May 242008

Abid Hasan

The writer has served as operations adviser at the World Bank in Washington

The anger and savagery that is creeping into society is largely a result of pro-rich policies and inadequate attention to improving key services for the poor. Pakistan will implode if a small percentage of citizens and officials live and spend like they were in the first world, while the majority ekes a miserable living in fourth world conditions. Among many overdue reforms, a paradigm shift in budget and economic policies is needed.

Pro-poor expenditure and tax policies must be the central pillars of the upcoming budget, using the following principles: (a) sending a clear signal that belt tightening is a necessity and that the next two years will be “Years of the Poor,” where pro-poor expenditures will have the first right on budget resources after debt servicing and salaries. (b) Introducing monthly cash transfers targeted on poor and low-income households (c) eliminating untargeted subsidies, and ruthless pruning and reprioritisation of the current and development budget, to free resources for new pro-poor programmes. (d) new taxes — perhaps called “poverty reduction surcharge” (PRS) – imposed on consumption and activities related to the wealthier households (e) reducing the fiscal deficit to six percent in fiscal year 2009 and 4.5 percent in 2010, since continued high deficit will threaten economic stability, encourage wasteful expenditures (i.e., foreign travel and luxurious living of high officials and low-quality projects), and undermine efforts to lower inflation and imports

Total resources in the 2009 federal budget, on the above basis, would be around Rs1,700 billion, comprising: (i) Rs1,000 billion of existing taxes (net of NFC transfers) assuming normal growth in collection (ii) Rs130-140 billion of PRS collection, the target set to enable full funding of the new pro-poor programmes (iii) Rs550-600 billion of deficit financing.

New taxes: The PRS should be imposed on the following: (a) share turnover, to raise as a minimum Rs40-50 billion in fiscal 2009 (b) high usage utility consumers, to collect at least Rs20-25 billion, and imposed on SMSs, pre-paid cards, and utility bills over Rs2000 per month, with cascading–higher rates for higher bills. Bulk of PRS would come from the cell phone sector and power consumers using A/Cs. PRS imposed on power tariffs would be over and above the needed tariff adjustments (c) sales and consumption of imported and domestic luxury goods and services – cars above 800cc, A/Cs, large fridges, flat screen TVs, airline travel, high value cloth, etc. – to collect at least Rs15-20 billion (d) on retail sales at upmarket outlets in all major cities, with the aim of collecting about Rs25-30 billion.

PRS should be imposed (over a threshold size) on property and land in prime commercial and residential areas in major towns, and on large agricultural land holdings, to collect at least Rs25-30 billion. Tax on urban land would reduce land holding and prices. The PRS could be included in property tax bills, should be at non-discretionary specific rates, and incentives provided so that provincial/district governments have a strong motivation to collect in order to enhance cash transfers to poor in their province. Compared to general taxes, the PRS is a “second best” tax but it would have greater moral underpinning (and hence greater voluntary compliance) because of its direct link with poverty expenditures. The total PRS would be less than one percent of consumption of the top 20 percent.

More generally, tax policy should be used to switch consumption patterns appropriate to the country’s poverty status. As an example, in Pakistan for every one car sold, four motorbikes and four cycles are sold. The ratio for India is six motorbikes and 10 cycles, and in Vietnam it is 25 motorbikes and 10 cycles, for every one car sold. These two countries are almost the same or higher per capita income, and similar poverty profile, as Pakistan. And yet their population uses, relatively, more motorbikes and bicycles. Progressive tax policy – for example, zero rating bicycles, motor bikes and public transportation and high taxes on cars – and correct pricing of fuel would encourage this “pro-poor” switch.

