Pakistan to Beg and Borrow Billions to Finance 2013-14 Budget
By Riaz Haq
CA
Pakistan's proposed federal budget 2013-14 includes $36 billion in spending with deficit financing of $16 billion. Of this $16 billion, over $5 billion will be borrowed by the federal government to pay the power sector to settle the so-called circular debt.
Heavy Tax Burden on the Poor
Direct taxes make up only about 3.5% of Pakistan's federal revenue. The rest comes from indirect taxation, mainly consumption tax, making Pakistan's tax policy among the most regressive in the world. The low-income people who have to spend almost all of their incomes will be paying tax on their entire incomes while the high-income groups who spend a small percentage of their income will pay little in taxes.
While the general sales tax (GST), a consumption tax, has been raised from 16% to 17%, vast swaths of the economy have been left out of the tax net. A major weakness in public finances is the lack of fiscal effort by the provinces. With some of the largest segments of economic activity such as agriculture, real estate, and services in the provincial domain, the provincial tax receipts total an abysmal 0.7 percent of GDP.
To make up the difference between revenue and spending, the government is forced to beg or borrow the difference. It fosters foreign aid dependence and burdens Pakistan's future generations with debt that they will have to repay.
Pakistan needs to revamp its entire taxation system to make it more equitable and progressive with the rich paying a larger share of the taxes and to raise the tax-gdp ratio from the current 9% to at least 15%.
Resolving Energy Crisis
Paying off $5 billion to the power sector will do little to resolve load-shedding. The previous government paid $14.8 billion to the power sector and the problem of load-shedding only got worse .
What is needed is to clearly identify and fix the root cause which is the flawed finances of the sector. The cost of electricity production needs to come down substantially and the revenue from bill collection needs to increase significantly to bring finances into balance. The fuel mix needs to change to lower the costs. And there needs to be serious law enforcement done to reduce power theft and collect payments for the use of electricity. In addition, the IPP contracts need to be renegotiated to link payments to fuel efficiency and power generation capacity utilization.
Pakistan needs a long-term and comprehensive energy policy to assure availability of cheap and abundant energy to fuel economic growth and prosperity in the country.
Since the middle of the 18th century, the Industrial Revolution has transformed the world. Energy has become the life-blood of modern economies. Energy-hungry machines are now doing more and more of the work at much higher levels of productivity than humans and animals who did it in the pre-industrial era.
Every modern, industrial society in history has gone through a 20-year period where there was extremely large investment in the power sector, and availability of ample electricity made the transition from a privilege of an urban elite to something every family would have . If Pakistan wishes to join the industrialized world, it will have to do the same by having a comprehensive energy policy and large investments in the power sector. Failure to do so would condemn Pakistanis to a life of poverty and backwardness.
Please watch the following video discussion on the subject of Pakistan's budget 2013-14 and resolution of power crisis:
First budget of new Nawaz Sharif government, no relief for poor; Energy Crisis; Reliance on oil from WBT TV on Vimeo .
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