July Issue 2010
Take from the Poor and Give to the Rich
Friends and family described Muhammad Akbar as kind, loving and hardworking — traits that everyone can respect. But he wasn’t unbreakable. With a loan hanging over his head, relentless inflation and a hungry wife and kids at home, the rickshaw driver’s thin income was being pulled in different directions. He tried to make things work, but with no luck. Wracked with pain and despair, the father of three girls couldn’t bear to see his family suffer anymore. His wife, Muzammil Bibi, understood. Together they decided that poison was the only relief they could afford. So one day in mid-June in Lahore, Akbar and Muzammil, with their three daughters beside them, decided to end their collective misery once and for all.
Sadly, Akbar and Muzammil’s story is not unique. Reports of suicides due to unbearable poverty have been ubiquitous over the last three years in Pakistan. The recent wave of despondency has had a deeper significance because of the presentation of the federal budget in parliament on June 5, 2010 — a budget that Finance Minister Abdul Hafeez Shaikh described as pro-poor.
But is the federal budget for 2010-2011, which has already passed in the National Assembly, truly pro-poor? Moreover, is creating a pro-poor budget even possible?
In his budget speech, the finance minister declared several measures to give relief to the poor. But near the top of his speech he singled out the one issue that was hurting everyone: inflation. “High inflation is devastating, especially for the poor,” said Shaikh. “The best relief package we can offer is to do whatever we can to reduce inflation.”
After inflation hit a record 25% in 2008, it dropped to an estimated 12% in fiscal 2010 and the finance ministry believes it can get it down into single digits over the next year and keep it there. The government plans on borrowing less from the State Bank of Pakistan (and thus printing less money) to help keep inflation in check. But rising tariffs on petrol, gas and electricity will put upward pressure on prices.
Nonetheless, a budget is about much more than anti-inflationary measures. Dr. Asad Sayeed, a development economist at the Collective for Social Science Research, a think tank in Karachi, says that a budget is essentially about two things: revenues and spending. He says that the point is to determine from whom does the government get money and on whom does it spend it.
By looking at federal government spending, it is not hard to see how the poor get little benefit. Almost half of the total value of the federal budget is being spent on debt repayment, interest payments and the military (32% on debt servicing and 16% on defence expenditures).
And while some may argue that the nation’s current fight against militancy demands huge defence expenditures, there are problems with the system. “The military is not accountable,” says Sayeed. “There is no legal or institutional manner for you or I to check exactly how defence funding is being spent.” Any system that feeds the ruling establishment without any accountability to the people is fairly anti-poor.
Of course, the spending goes far beyond the fight with internal militants. Babar Ayaz, a veteran business journalist, says that the prevailing perspective of the establishment is a big problem. “A paradigm shift is needed.” He explains that the geo-political thinking that considers India as the enemy that poses an existential threat to Pakistan (though he admits India is no saint), uses jihadi forces as strategic assets and seeks a national security policy where Islamabad must play a central role in Afghan policy places a huge demand on limited public resources. He describes the resulting spending as “non-productive expenses” that are made at the expense of the common man.
Debt servicing can be seen in the same light. “When you raise money from the poor and pay off rich debtors, either international or domestic, this does not help the poor,” says Sayeed.
Of course, the government has announced a few programmes in the latest budget to help the poor and low-income salaried class. The exemption limit for salaried taxpayers is being enhanced from Rs 200,000 to Rs 300,000, a move that aims to benefit over 400,000 taxpayers. The Benazir Income Support Fund continues as a programme of “targeted cash grants” for the poor and its funding is being boosted to Rs 50 billion from Rs 46 billion last year. The amount allocated for the Public Sector Development Programme itself has risen to Rs 663 billion, an increase of 2.6% over the budgeted amount for 2009-2010, but more than a 50% higher from fiscal year 2007. Even the pilot scheme to guarantee 100 days of paid work to unskilled rural workers is a noble one. These spending programmes are good in principle but their implementation has yet to be scrutinised. Moreover, they do little to tackle the root causes of poverty.
