Reportedly the upcoming federal budget is likely to allocate Rs. 681 billion as subsidy on the electricity tariff. While the subsidy may be important to financially support small farmers, or to protect lower-income group consumers, there could be an element of subsidies given unjustifiably to segments of society, which do not qualify for such financial support.
Moreover, the basic need of subsidy arises in the first place due to increases in tariffs, because of weak governance resulting in significant losses in the energy sector, and due to the sub-optimal nature of contracts with independent power producers (IPPs) whereby even idle capacity needs to be paid for.
Hence, instead of reforming the sector, and drastically moving towards renewable energy, subsidy has to be provided at a large scale, which in turn, eats into the development budget. For instance, reportedly Rs. 204 billion have already been taken away from the development budget allocation for the current fiscal year.
Here, the need for meeting International Monetary Fund’s primary surplus programme conditionality, on one hand, and over-board austerity policy keeping interest payment expenditure on the high side, significantly dents the development budget, which together with an overall weak domestic resource mobilization effort, and low economic growth also keeping revenues on the lower side, among other reasons, does not allow making ample development-, economic resilience related, and welfare related expenditures.
Given the fast-unfolding nature of the climate change crisis, and its strong causation with the likelihood of the ‘Pandemicene’ phenomenon, it is required to spend large amounts on making the economy resilient. Moreover, there is a need to make much higher welfare related spending, in the wake of rise in poverty, and inequality, caused in the wake of pandemic, and the catastrophic flooding in 2022.
Moreover, weak multilateral spirit has also accentuated the problem of lack of fiscal space available with developing countries, including Pakistan, in terms of both lack of provision of climate finance, and sub-optimal debt relief provided by countries, especially by those countries, which have a strong carbon footprint; while Pakistan, for instance, although among top-ten countries to be affected by climate change crisis, has a very small carbon footprint. Sub-optimal provision of financial support with regard to climate change– both bilaterally, and through their donations to the multilateral institutions– once again adds to lack of economic resilience-, and welfare related spending in developing countries.
At the same time, the budget will be presented in an environment of reined-in policy rate over the coming months, whereby a lesser amount will have to be earmarked for making interest payments. This will help create, in turn, more fiscal space for spending on enhancing resilience, and welfare in the economy. Moreover, lower cost of doing business, will likely produce positive consequences for instance, for economic growth, exports, employment, and revenues.
Also, years of under-investment in the educational-, and economic empowerment of the demos has reduced the quality, and strength of political voice, resulting in lack of pressure from the demos on public representatives to legislate towards, for instance, enhancing the base, and progressivity of taxes. Here, if adopted, the proposal by renowned economist, Emanuel Saez, and Gabriel Zucman to adopt a ‘national income tax’ by countries should be made part of the upcoming budget.
The two economists pointed out in their book ‘The triumph of injustice: how the rich dodge taxes and how to make them pay’ in this regard as ‘‘…a national income tax… is a tax on all income, whether it derives from labour or from capital, and whether it originates from the manufacturing sector, finance, nonprofits, or any other sector of the economy. The tax does not exempt saving, which is highly concentrated among the well-off and is more effectively encouraged by government regulations (such as automatic enrollment in pension plans and financial regulation) than tax breaks. To keep administration simple, the national income tax has a single rate and offers no deductions. …[it] is certainly not meant to replace the income tax, or any other progressive tax for that matter. It is meant to supplement progressive taxation and to replace regressive taxes… The national income tax is a true flat income tax.’
The government needs to present a green budget, whereby it should making allocations for instance, for drastic solarization of the economy, so that there is little need to provide high level of energy-related subsidies, and also the shift towards renewable energy will lower the need for fuel-related subsidies, and will lower the cost-push, and imported inflation, not to mention the positive consequences in terms of reducing the pace of climate change this shift will have.
At the same time, the budget will be presented in an environment of reined-in policy rate over the coming months, whereby a lesser amount will have to be earmarked for making interest payments. This will help create, in turn, more fiscal space for spending on enhancing resilience, and welfare in the economy. Moreover, lower cost of doing business, will likely produce positive consequences for instance, for economic growth, exports, employment, and revenues.
