan will continue to sink deeper, heading towards an inevitable “disorderly” default and a full-blown economic meltdown.
Economic growth is like a magic potion – a cure for many illnesses and good for our homeland’s wellness.
The writer is a philanthropist and an economist based in Belgium
Published in The Express Tribune, March 11th, 2024.
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