PMLN's Economic Policy

Society Pakistan & World Affairs
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Nawaz Sharif a few days ago on some TV program claimed that big enterprises, and banks etc are being over taxed hence they will be given tax cuts. This in a country where the tax to GDP ratio is already among the lowest in the world. Another interesting blooper was that every one would be charged 10 % income tax (that means the CEO of the company and the sweeper will be taxed uniformly), although every where else in the world the people are taxed according to their earnings. What do you guys think about their economic policy?

Nawaz’s EEE formula

Listening to our political leaders talk about the economic policy makes for good entertainment. It’s a wonder that we don’t get more of it on prime time. Whether it is PM Raja ‘Rental’ talking about solutions to our energy problems, or former PM Gilani talking about good governance, these classics are made for prime time TV. President Zardari’s style is more dry humour, where the only one laughing is the president and his hand-picked economic managers.

The latest gem comes from our two time former prime minister, Nawaz Sharif, in the form of his ‘revolutionary’ economic policy coined the 3Es. It should really have been coined the 10 percent formula. Mian Sahib told the nation and a rather bewildered Hamid Mir on an episode of ‘Capital Talk’ aired on September 25, that the solution to all our economic woes lie in big fat tax cuts to banks, oil companies, sugar mills and rich wealthy individuals. And Mian Sahib did not stop there. He went on to propose a 10 percent uniform income tax that would burden the hardworking middle income households to foot the bill of these fat tax cuts to the wealthy elite.

Let me explain why. It is no secret that Pakistan does not collect enough taxes. Tax collection was only 9.9 percent of the GDP in FY12, one of the lowest in the emerging markets and at par with African banana republics. The problem is that the rich do not pay taxes; large scale exemptions and weak enforcement provides enough space for them to slip through the tax net. This forces the government to levy heavy indirect taxes, regressive taxes like GST that disproportionally burden the poor. Even that is not enough to cover the budget gap, forcing the government to print more money to cover that gap. This leads to inflation, another regressive tax that disproportionally burdens the poor. Given the ground realities does it make any sense to burden the poor and dish out big fat tax cuts to the rich?

Nawaz Sharif told Hamid Mir that the tax rate for business is too high and that corporate tax rate must be brought down to 10 percent. The corporate sector includes big banks, oil companies, sugar and cement cartels, 5-star hotels and multinationals. Due to record earnings, the corporate sector contributed Rs450bn (2.2 percent of GDP and nearly 25 percent of the total FBR collection) in FY12. If the corporate tax rate is brought down to 10 percent, as Mr Sharif proposes, from 35 percent today, then that would result in a straight loss of Rs320bn (1.6 percent of the GDP) in tax collection. This is two times the amount of money the government spent on the health of 180m Pakistanis in FY12.

Such a massive tax break to big businesses will come at a high cost to the masses. Lack of resources will mean less money for education, health and clean drinking water facilities for the poor households. Who stands to benefit? This money will go straight into the pockets of the big tycoons, wealthy investors and shareholders in the form of record profits. This is not just bad economics, it is daylight robbery. How can Mian Sahib justify such an irresponsible policy that effectively is taking money away from the poor and stuffing it into the pockets of the wealthy elite?
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But Mian Sahib did not stop there. When Hamid Mir complained about how much tax he pays, Mian Sahib took immediate notice. He promised to implement a uniform 10 percent income tax rate. Today a person making Rs10 lakhs a month pays Rs193,000 a month in income tax. If the tax rate is reduced to 10 percent the same person will only pay half that amount in tax (ie Rs100,000 per month). Effectively, Mian Sahib promises to reduce the tax paid by the wealthy by a whopping 50 percent.

Today a middle income household earning Rs40,000 a month pays only Rs333 in monthly income tax. Mian Sahib promises to implement a uniform 10 percent tax rate which will effectively mean that the same person who was paying Rs333 a month will now end up paying Rs4,000 in monthly income tax. This effectively slaps the hard working middle class worker, the backbone of this economy, with a massive 1100 percent increase in tax burden. Will burdening the middle class worker and households, while doling out massive tax cuts to the wealthy elite, solve the woes of this economy?
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If Mian Sahib is so big on tax breaks, then why is there no proposal to cut sales tax? The sales tax is the single biggest burden on the masses; it is highly regressive in nature because it disproportionally burdens the poor. Every person, rich or poor, pays the same 16 percent GST on a pack of milk. Why is it that the tax that really affects the masses is the only tax that Mian Sahib does not want to cut?

I am at a loss to explain. There are only two plausible reasons. First that Mian Sahib has little comprehension of the economic policy. However, it is hard to buy this excuse. How can a two time former PM, a former CM and a former finance minister of Punjab be this clueless about the economic policy? The only likely explanation for this would be that Mian Sahib is getting some really bad advice from his daughter’s in-laws.

