Budget Analysis: Defending economic freedom in words, lobbying interests in actions

The first ten minutes of Finance Minister Ishaq Dar’s budget speech were an economic liberal’s dream come true – a full-throated defence of capitalism as the necessary ingredient needed to inject dynamism into a hitherto moribund economy. The rest of the speech, however, contained few important specifics on how exactly the government plans to put that vision into action.

Dar’s elucidation of his party’s vision of what the role of government should be is the stuff of libertarian legend: a clear separation of the government and the private sector’s respective roles in the economy. The speech also attacked the very notion of state-owned enterprises as an intolerable distortion in the natural order of a functional economy.

“A government too occupied in carrying out business activities, which can best be done by the private sector through a market mechanism, is indeed a prescription for distorting the entire economic system and creating inequities in its functioning. Of course, markets have to be regulated so that a competitive environment is ensured. Indeed, because we were too occupied in managing businesses, we have grossly neglected the regulatory role of the government, to the detriment of safeguarding consumers’ interests,” said Dar.

Translation: the government was so busy running the entire country’s energy sector into the ground that it forgot to provide you folks with electricity. (This example holds true in many other sectors as well.)

This was the part of Dar’s speech where he was lively and animated, had full command over the words he was using, and generally sounded like he was saying what he believed. But even here, Dar was vague, arguing in favour of privatisation, but without actually saying what the government would be privatising and when.

Then came the part about taxation and proposed changes to policy, somewhere in the second half-hour of his speech, and Dar’s eyes seemed to glaze over as if he was reading out words that somebody else had written for him – words which he had not had the time to grasp the full meaning and implications of.

And that is where things went horribly wrong.

For starters, the government’s new taxation policies do have some merits. There is, for instance, the idea that the government should probably ask registered sales tax payers to collect the full sales tax from unregistered businesses. It makes sense, especially when one considers the alternative: over the past few decades, the government has basically been waiting for unregistered businesses to come forth and file their taxes.

And the Pakistan Muslim League-Nawaz  appears to be continuing the policy of its predecessors in trying to utilise the power of Big Data to catch more tax thieves. This includes giving the Federal Board of Revenue (FBR) the power to access banking records, something that the State Bank of Pakistan had been resisting previously. (This move will have implications for banking privacy and bank deposits levels, but that is a discussion for another day.)

But ultimately, the policy of taxing some sectors very heavily – take telecommunications for example – and exempting others like export-oriented textile companies altogether, has remained intact. The government’s distortionary impact on the economy, so eloquently criticised by Dar himself, has been left untouched.

Some small sectors that had previously been left untaxed have been brought into the fold, such as imported canola seeds used to make cooking oil. But the overarching structure where the FBR seeks to minimise its workload by taxing what is easy, rather than what is necessary, is very much alive in the PML-N’s vision of economic freedom.

Dar can be excused this year for having taken office too close to the budget to have enough time to come up with a taxation policy that would be closer to his own vision of the economy. It is possible that he decided to adopt the FBR’s recommendations for changes in tax policy simply to create enough fiscal space for him to carry out the government’s policies. Next year, however, he will have no excuses.

Published in The Express Tribune, June 13th, 2013

Farooq Tirmizi

CEO, Elphinstone

Farooq Tirmizi is the founder and CEO of Elphinstone, the financial services firm that operates SmartRupee.

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