Pakistan quickly approved the IMF-mandated Federal Budget 2024–25 on Friday, despite some last-minute changes that essentially doubled the tax rate on salaried class, increased the cost of gasoline and diesel, and imposed a hefty 10% surcharge on high salaries. While the Washington-based lender continues to feel that it is insufficient, many in Pakistan have called this terrible.
Here, there are a few things we must comprehend. As demonstrated lately in Kenya, raising taxes in the upcoming budget may appear like a solution, but it will ultimately backfire. Cutting spending has its limits, too, considering how much debt we have.
The government is not even allowed to contemplate a situation in which it could successfully and amicably reprofile its debt to lessen the tax burden on individuals who are living paycheck to paycheck in the Federal Budget 2024–25. The class of salaried people is doomed.
Important Budget Points of Interest:
In essence, the 10 percent surcharge is a penalty imposed on high earners over and above the already oppressive 35 percent ordinary tax rate on their gross annual income. In addition, a new progressive tax system for real estate transactions has been implemented, under which non-filers would be required to pay at least Rs. 10 million on properties of comparable value, while filers will be required to pay at least Rs. 4 million on properties valued at Rs. 100 million.Even mobile phones are not exempt. For phones under Rs. 140,000, there will be an additional tax of 18%; for phones over this amount, there will be a 25% tax.
There will now be an 18% sales tax included in the regular milk/fat-filled milk tariff. Will infants relocate overseas?
Last but not least, exporters will now be subject to the standard tax system, which means they will pay appropriate super tax on top of the corporate tax of 29% on their export revenue.
Debt and Budget:
Pakistan is caught up in one of the worst debt traps in the world. The nation has accumulated enormous debt, wasting it on wasteful expenses like consumption. The country is being pushed toward defaulting on its development and climate needs in order to meet past debt payments.stated in a tweet a former deputy governor of the central bank.
With this trend expected to last for a few years, the government currently spends more on debt servicing than any other nation in the world. As a result, in order to pay off previous debt, harsh and irrational taxes are required, leaving little money for future investments in Pakistan.
The scourge of interest payments:
Among emerging nations, Pakistan has the highest interest rate (6 percent) relative to its GDP. Pakistan is second only to Sri Lanka in that interest payments account for 65 percent of government revenue. The government cannot afford social spending that is vital for improving job quality, exports, foreign investment, and the population’s skill level due to this high interest load.
The government ranks second worst in the world, behind Sri Lanka, spending nearly three times as much on interest as on education. Furthermore—a ratio that is only worse in Angola and Lebanon the government spends twice as much on interest as it does on investment, which is crucial for growth. Just 14% of Pakistan’s GDP is being invested, which is much less than what is required for long-term growth.
Not putting it nicely enough: Pakistan’s interest expenses have been among the highest in the world for the past four years, despite reduced interest rates.Not simply high interest rates, but Pakistan’s massive debt load is the issue. Interest payments still account for over 55% of government revenue, even with a seemingly miraculous 2 percent GDP gain in revenues during the following few years.
Positive Regarding Inflation?
The ambitious aim of Rs. 13 trillion in tax collection and Rs. 9.8 trillion in debt servicing are part of the new Rs. 18.9 trillion budget. The inflation forecast for this month has been raised to 13.5% from the suggested objective of 12% for 2024–2025. This raises questions about how the government will control inflation in the upcoming months. Starting tomorrow, the IMF predicts inflation to be greater than 12 percent.
