Tax hikes in Pakistan

Syed Tahir Rashdi
Everyone talks about taxes in Pakistan. Businesses talk about paying too much in taxes. Governments talk about not being able to collect any taxes. As we move on to talking about Government spending ‘G’ in CIGXM of the economy, it is important to first discuss where the money for that expenditure comes from. Eventually, Macro Pakistani also wants to break down budget documents and present them to you in a bite-sized manner. Primarily through the supply side. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can also slow long-run economic growth by increasing deficits. The long-run effects of tax policies thus depend not only on their incentive effects but also their deficit effects. By influencing incentives, taxes can affect both supply and demand factors. Reducing marginal tax rates on wages and salaries, for example, can induce people to work more. Expanding the earned income tax credit can bring more low-skilled workers into the labor force. Lower marginal tax rates on the returns to assets (such as interest, dividends, and capital gains) can encourage saving. Reducing marginal tax rates on business income can cause some companies to invest domestically rather than abroad. Tax breaks for research can encourage the creation of new ideas that spill over to help the broader economy. And so on. Pakistan is facing an imminent economic meltdown with the country modifying its policies according to the conditions laid down by the International Monetary Fund, in an effort to unlock the tranche of a $6.5 billion loan facility to overcome the financial crisis. IMF’s delay in sending loans is pushing the country’s economy into a ‘tailspin. At first, she suggested raising tax revenues as those making good money in the public or private sectors, need to contribute to the economy. Secondly, she proposed a fairer distribution of precious resources by taking subsidies away from people who don’t need them. Following this, the national assembly of Pakistan unanimously approved the government’s Finance (Supplementary) Bill 2023 or ‘mini-budget’, a move for seeking a $6.5 billion tranche of the IMF loan. The government has increased taxes on a raft of luxury imports and services. Hence, understanding the government’s revenue performance in past years will be useful going forward. All governments need money to spend on public goods. Back in the 1980s and 1990s, the Pakistani government used to earn revenues of just over 17% of GDP. Instead of improving over the years, the state of our public resources has actually worsened. This has constrained government spending over the past 40 years and led to consistent budget deficits. Budget deficits were around 7% of GDP back in 1980s and 1990s due to increased military spending (6.5% of GDP) in 1980s, followed by the interest charged on the loans that were taken to finance that deficit (6.8% of GDP) in the 1990s. Although that level of government spending has declined in recent years, the deficits remain. After falling to 4.4% of GDP, the deficits rose to 6.7% in the 2010s, peaking in 2019 at 9.1%. The 2020s have not gotten off to a great start either, with some estimates of 8.1% budget deficit under discussion. One major reason for the high deficits (pre-COVID) is the decline in revenues.