Life after accounting: A three-step roadmap to prosperity

Ensure power supply, reform tax system and abolish subsidies.

ISLAMABAD:

Imagine life after accounting. I have just sworn in as the new finance minister of a great country, great in terms of potential but not in terms of performance.

On the first day, I see budget books for 2014-15 and discover that 61% of available resources have to be booked against debt servicing, defence of the country and public safety – the three obligations I must meet.

I am told by the secretary that there are pre-set formats and pre-defined allocations for the remaining 39%, from which I may not deviate a great deal. I am also provided with a number of complex formulae for taxes and multiple layers of tariffs to generate new resources by a good-hearted FBR chairman. He also provides me with a long list of proposals given by business associations.



I burn all documents, fire the secretary and start from a clean slate. I go to meet the prime minister, who has a solid vision of bold economic reforms and has a credible history of taking revolutionary decisions. I find him dull, frustrated but eager to do something. I have following principles and proposals on a single sheet of paper.

General principles of budgeting

A budget is the document of fiscal priorities of a government. It should not be used as a tool to influence business outcomes and investment decisions. In other words, budgets should not be used as an industrial or trade policy. This leads to giving special favours (exemptions and subsidies) to selected business groups.

Governments should not target any level of exports, imports, inflation, growth, etc. They can only target expenditure and then propose how/which resources should be mobilised.

In any case, the government cannot control the level of exports or imports and such targeting forces it to dole out special favours and exemptions.

Major challenges

After a cursory analysis, I find that the federal budget size is up by 7.9% from last year, which in real terms means that it has slightly reduced from the previous year. I also discover that for a country of our size, the economic pie including exports is very small.

Bangladesh, with an economy 45% smaller than mine, has achieved the same level of exports and is certain to surpass in a couple of years.

Which single step could help my country realise its potential and increase the pie in minimum possible time? The answer is to restore complete power supply for all.

Park PSDP in power infrastructure

As I do not have the luxury of spending a little on everyone else favourite projects, I only leave a little to conclude the ongoing projects and announce a freeze on any new projects until I solve the power crisis.

Furthermore, I allow power producers to charge higher prices from well-paying customers and allow distribution companies (DISCOs) accept wheeling charges for using their transmission lines.

“This single measure would flush the power producers and DISCOs with hard cash, drastically reduce circular debt and ensure provision of electricity to at least 50% of customers in a manner of three months,” I tell the prime minister.

10/20 rule of taxation

Complex, multi-layered taxes and tariffs only serve the purpose of the taxman, and to some extent, large businesses, which could bear the cost of compliance with a complex code. They introduce distortions and inefficiencies in the economy. Indeed, a friend at IMF tells me that they cost around $4-5 billion every year.

In fact, the whole plethora of tax refunds appears nonsense to me. Why to charge, if it were to be refunded? I convince the prime minister that these 6,000 or so tariff lines and hundreds of taxes and their levels create rent-seeking in the business community and make them thieves. In fact, many businesses thrive on the very basis of complexity, unpredictability and uncertainty of tax policy.

I recommend the prime minister to abolish the FBR with a stroke of pen, automate entire system of taxation and tariffs under the supervision of a new office of ‘Forensic Auditors’ at the PM Secretariat.

I call this code a 10/20 rule, under which single and flat rates of 10% customs duty and 10% general sales tax, and a maximum of 10% and 20% of income tax, regardless of the income source, will be levied.

Abolish duty drawback schemes

In one year, after I fulfill the promise of complete restoration of power, I tell the prime minister that I will withdraw all such subsidies, which in one form or another, have been doled out to the businesses.

I am told that the finance ministry has already re-appropriated the Rs20 billion accumulated under the Export Development Fund, and the Export Refinance Scheme and Duty Drawback Scheme have effectively withheld export diversification. I am also told that the Ministry of Commerce is fully aware of how Rs50 billion doled out under R&D subsidy between 2005 and 2008 was actually a price transfer. I decide to withdraw all such subsidies as well.

The writer is the founder and Executive Director of PRIME Institute, a market-economy think tank based in Islamabad

Published in The Express Tribune, June 16^th, 2014.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.