Education and healthcare are two key areas in which the government can provide powerful direct spending to benefit the poor in the short and long run. With the 18th Amendment and the most recent NFC Award, the responsibility for these social sectors falls mostly on the provinces. With just over Rs 1 trillion being transferred to the provinces this year, many observers are looking at the provinces to use some of that money intelligently to come up with focused and efficient health and education programmes. Historically, Pakistan has failed its citizens in these areas. Expenditure on education was just 2.1% of GDP in 2009, while healthcare spending by the government was a mere 0.5% of GDP — compare that to the 6% of GDP to be spent on debt servicing. It is unclear what the provinces will end up spending next year, but the usual low levels of spending hurt the poor the most. As the Asian Development Bank wrote in an outlook report on Pakistan for 2010, “Such weak social sector expenditures are difficult to justify in a country whose human development index ranking of 141 places it toward the bottom.”
Spending could improve in these areas if revenues improved. But the government has a problem collecting taxes. “The government does not have the ability or capacity to directly tax incomes. If it directly taxed incomes, we would have a progressive tax structure.”
But it doesn’t.
Pakistan uses lots of indirect taxation, just like other developing countries. In fact, in the 2010-2011 federal budget, indirect taxes are expected to make up 63% of tax revenue. This is not good for the poor. “The effect on the poor is greater via indirect taxation,” says Sayeed. Indirect levies on daily key necessities, such as petrol and gas, as a percentage of income are very high for the poor. In effect, Pakistan’s system of indirect taxation taxes the poor more than the rich.
Of course, the government can control the level of indirect taxation to some extent. By not placing indirect taxes on food, clothing and medicine, the government can reduce the level of regressiveness. The proposed Value-Added Tax (VAT) was designed to exempt those key basic necessities that make up the bulk of spending in low-income households. The reformed GST presented in the budget, which has morphed into a flat tax of 15%, will also not apply to “health, education and food items consumed by the poor.”
But the VAT had been designed with another purpose. “It is to be used as an instrument to document the economy,” says Sayeed. By applying the VAT on goods as they travel through the supply chain all the way to the retail level, the flow of goods can be tracked and the income generated at each stage can be recorded. The VAT, he says, becomes a move towards a progressive income tax system. As such there is a lot of resistance to it. “Many shopkeepers do not understand it, so they reject it. Other big business owners know very well what it is, and thus they reject it too.”
Commentators will debate about the need for agricultural tax reform — some say it is necessary while others believe the net tax revenue generated from farm incomes would be small (rising subsidies and too many small landholders who would be exempt) — but the bottom line is that the government needs to expand its tax net, especially its income tax net. As it stands today, Pakistan’s tax-to-GDP ratio is, according to the finance ministry, approximately 11% and, as a result, government spending as a percentage of GDP is only 20%, both rates are way below global standards. In fact, the nation’s low tax-to-GDP ratio is in the bottom 20% in the world.
But things on the tax front do not look likely to improve anytime soon. The reaction to the VAT confirms a basic truth in Pakistan: the rich do not want to pay taxes. As such, the government continues to depend on regressive indirect taxes.
Meanwhile, around the country, families such as Muhammad Akbar’s provide a cautionary tale for the government. While, Akbar’s wife, Muzammil Bibi, was the sole survivor of the group poisoning she undertook with her husband and three daughters, and was promised Rs 1 million of compensation by Punjab Chief Minister Shahbaz Sharif, it is likely that she, along with millions of other struggling Pakistanis, would expect the government to take more strategic action: action to address root causes and provide long-term prosperity. In a report in the Daily Times, the president of the Auto Rickshaw Dealers Association spoke about Akbar’s case and, according to the report, the representative argued that “the government had banned two-stroke rickshaws, affecting around 50,000 families.” The policy move was an added burden on “poor drivers who could not switch to four-stroke rickshaws due to financial constraints.”
Clearly, re-allocating spending and reforming the tax system could provide pools of money that could be spent on targeted programmes to help the poor, such as struggling rickshaw drivers. Babar Ayaz says that it is about ensuring the “trickle down” of wealth. “The tap must be turned on more,” he says. “And we Pakistanis need to do it.”