Budget 2023-24: How to ride out economic headwinds
Budgetary strategy should primarily be focused on more progressive taxation and containment of public expenditure to stabilise economy and provide relief to poorer sections of society
Updated Thursday May 25 2023
The key feature of the budget strategy for 2023-24 is that the federal and provincial budgets will have to be contractionary in nature for restricting aggregate demand and thereby assist in containing the current account deficit in the external balance of payments. High interest rates will probably continue, with some scope for reduction if the rate of inflation begins to fall significantly.
The GDP growth rate is projected in 2023-24 at 3.5%, facilitated by the lower base in 2022-23. The rate of inflation is projected at 23%. These projections hinge crucially on a favourable environment, especially on the continuation of the relationship with the International Monetary Fund (IMF) through a new programme of three years starting in early 2023-24.
The target should be to restrict the primary deficit to 0.5% of the GDP as compared to the 1.5 % of the GDP (primary deficit) anticipated in 2022-23. The objective, therefore, should be to raise the federal plus provincial revenues to GDP ratio by 0.5%, and to reduce the total public expenditure, excluding debt servicing, by 0.5% of the GDP.
The implication of these targets is that, given the macroeconomic projections, revenues will need to show a growth rate of 25% and total expenditure, excluding debt servicing, to rise by a maximum of 15% in 2023-24. At this stage it is difficult to project the cost of debt servicing next year.
The budgetary strategy should primarily be focused on more progressive taxation and containment of public expenditure to stabilise the economy and provide much relief to the poorer sections of society, who have been badly hit by higher unemployment and runaway inflation.
Federal and provincial budgets will have to be contractionary in nature for restricting aggregate demand
Taxation proposals of a progressive nature are proposed below:
(i) The highest personal income tax slab should be brought down to Rs9,000,000 from Rs 12,000,000, with suitable adjustment in the lower slabs, so as to raise the marginal tax rate for large taxpayers.
(ii) The super tax on corporate income may be withdrawn and a progressive tax structure be introduced with a tax rate of 30% on companies with a rate of return on equity of up to 15% and a higher tax rate applied of 35% on the return above 15%.
(iii) All fixed and final taxes on unearned income be converted back to advance taxes, with the requirement that they be included in total income in the filing of tax returns.
(iv) The minimum rate of taxation on capital gains from land or property sales be raised to 10%, irrespective of the holding period.
(v) Rental income taxation should be based on minimum rental values determined as 3% of the capital value corresponding to the neighborhood values from the FBR survey. This basis should also be used by provincial governments to determine payment of the urban immoveable property tax.
(vi) Income tax exemption should only be given to NGOs operating in the fields of education, health, or poverty mitigation.
(vii) Large pensions above Rs3,000,000 may be subject to a progressive tax from 5% to 10%.
(viii) The taxation via electricity bills should be extended further to traders by reducing the currently high exemption limit.
(ix) The provincial governments should raise the fixed tax rates of the agricultural income tax on agricultural land holdings in a progressive manner.
(x) The rate of stamp duty may be raised by the provincial governments from 3% to 10% on inter-generational transfers.
(xi) No major reforms are proposed in indirect taxes.
Economy in expenditure
Spending cuts can be achieved in the following manner:
(i) Merger of divisions/ministries at the federal level and departments at the provincial level.
(ii) Moratorium on filling of vacancies.
(iii) ‘Zero-base’ budgeting of federally attached departments and autonomous bodies.
(iv) Ending overlap in the form of joint federal and provincial presence in functions in the abolished Current List and the Federal Legislative List-II.
(v) Enhancing the age at retirement to 63 years, with minimum service of 30 years for superannuation.
(vi) Moratorium on new development projects at the federal level, except those which will receive concessional foreign assistance.
(vii) Significant reduction in non-combat expenditure of the defence services.
(viii) Accelerated privatisation of state-owned enterprises which are loss-making and/or operating in competitive markets.
(ix) Exploring the case for handing over electricity distribution to provincial governments with suitable cost-sharing arrangements.
Providing relief to the poor
Finally, and importantly, the proposed budgetary measures for providing relief directly to the poor and the lower middle class are as follows:
(i) Raising the income tax exemption limit from Rs600,000 to Rs1,000,000.
(ii) Enhancing the size of the BISP programme from Rs400 billion to Rs800 billion, with contributions also by provincial governments.
(iii) Increase the subsidy to PASSCO for procurement of wheat.
(iv) Increase in the subsidy to the Utility Stores Corporation.
(v) Enhancement in the reduction in tax liability due to charitable contributions to a minimum of 25%.
(vi) The provincial governments announce in their respective budgets an increase in the minimum wage to Rs40,000. Strengthening of the labor departments and labor courts to ensure implementation.
(vii) Concessionary refinancing of loans by the SBP to SMEs and of microfinance for small personal loans.
In conclusion, Pakistan is passing through a period of great uncertainty and instability on both the economic and political fronts. The budgets of 2023-24 by the federal and provincial governments must be seen as an effort to achieve greater equity and resilience in the economic system. All efforts must be made to avoid tax-free and lavish spending or subsidies of election-year budgets.
The author is Professor Emeritus at BNU and former federal finance minister.