Expenditure policies and priorities: Debt service during fiscal 2009 is estimated at Rs550 billion, leaving Rs1,150-1,200 for remaining expenditures to be allocated as follows: (a) Rs500-510 billion for defence and other current expenditures, which should be cut by 15 percent compared to fiscal 2008 with higher cuts on low priority departments and fully protecting high priority social services (b) Rs200-210 billion for the on-going PSDP (public sector development progamme) which should be ruthlessly pruned to eliminate the large number of wasteful and low-quality projects, and defer or drop mega infrastructure projects, airports, HEC projects, other than those which will be increasing irrigation water and energy capacity (c) Rs70-80 billion for the new PSDP should focused on agriculture, exports and provincial pro-poor programmes (d) Rs340-350 billion should be set aside for subsidies (e) Rs50-60 billion should be for paying government-guaranteed energy company debt

Untargeted subsidies – which benefit the rich and middle income groups as well – should be gradually eliminated and replaced by targeted subsidies. Untargeted subsidies now amount to almost Rs400 billion – Rs140 billion on petroleum, Rs120 billion on electricity, and Rs45-50 billion each on wheat, fertiliser and research and development. Removing energy subsidies would reduce waste and import demand once consumers pay actual import prices. It is proposed that the total untargeted subsidy should be reduced by 50 percent in fiscal 2009, to Rs200 billion, by eliminating most of the petroleum (including CNG) and electricity subsidy (except life line tariffs), and another 25 percent in fiscal 2010. The wheat and fertiliser subsidy could be kept for another 12-18 months, and substantially reduced for wheat after full implementation of household cash transfer scheme and for fertiliser once food grain prices are market based.

For the new targeted programmes, a Rs150 billion allocation is proposed as follows: (a) Rs120-130 billion for a monthly cash transfer (of, say, Rs1,000 per family) to 9-10 million deserving families (b) Rs25-30 billion for a guaranteed labour-intensive works programme in the poorest districts/tehsils, while ensuring that wages are just below the market wage so that only poor unskilled people are recipients who would leave the programme when they find market based employment. These programmes would enable poor/low income households to fully absorb food inflation and increase in expenditures resulting from removal of petroleum and electricity subsidies.

For fiscal 2009, the recipient pool for the cash transfer programme must be generous and cover the bottom 45-50 percent by including low-income households – to prevent the social meltdown – with the pool reduced to the bottom 30 percent in two years. It is proposed that the recipient pool comprise all households where the children are enrolled in government and low-fee NGO schools, the reason being that they come from low-income households. Importantly, the database of enrolled children is non-discretionary, and can be easily and quickly collected. With around 20 million children in these schools, around 10 million families could be covered. A special mechanism will have to be established to include poor households with either no children or those out of school.

Several other actions are critical to reduce poverty and sustain growth, for which PSDP funding should be allocated. First, a crash programme should be initiated and allocated Rs25-30 billion, for increasing food grain production, through better farm practice, improved seeds and water usage, and – importantly – full market prices. Such a programme could increase food grain production by 25-30 percent in 12-18 months. It would have a salutary impact on rural incomes, eliminate hoarding and smuggling, and also enable the government to withdraw the fertiliser subsidy and impose agricultural tax. While it will increase the amount of wheat subsidy, the subsidy itself could be lowered once cash transfer programme is fully in place.

Second, Rs15-20 billion should be allocated for export promotion. Exports need to be aggressively promoted as the main engine of growth and source of employment, since exports tend to be labour-intensive. This has been the development strategy for all high-growth countries which have reduced poverty significantly. Over the last decade, export-to-GDP ratio increased from 22 percent to 45 percent for China, from 14 to 23 percent for India, from 40 to 75 percent for Vietnam, while it has been stagnant at around 15 percent in the case of Pakistan.

Third, Rs35-30 billion should be allocated for incentive-based federal funding to encourage provinces to spend on select pro-poor expenditures and agriculture, and reduce wasteful current/development expenditures. India spends (as a percentage of GDP) five times what Pakistan spends on targeted pro-poor programmes. Pakistan has no choice but to be bold in initiating new programmes for poverty reduction, and generously allocating resources for these. And wealthier segments have to realise, for their own safety and for Pakistan’s sake, that they have to bear additional taxes.


Courtesy: The News International, 24/5/2008


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