VIEW: Fiscal space and social contract - Dr Faisal Bari - Wednesday, December 15, 2010

Source : www.dailytimes.com

Most Pakistanis believe the government does not have the will to tax the rich of the country: their own group. But it is probably also the case that the state is quite ineffective and is unable to tax the rich

Pakistan is able to raise only nine odd percent of its GDP as revenue through taxes. It is one of the lowest in the world. And it is definitely not enough for the government to pay for all things we want it to pay for. For example, the latest National Education Policy promises that the government will, by 2015, raise the expenditure on education to about 7.5 percent of GDP. And we have not even talked of defence expenditure, non-development expenditure or other development expenditure.

Pakistan needs to raise a lot more in tax revenue. But the converse is that Pakistanis, by and large, and for very good reasons, do not want to pay taxes or pay more taxes. A friend who happens to be in the tax net pays 40 plus percent of his income in taxes. He is a salaried person and gets his salary after his tax contributions of 25 percent have been deducted. Then he pays sales and other taxes on all he and his family consume. He feels he gets nothing in return. His children go to private schools, if they fall ill he takes them to private hospitals; he does not use public transport, and he spends quite a bit on private guards for protection of his house, life and property. Even at the larger level, his priorities are seldom reflected in national politics. He wants Pakistan to have a democratic system, with strong law and order and respect for human rights. His hopes have seldom been met. He does use public roads and so on, but he pays a road tax for them separately, so what do his taxes get him?

It is not the case that he does not want to contribute to national expenses and share the burden. In fact, he says that he would be willing to pay even more in taxes if he knew that the money was going to contribute towards health and education of those who cannot afford it, or contribute towards building national infrastructure, but he is not willing to waste money, or contribute towards Swiss and other accounts of the generals, bureaucrats and politicians.

Herein lies the catch-22 we are in. The government does not have any credibility. It is under a lot of pressure to raise more money through taxes, but that pressure just forces it to levy taxes that are easy to collect. They happen to be on the poor (regressive taxes like the reformed GST) and on those who are already in the tax net (the hike in income tax for flood reconstruction). Most Pakistanis believe the government does not have the will to tax the rich of the country: their own group. But it is probably also the case that the state is quite ineffective and is unable to tax the rich. Whatever the combination of reasons, the government cannot credibly signal that it is serious about tax reform.

The government has also been unable to credibly signal that it can or is willing to reduce inefficiency and/or reduce corruption. Leaving aside the president’s reputation, the government’s efforts to reduce corruption are being led by Rehman Malik. And the law ministry is being led by Babar Awan. Can anyone, other than diehard PPP supporters, believe that government is serious about reform, cutting expenditures and investing in the future?

The finance minister can bluster all he wants but the fact remains that the people of Pakistan have little or no trust in government. Is it any wonder outsiders also do not trust it and do not want to commit any money to the government? The details of money coming for flood relief, given on the website of the Economic Affairs Division (EAD), shows that a) most western countries who have committed money have chosen to spend the money through the UN (not that the UN is much better in terms of efficiency) and international non-governmental organisations (NGOs), and b) it is only some of the Islamic countries such as Saudi Arabia and Iran (not the most representative and accountable governments themselves) and a few others who have chosen to give money to the government. The same is true for ordinary Pakistanis, who have donated money for flood relief to private individuals/organisations rather than government initiatives.

The way out of this catch-22 is not going to be the people of Pakistan or outsiders giving government another chance without credible steps from the government. If the government is serious about reforms and improving the situation of the people, it has to make moves to show that commitment. And it is not too difficult to think what some of these moves could be. The government could impose and effectively implement taxes: a) on the bigger landholders; b) those who earn a lot through agricultural income; c) people with large houses or plots in urban areas; d) on capital gains, and e) make income tax more effective and progressive.

It could commit to reducing non-development and defence expenditure by x percent (worked out through parliament) every year, and commit to spending that money on education, health and social welfare. It could form cross-party groups to work on a) new taxation policies, b) laws and policies on accountability, and c) for managing the energy crisis. It could commit to increasing transparency and accountability by bringing meaningful freedom of information legislation and implementing it in letter and spirit. If only a fraction of these steps could be taken credibly, a lot of people would be willing to give more credit to the government and have more faith in it. None of these are too difficult to do and all of these are in the interests of the country, though they might go against factional interests. If the PPP could resist these interests, the next election could be a lot more interesting for everyone.

The days of rhetoric are gone and it is impossible for the government, irrespective of which party has power, to regain credibility through speeches, empty gestures or shouting in talk shows. Given the amount of information and opinion that is available through the media, local and international, and the lack of credibility that has been earned by the Pakistani elite over the last 60 years, it is going to take a lot of work, a real break from the past, for any government to be able to get the trust of the people back. The Pakistan government needs the trust of the people to govern, especially given the significant challenges we are facing. The policies for doing that are not too difficult to figure out. But the political will needed for this, to go for the long-term interests of the country rather than shot-term individual or sectional interests, it seems, is not going to be easy for the elite to manage. Maybe we need a new ‘Pakistan pact’. But it is not needed just from the political parties; all sections of the elite have to pitch in. Can such a coalition be formed? Can ‘enlightened self-interest’ be expected from the elite?

The writer is an Associate Professor of Economics at LUMS (currently on leave) and a Senior Advisor at Open Society Foundation (OSF). He can be reached at fbari@sorosny.org