Shabbir Ahmad
EVER since the global turn to austerity during the last decade or so, every country which introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. When economic crisis struck the advanced economies in 2008, some governments resorted to austerity. Portugal was one of the European nations hardest hit by the crisis. They opted for adopting austerity measures. However, things went from bad to worse for Portugal after that. Their fiscal deficit reached about 11 percent of the GDP while unemployment peaked at 16 percent. Similarly, the United Kingdom announced austerity plans in 2010, in an effort to tackle Britain’s record budget deficit and rising national debt but it backfired, and the desired objectives could not be reached. Now, the question is, if austerity rarely works as an economic rebuilding tool, then why the IMF, World Bank and other institutions condition their economic or bail-out packages?
Pakistan turned to the IMF for a bail-out package earlier this year in order to ease the economic pressure the current government was facing. Under the IMF bailout, Pakistan is under heavy pressure to boost its tax revenues to plug a fiscal deficit as well as avert a looming balance of payments crisis. That is why several austerity driven measures were included in the budget for the ongoing financial year. A strong wave of inflation had already hit the country even during the previous financial year mainly due to currency depreciation and the resultant hike in energy prices. However, this year, pressure from the IMF will be a tough test for the economic capabilities of the current government.
The government is already facing a backlash over its economic policies, with public discontent growing over increased taxes and rising inflation. The government wants to mend public finances by boosting tax revenue to cut reliance on borrowings. Its targets is to raise 5.5 trillion rupees revenue this fiscal year from 4.4 trillion rupees last year. Indirect taxes will form the major share of overall tax collection since direct tax base is too narrow in the country. Pakistan has struggled for decades to collect taxes with estimates suggesting that only around one percent of the 200-million population filed a return in 2018.That is why, if the IMF wants Pakistan to increase tax collection, the most effective way would be to increase indirect taxes as we have seen in the budget. As I have mentioned Portugal in the beginning, they were also directed by the troika including the EU and the IMF, to take austerity measures including raising VAT, imposing higher income taxes on salaried class, utilities privatization, freezing or even cuts to salaries and pensions, among others. But these measures, could not prevent the country to go in a debt trap. Their debt increased and the economists started to believe that they will not be able to repay their debts. Fortunately, they realised the cause of their deteriorating economic condition in time and reversed their policies.
Portugal’s government initially clashed with Brussels by reversing public spending cuts and allowing the deficit to swell well above agreed objectives, before ultimately proving to EU officials that by putting more money in people’s pockets it could lift growth make it easier to meet budget targets. The government has increased state pensions, the minimum wage and public sector pay while cutting indirect taxes and improving welfare benefits for the lowest-paid. The steps have been cited for helping foster private consumption and thereby cultivating economic growth. After four years of post bail-out program, the country ended 25 consecutive years of budget deficits and produced a surplus budget. Portuguese Prime Minister stated, “We’ve shown an alternative is possible and we’ll keep building that alternative.”
Although situation in Pakistan is different from Portugal but for Pakistan, an alternative is also possible. Portugal’s policy of “putting more money in people’s pockets” need to be followed in case of disadvantaged sections of society. Uplifting the poor, facilitating the salaried class, increasing and implementing the minimum wage policy can go a long way in the country’s development. However, Pakistan needs revolutionary structural reforms in order to follow an alternative way to IMF’s austerity drive. The current economic institutions need to be overhauled. Approaches to revenue generation need to be changed. Burden on the poor section of society should be eased and shifted to the well-off people. To improve this ranking and draw more investment, Pakistan should ease customs laws and regulations, improve the security of the country and rebrand and boost its international image as a desirable destination for tourism and industry alike – a goal the current government is set to pursue as it eases its visa policy. Pakistan needs to ensure an investment-friendly environment that attracts more foreign direct investment (FDI), instead of relying so heavily on foreign aid.
The government needs to enhance direct tax collection. It needs to broaden its tax base instead of overburdening current taxpayers, improve fiscal transparency and strengthen tax collection coordination at the national and provincial levels to ensure that revenue targets are met. They need to stop giving tax amnesties to big businesses. The agricultural sector, dominated by big, politically powerful landowners, makes up around 20% of the economy but accounts for only 0.22 per cent of direct taxes, according to the World Bank. The bread and butter of austerity, cutting spending and raising taxes, usually do not apply equally to everyone. That is why austerity always disproportionately affects the poor. The poor lose out most when public services are cut since they are priced-out of alternatives. Along with this, VAT is one of the few taxes that increases, and it is well documented that this increases the burden of tax for the poorest the most. If Pakistan is to avoid the drawbacks of austerity drive and the resultant economic disaster, it must revise its current economic policies and direct it to the measures that will actually generate social and economic development and uplift the poor.
—The writer is freelance columnist.
