Revenue generation in times of disaster

Major efforts are required to deal with multiple challenges in order to help minimise suffering of the hapless masses.

Pakistan is certainly going through very tough times at present. While already struggling to cope with the negative impact of the war against terrorism, the energy crisis, and lacklustre growth, massive flooding has suddenly unleashed further havoc across the country. Major efforts are required to deal with these multiple challenges in order to help minimise the suffering of the hapless masses. Besides obvious relief and rehabilitation needs, the floods have caused a lot of destruction to existing infrastructure and will seriously decrease anticipated agricultural output.

Donor support is beginning to pour in, but the amount of aid which eventually becomes available will probably not be enough to deal with the scale of the disaster. Given the lacklustre support that has actually materialised despite international pledges to help Pakistan contend with its problems since the Tokyo conference last year, relying on international commitments alone will certainly not be wise.

Recent reports have thus begun to emerge that the entire federal budget is being reviewed and the federal tax collection target may also undergo revision due to the flood damage. Although initial knee-jerk reactions suggested that tax collection targets for the current year seemed unrealistic given the destruction caused by the floods, the more recent indications seem to suggest that tax collection targets will actually be increased.

Tax collection had been proving to be a thorny issue even before the floods had struck. In fact, the release of $1.7 billion, the sixth installment of the over $10 billion International Monetary Fund (IMF) aid package to Pakistan, had been hanging in the balance due to this problem.

A government delegation was supposed to go to the US for securing the release of this amount at the end of August. The finance ministry had begun to feel more confident about the coming IMF negotiations due to a supposed breakthrough between the centre and provinces on increased tax collection though a reformed GST instead.

While the IMF may be more lenient towards Pakistan due to the flood situation, the Pakistani delegation will no doubt face a barrage of questions on how it will overcome its budget deficit despite the adversities. While curbing its own administrative expenditures further or decreasing defence expenditures do not seem like an attractive option, the government may have to divert funding from the Public Sector Development Programme for flood rehabilitation.

Yet curbing development funds is not a good idea given the insufficient infrastructure, low human resource capacity and widespread income disparities. Our policymakers must instead focus on long-neglected issues like the fact that Pakistan has amongst the lowest tax-to-GDP ratios in the world.

Low revenue collection can be blamed on the country’s recurrent fragile economic conditions, and now conveniently on the devastation caused by the floods. But the real reason is that the rich remain unwilling to pay a fair share of taxes, and there is no political will to crack down on the underground economy. Taxation can go a long way in providing a sustainable source of revenue generation and providing funds when donor support is less than forthcoming.

Now is in fact the right time for demonstrating a resolve to deal with under-taxed sectors and free riders like speculative traders, instead of introducing further regressive measures that burden existing taxpayers, already facing the brunt of economic woes and a major natural disaster.

Published in The Express Tribune, August 13^th, 2010.