Prestige and Poverty

While there is no harm in having the mindset of a 16th century Moghul emperor in a personal capacity even in today’s world.

The spending priorities of a democratically-elected government in a developing country ought to be conditioned by the availability of budgetary resources, urgent needs of the people and limits of the constitution.

Our prime minister’s perception of economic progress seems to involve building megaprojects like multi-lane motorways, modern airports and a network of ring roads and inter-city bullet trains.


By focusing on high- profile and expensive projects, the prime minister seems to disregard the fact that the majority of the people live in mud houses built around dusty and unpaved roads travelled on foot or on donkeys and bullock carts.

This majority is having a hard time properly feeding and clothing their families due to sharply rising prices with shrinking employment opportunities and falling real incomes.

These people are at a loss to understand the utility of megaprojects financed by taxing them in one way or the other.

But it is not for the first time that the PML-N government led by Prime Minister Nawaz Sharif has been engaged in such ventures.

In his second term as prime minister, Nawaz Sharif was keen to build the Islamabad-Lahore motorway even by resorting to borrowing. He was told that the huge expenditure on its construction could be better utilised to build a network of farm-to-market rural roads that would promote agricultural and industrial development.

Alternatively, the budget deficit could be kept low by avoiding such extravagant expenditure in order to ensure relative price stability. In response, Nawaz Sharif is reported to have stated that Sher Shah Suri is remembered for the Grand Trunk Road he built and nobody cares to remember what his budget deficit was.

Moreover, Nawaz Sharif was able to get a large amount of grant from the government of Saudi Arabia in the form of free oil after the nuclear tests in 1998. He instructed the Ministry of Finance to keep the sale proceeds of that ‘gift’ of oil in a special account in the National Bank of Pakistan for him to use on megaprojects of his choice on the plea that it was a donation given by the Saudi Arabian government because of his good
personal relations with them.

Implementation of his instructions would have violated the constitutional requirement of placing all government receipts in the Consolidated Fund. Moreover, development projects involving large expenditure should constitute a part of the budget approved by the National Assembly rather than being approved by the prime minister at his discretion. For these reasons his instructions were not followed.

The prime minister’s recent decision to place the rupee counterpart of a large Saudi grant/loan in a separate development fund to be used to finance mega projects demonstrates that rather than learning from history he is about to repeat it.

Setting up such a fund outside of the Consolidated Fund, and without the approval of the National Assembly, would violate constitutional provisions. Such spending would also collide with the fundamental rights of the people of Pakistan who are entitled to live free from hunger and disease through efficient use of resources at the disposal of the government.

It seems that the PML-N government has forgotten its election promises to break the begging bowl. Building megaprojects as a symbol of national prestige by begging and borrowing is disgraceful for us as a nation.

Moreover, it compromises foreign policy and defence. Most importantly, it shows a regrettable lack of sensitivity about the grinding poverty of the majority of the people.

The country needs to chart a new course in economic management. It should let go of the habit of carrying a begging bowl to foreign countries and agencies. It is all the more important not to do so to finance high-profile ‘prestige’ projects.

The government should also abandon the habit of printing rupees and spending them wastefully.

We need a government that goes beyond gimmickry and grandeur on the expenditure side and does not tax the poor by heavily relying on indirect taxes and inflation.

Undaunted by the pressures of vested interest groups, and leaving aside their own business interests, the federal and provincial governments should undertake tax reforms and establish expenditure priorities that meet certain well-established criteria.

First, all tax loopholes created to cater to the interests of the rich and the powerful must be plugged. All assets beyond a certain threshold must be subjected to wealth tax. All inheritances beyond a certain amount should be made subject to inheritance tax. All wealth taken out and held abroad must be brought back and subjected to income tax.

Second, all incomes at a given level must be taxed equally regardless of the source of income. From income taxation point of view, a given level of income of a folk singer should be subjected to the same tax rate as that of an ‘imam’ of a mosque.

An absentee landlord earning rental income equivalent to the salary of a worker must be made to pay an equivalent amount of taxes. An underground operator who amasses richness must be brought under the tax net.

Third, the income tax system must be progressive in effect. Such a tax would require that the marginal tax rate must rise with the increase in income and the tax base is not punctured by concessions, exclusions and exemptions to the rich and powerful.

Fourth, the present reliance on indirect taxes and printing of excessive currency notes should be reduced by creating an appropriate balance between direct and indirect taxes. Right now the major sources of tax revenue are petroleum levy, sales tax, import and excise duties and withholding taxes.

Their incidence falls heavily on the poor in addition to the incidence of invisible tax through inflation generated by excessive printing of currency notes.

Fifth, there is a need to bring about a balance between spending and taxing by the federal government and the provincial governments. At present, the provinces engage in spending without taxing and the federal government cannot spend what it collects through taxation.

Sixth, corruption in tax administration should be effectively eradicated and economic activities documented. Tax reforms would generate enough revenue resources to be able to break the begging bowl and move towards self-reliance.

Tax reforms are an essential, but not sufficient condition for improving economic governance. Equal importance needs to be given to establishing proper expenditure priorities.

First, it should be recognised that the country’s defence is not guaranteed by excessive spending on military manpower and equipment.

A defence establishment financed by begging and borrowing and printing of currency notes cannot stand the test of time. A strong economy is the essential first step for a deterrent defence.

Second, spending on the luxurious lifestyles of politicians and bureaucrats and import of bullet proof cars for the use of VIPs and similar other wasteful expenditure must be stopped.

The most productive expenditure is educating and imparting skills to the youth. A healthy people will prove to be very productive. Our expenditure priorities must, therefore, be changed to increase allocation to education and health.

Third, quick-yielding development projects that facilitate investment, production and trade should be preferred over ‘prestige’ projects that are usually money guzzlers.

Expenditure on building farm–to-market roads, provision of better seeds and cheap agricultural inputs and ensuring regular flow of water, electricity, gas and other inputs would promote economic development and build up our national image better than high-speed trains, multi-lane highways and glittering airport buildings.

In short, mega projects should be left to the next generation which should be better educated, better trained and better fed by diverting expenditure to people and their skill development and creating economic infrastructure that facilitates agricultural and industrial development.

March, 2014