The Burden of Pakistan's Ambitious Budget Will Fall Heavily on the Taxpayers

The rise in tax targets would comprise of a 48 percent hike in direct taxes and a 35 percent hike in indirect taxes.

Pakistan Prime Minister Shehbaz Sharif.

Photo: X/@CMShehbaz)

Pakistani Finance Minister Muhammad Aurangzeb has announced an ambitious set of targets in its 2024-2025 budget, presented to the National Assembly on 12 June. Reports suggest that the budget provisions are aimed at preparing the ground for appealing to the International Monetary Fund (IMF) for the 24th time for a “longer and larger” bailout programme under the Extended Fund Facility.

The Pakistan Muslim League (N) government of Prime Minister Shehbaz Sharif is seeking a loan of $6-8 billion, in a bid to avert a default by an economy growing at the slowest pace in the South Asian region. Last year, Pakistan narrowly avoided a default because of a short-term IMF bailout of $3 billion spread out over nine months.

Pakistan has to find ways to increase its revenues to reduce its fiscal deficit as part of the measures being sought by the IMF.

The total outlay of Aurangzeb’s budget is set at Rs 18.9 trillion ($68 billion), a significant increase from last year’s $50 billion. More than half of this, Rs 9.775 trillion, would go to interest payments. Pakistan’s public debt both domestic and foreign has soared to Rs 67,525 billion currently.

The budget has set an ‘ambitious’ revenue target of Rs 13 trillion ($46.6 billion) for the year beginning 1 July. This would be a massive 40 per cent jump from the current year’s target. Defence spending has gone up nearly 15 percent to Rs 2.12 trillion. Such a jump in expected revenue will be sought to be achieved through additional taxes.

This would leave a budget deficit of 6.9 percent of the GDP, where the current year’s estimate is 7.4 percent. The government hopes to achieve a growth target of 3.6 per cent. It had set a similar target last year but ended at a growth rate of 2.38 till June 2024.

According to Aurangzeb, the rise in tax targets would comprise a 48 percent hike in direct taxes and a 35 percent hike in indirect taxes over the revised estimates of the current year. Non-tax revenues, which include a levy on petroleum, would rise as much as 64 percent. There would be a sales tax increase of 18 percent on textile and leather products and mobile phones and capital gains from real estate.

In a country which has a large informal sector, the burden, therefore, will fall on the existing taxpayers. All governments in Pakistan have spoken of the need to widen the tax base, but that has been easier said than done.

Two days before the budget was presented, the Pakistani central bank had warned that this budget could be inflationary since there was not much progress in structural reforms to broaden the tax base and the target could only be met by hiking taxes.

The government has also advocated privatisation by selling loss-making enterprises including the Pakistan International Airlines (PIA). The government is expecting to receive bids for the airlines in August.

While the government has managed a degree of control over external and fiscal deficits, it was accompanied by a drop in growth, as well as high inflation which has averaged close to 30 percent in the previous financial year and 24.52 percent this year. Further, the Pakistani rupee depreciated 40 per cent compared to the dollar. The government has now announced what many say is an unrealistic target of bringing down inflation to 12 percent in the coming year.

Ever since it came to power in the controversial elections of February 2024, the Shehbaz Sharif government has publicly acknowledged the need for tough reforms. However, high inflation, low industrial growth, and unemployment have hobbled the government. As it is, the IMF will be seeking tougher reforms to widen the tax base and enhance power tariffs further.

To go by a recent statement, a visiting IMF team said that it was satisfied that Pakistan had made significant progress “on a comprehensive economic policy and reform programme that can be supported under an Extended Fund Facility.”

Whether Pakistan can meet its targets is a moot question. There is bound to be resistance from the public to the already draconian tax measures. Aurangzeb, formerly chief of HBL (Pakistan’s largest bank), has been brought in to deal with the chronic problems afflicting the Pakistani economy. What that requires are tough measures but there are a variety of reasons why those are not easy to undertake.

Overall, Pakistan faces complex political, military, and economic challenges. The major hurdle in its economic situation is the significant external debt of the country, the servicing of which takes up a large proportion of its income. Foreign exchange reserves are low, making it difficult to import essential goods. Of its total external debt of around $130 billion, 30 per cent is to China and 20 per cent to the IMF.

Economic growth has been uneven and it hasn’t kept up with its neighbours like India and Bangladesh. The large fiscal deficit arising from the government’s inability to collect sufficient revenue leads to inflation and prevents the funding of public services. As in the case of India, it faces agricultural problems arising from low investment rates, poor farm prices, and rising input costs.

The biggest problem is the fact that the government is a weak coalition and the most popular political force continues to be Imran Khan who remains in jail.

Not surprisingly, his party members noisily opposed the budget presentation. Equally difficult has been the relationship of the PML(N) government with its main coalition partner, i.e., Bilawal Bhutto’s Pakistan People’s Party, which is not happy with the budget.

This persistent political instability has generally undermined trust in government and created a climate of uncertainty for businesses and investors, as well as for ordinary citizens.

(The writer is a Distinguished Fellow, Observer Research Foundation, New Delhi. This is an opinion article and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)