THE annual budget should be the means to achieve stated objectives. The government should use the occasion to present its strategic vision and announce the instruments, policy initiatives and institutional arrangements to realise these.

Given our recent history of sputtering economic growth and rising unemployment, the goals must be: growth stimulation, raising resources through a fair and equitable tax architecture, reducing the pressure of growing poverty, and improved quality of and access to services including protection of life and property, basic education, healthcare, potable water and sanitation.

Although delivery of these is a provincial mandate, the deterioration of key indicators for building a humane, just society is disconcerting. The literacy rate has declined from 60pc to 58pc, the percentage of households with access to improved drinking water has fallen from 30pc to 26pc, etc.

The government`s claim is that the first year involved crisis management, while the second year focused on stabilisation, achieved through expensive foreign loans, sales of government shares in profitable corporates, one-time grants of generous friends, with declining global oil and commodity prices having a salutary effect on inflation, which may rise with an uptick in oil prices. This third year would focus on growth. To what extent does the budget and the underlying data and strategy support the government contention that it will kindle growth? Before we proceed to discuss this and budgetary hopes, let us begin with the key positive features.

These include the relief given to industry and trade in KP, timid sops for the textile industry and incentives to the relatively labour-intensive sectors of construction and agriculture in the expectation that the support to the latter two sectors can fuel growth and create adequate employment opportunities.

Whether these incentives will give these sectors a major push remains to be seen since the principal issues of high taxes on inputs (like fertiliser) or poor productivity per acre remains unaddressed and cement and steel, critical sectors for construction, continue to be heavily taxed.

What we see is tinkering at the margins and, by implication, a desire to muddle through, with an eye more on further reduction of the fiscal deficit than initiatives to revive the stalled growth. There is little by way of fundamental structural reforms to alter the inequitable tax regime, which continues to rely on raising rates rather than improving collection.Similarly, not much has been done to reform the skewed expenditure profiles and styles (driven more by political whims than the economy`s needs and favouring Punjab more). For instance, one cannot spot the measures for confronting our bane widespread tax evasion (most new taxation targets existing taxpayers). There is no serious attempt to target the under-taxed retail and wholesale sectors (the PML-N constituency).

Another instance includes the initiatives to tackle high-cost provision, opaque functioning and governance issues af flicting the energy sector (even though the subsidy for the sector is being reduced), especially the failure to deregulate the sector. In other words, a solemn effort at addressing our perennial issue under IMF programmes and the quality of adjustment for containing the fiscal deficit is missing.

The projection of a fiscal deficit of 4.3pc relies on obfuscation and sleight of hand involving underestimation of current expenditures (especially on subsidies), provinces generating cash surpluses of almost Rs300 billion (it is not clear why they would oblige Islamabad), an optimistic increase in tax revenues of 19pc (a task not accomplished in the last two years), weak productivity gains of the key sectors and an uncertain policy environment bearing on private-investor sentiment.

To achieve anywhere near the growth target of 5.5pc, investment would have to be at least 20pc of GDP, requiring an astronomical increase from the present 14.7pc. Even if one ignores the issue of how this could be financed from domestic resources (our savings rate is barely 14.5pc) can the budgetary measures shift investor sentiment? Obviously, only time will tell.

However, lest we forget: a) the manufacturing sector is experiencing much higher cost of inputs than its competitors even within the region; b) an exchange rate the State Bank itself accepts has appreciated by 18pc whereas the currencies of most of our international competitors have undergone double-digit depreciation, affecting the competitiveness of exporting and import-competing industries; c) Rs120bn worth of GST refunds outstanding (despite promises in last year`s budget to pay off these claims speedily) this budget actually increases the GST rate further for textiles; d) the onslaught of imports, especially from China, under dif ferent free trade agreements, resulting in the closure of some industrial sub-sectors; e) rampant smuggling; and f) banks unwilling to lend to the private sector, preferring to invest in governmentT-bills and PIBs.

Although the budget proposes to raise the tax rate on bank earnings from government securities to disincentivise such investments it could lead to the government resorting to the State Bank window for financing its deficit, especially since bank deposits or investments of households in government savings schemes would grow much more slowly, if not decline, following the lowering of interest rates and increase in tax on banking transactions.

What is worrying are the complaints of the formal regular taxpaying sectors against what they classify as the Federal Board of Revenue`s hostile stance, targeting them through spurious demands and levying unlawful penalties through abuse of discretionary powers, while also lumbering them with the obligations of a withholding agent for all kinds of taxes.

Even if such a view is only a perception it is af fecting investor sentiment adversely, incentivising a shift towards informality, an outcome opposite to the objective of official policy. And this budget falls well short of the need to create a light-touch tax environment for existing taxpayers, silent as it is on the FBR`s discretionary powers.

The FBR is still not effectively and efficiently using technology and information available within the system to crack down on tax evaders, eg CNICs are required for transactions in real estate and motor vehicles, provincial excise and taxation Departments have data on property ownership, FBR has access to individual bank accounts, etc.

Given the availability of such data it is dif ficult to f athom why the continued heavy reliance on increasing withholding tax rates for non-filers. Experience suggests that it may increase revenues but not the number of filers.

Moreover, the data referred to here can be supplemented by discontinuing fresh issues of the Rs5,000 note, enacting legislation that makes benami transactions illegal. In 2000, this writer proposed this and was appointed chair of a government sub-committee for this purpose, which drafted such a law af ter extensive discussions with stakeholders.

With the slowly growing productive capacity of the economy, raising the tax-to-GDP ratio has become much more difficult. It is the improvement in the growth rate that will generate the additional revenues for funding critical social and economic services which, as evidenced above, continue to suf fer from issues of access and quality. • The writer is a former govemor of the State Bank of Pakistan.