Commentary for Dawn on 2018 Pakistan Budget Changes

These are my comments published in Dawn.com on Sep 19, 2018 after the amended finance bill by the 15th National Assembly of Pakistan.

“The bill is anything but populist”

— Shahrukh Wani, researcher at Blavatnik School of Government, Oxford

The announcement contains pretty straightforward short-term stabilising measures.

Essentially, this allows the government to ‘tighten its belt’ a bit and give a signal to the world that we can pay back our debts.

For all talk about populism, interestingly, this bill is anything but populist. Overall, in the short-term, the markets are likely to react positively to this.

The good parts of the bill are that the government does need to genuinely increase revenue, and increasing taxes on high-income earners was pretty much expected and required.

Giving them these extensive tax breaks last year was ill-advised considering the revenue shortfall the government has and high-level economic inequality Pakistan has.

The uncertain part is that increasing tax revenue by improving administrative procedures is going to be easier said than done, as this requires the government to expand the capacity of the national tax infrastructure. This usually takes time and money to do so. It is unclear from this bill how the government expects to do this.

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The bad: there is a well-founded fear that increasing the withholding tax on non-cash banking transactions might create an incentive for people to not use the formal banking channel.

This fear is backed by the State Bank of Pakistan’s impact analyses of this very tax back in 2017 which found that it led to a decline in private business deposits.

Also, while the finance minister claimed that the lifting of the ban on non-taxpayers from acquiring cars or land is due to pressure from overseas Pakistanis, it might be safer to assume that it could very well be due to influence of real estate developers and the automobile industry.

In the long run, this is a wrong move as it takes away a strong incentive for people to file their taxes.

Going forward, all of this will need to be combined with reforms to increase the number of taxpayers instead of increasing taxes on the already compliant ones, which seems to be what the government has done.

But, as taxes are mainly aimed at high-income earners, it is unlikely to have a direct widespread impact.

The government will also have to think more about how to increase exports and boost productivity. Without this, we will need another set of stabilisation measures soon.

Source: https://www.dawn.com/news/1433677

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