Mian Sahib never shies away from singing self-praises and the many accomplishments of his team of financial wizards, led by Ishaq Dar. These are the same financial wizards that made Mian Sahib believe that the economy was on the path to becoming an ‘Asian Tiger’ and that their far-sighted economic policies were so visionary that they were being copied by the Indian government.

However, hard economic data speaks louder than self-praise. **According to the SBP’s data, the economy grew at only 3.1 percent during Nawaz Sharif’s last stint in power (1997-1999), the slowest pace in Pakistan’s history. This record has now finally been broken by the current PPP-led government, with an average growth of only three percent in 2008 to 2012. **It is fascinating that while Mian Sahib rightly criticises the dismal performance of the PPP-led government, he compares his own government’s performance with the Asian Tigers.

**In conclusion, the 10 percent formula put forward by the PML-N chief is deeply flawed and the highly regressive tax policy will burden the hard working middle income households, while doling out unprecedented tax breaks to the elite. Mian Sahib should immediately fire his team of financial wizards; they were a disaster for the country back in the 1990s and the 10 percent formula shows that they have not learnt much even a decade later. If the PML-N does make it to the corridors of power, the fate of its 3Es will be the same as the PPP’s 5Es. And we will go to the IMF for another bailout.
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The writer is an international expert in economic policy.

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Re: PMLN's EEE Policy

Mian saab ne nihari ziada khai ho gi uss din. NS should stay away from TV interviews. Niyat theek bhi ho tau zubaan sey ulta seedha nikal jata hai!

BTW, 3Es are copied from PPP's manifesto (5Es) which nobody bothers to ever read let alone try to implement. . Perhaps '10%' is inspired by our president as well.

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Mian sahab jao Phajjay day paway khao tay ae policies tuaday bus da rog nhe

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Speaking of PML N and their Policies …No one can beat PML N in copying stuff

Here is Romney’s policy site
http://www.romneytaxplan.com/

and here is PML N policy site
http://www.thepmlnvision.com

:rotfl:

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Re: PMLN's EEE Policy

Aafcourse when big enterprises are part of family bijness and banks are in the hip pAcket and hoohaa of elections is everywhere this tAk of tax cuts seems like a timely thing to do.

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PMLN EEE Policy Vs PTIs **CFSZKQ **Policy

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Vs Pee Pee Pee Lutt Mar Policy!

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So you considered PPP Vs PTI's Chanda , Fitra , Sadqa , Zakat Khairat ,Qurbani ki khal policy

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:rotfl:

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Its more like Coercion v/s Consensual.

The former is criminal and latter is not.

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PPP is an elected mandate they have right of doing everything(including corruption) why would they follow Chanda , Fitra , Sadqa , Zakat Khairat ,Qurbani ki khal policy?

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Jiyalas are afraid of PTI

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What an asinine statement, but then again only mindless PPP Jiyalaz would think getting their uneducated janwars elected gives them every right to abuse their authority.

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aatay hi tamaka:)

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Yes, PPP’s dacoo (forced) vs PTI’s chanda (voluntary) policy :chai:

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Bushonomics in Pakistan - Sayem Z Ali

I received some interesting responses to my previous article titled, ‘Nawaz’s 3E formula’. Dr Abbasi in his letter to the editor defended Nawaz Sharif’s 3Es policy of massive tax cuts to big business and the top 10 percent income earners. According to Dr Abbasi, similar tax cuts to big business encouraged higher investment spending and created more jobs in Europe and the US. Hence, Dr Abbasi suggests Nawaz Sharif’s 10-percent tax formula will work in Pakistan. I strongly disagree.

The tax cuts implemented by George Bush for big business and wealthy taxpayers led to the worst financial crisis in the US since World War II and caused record unemployment and sharp rise in poverty. Corporate tax rate was slashed from as high as 39.6 percent down to 15 percent and hefty tax breaks were doled out to wealthy individuals. These tax cuts were supposed to encourage higher spending by big banks, oil companies and multinationals for new job creation. Instead, big business and wealthy taxpayers used the money to bet on the stock markets and real estate, leading to a flush of liquidity in speculative investments. Instead of investing in the real economy and creating jobs, the money from the tax cuts created asset bubbles.

When the bubble burst in 2008, the whole world was left reeling. A record number of Americans lost their jobs, and unemployment more than doubled – from 4.2 percent in 2001 to over 9.7 percent by 2010. Government debt increased sharply, from $6 trillion (60 percent of GDP) in 2002 to $16 trillion (101.7 percent of GDP) in 2012. Today the global reserve currency status of the mighty dollar, the pillar of US economic strength, is under threat with countries diversifying their reserves away from the dollar and into emerging markets like Brazil, Russia, India and China.

The bipartisan US Congressional Research Office states that the George Bush tax cuts “benefitted the richest individuals earning $200,000 or more per year and increased concentration of income at the top.” As the tax rate paid by the top 0.1 percent of the population fell, their share of income increased three-fold, from 4.2 percent in 1999 to 12.3 percent by 2008. Hence, all that the George Bush tax cuts achieved was to make the rich even richer, at the expense of all middle- income and poor households.

Pakistan cannot afford such failed experiments. The government is already near default, debt has more than doubled in the last five years and a record number of Pakistanis are unemployed, illiterate and without basic health and clean drinking water facilities. This is because the Pakistani government does not collect enough taxes. At 9.9 percent of GDP, our tax collection is already one of the lowest in the world, even less than in African banana republics. The rich don’t pay taxes, and giving them more tax breaks will leave the people worse off.

Nawaz Sharif’s 3Es policy of George Bush-style tax cuts to big banks, oil companies, sugar and cement cartels, 5-star hotels, multinationals and top income earners will cause a loss of 1.6 percent of GDP in tax collection. That is double the entire government budget on providing basic health facilities to 180 million Pakistanis. Such a massive tax break to big business will come at high cost to the masses. Lack of resources will mean less money for education, health and clean drinking water facilities for poor households. Who stands to benefit? This money will go straight into the pockets of the big tycoons, wealthy investors and shareholders in the form of record profits. This is not just bad economics, it is broad daylight robbery.

**While the PPP tax amnesty scheme offers a one-time reprieve to tax cheats, Nawaz Sharif’s ten percent tax formula provides unlimited, unconditional tax breaks to the rich and wealthy. We should all be really concerned that political leaders are advocating highly irresponsible fiscal policies that will further aggravate the rich – poor divide in Pakistan. How can Nawaz Sharif justify a policy that effectively takes money away from the poor, only to stuff the pockets of the wealthy elite?

Unfortunately, Nawaz Sharif has made many mistakes in the past. Rewind back to the May 1998 freezing of foreign currency accounts. At that point Pakistani investors had $11 billion as saving in foreign currency (FCY) accounts with local banks, and all of that money disappeared following the freeze. Today the total FCY deposits stand at only $4.5 billion. Even 15 years later, Pakistan has not been able to recover from the damage that Nawaz Sharif’s government caused to local investors. The Pakistani rupee has plunged 120 percent since that fateful day in May and this is one of the main reasons why average Pakistanis have suffered from record inflation, unemployment and forced to hold a begging bowl for foreign aid.**

Just imagine if we had $11 billion’s FCY in our banking system today! We would not need to keep running after the IMF and US aid money. The Nawaz Sharif government did realise its folly and within 30 days reversed the decision to freeze foreign-currency accounts. But the damage had already been done. Therefore, instead of copying George Bush’s tax cuts, Nawaz Sharif and his team of financial “wizards” should for once focus on the real problems of the people. Instead of big tax cuts for the rich, Mian Sahib should focus on cutting the taxes paid by the poor.

The writer is an international expert in economic policy and works with a commercial bank. Tweets @SayemZA

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PML-N

I am surprised to read the PML-N’s defence of the failed economic policies of George W Bush, advocating their implementation in Pakistan. Zubair Mohmmad in his article titled ‘Bushonomics and PML-N’ on December 19 makes a valiant attempt to defend his party chief’s comments on a prime time TV show. He argues that we should ignore the fact that Nawaz Sharif ‘advocated’ Bush style tax cuts for big business and wealthy elite because what Sharif said was not a policy statement but ‘just a general comment’.

Is the writer suggesting that his party chief is ‘shooting from the hip’ when it comes to economic policy? At a time when the country is facing record inflation, record unemployment and the worst ever energy crisis, the writer is suggesting that the chief of his party, a two time former prime minister, has no concrete solutions to present to the people of Pakistan?

What does that say about the financial ‘wizards’ of the PML-N? We have heard Nawaz Sharif praise his economic team numerous times – yes the team that made Pakistan an Asian Tiger! These wizards are proudly passing off George Bush’s tax cuts as part of their economic agenda. Zubair Mohammad reminds us that the PML-N reduced taxes for big business and wealthy individuals during its two tenures in the 1990s and these tax cuts led to an increase in tax revenues. And that’s how the financial wizards operate. They spin a good story, and repeat it often enough for some people to start believing it.

I would kindly request the PML-N team to read the State Bank of Pakistan’s Handbook of Statistics 2010 to get their facts straight. The tax cuts to big business and wealthy individuals introduced by the first Nawaz Sharif government in 1990 led to a decline in tax collection. Tax to GDP fell from 14.3 percent of GDP in FY90 (fiscal year ending June 1990) to 13.3 percent of GDP in FY93. The second time the Sharif government came to power – in 1997 – it repeated the same mistakes, leading to the same results. Again tax collection declined from 14.4 percent of GDP in FY96 to 13.3 percent in FY99.

So quite contrary to the story being spun around by the PML-N’s financial wizards, the facts clearly show that the party’s tax cuts for the rich led to a decline in tax collection in the 1990s. But it seems they have not learnt their lessons. Once again, Nawaz Sharif’s 3Es policy advocates George Bush style tax cuts to big banks, oil companies, multinationals and wealthy elite. If the Nawaz Sharif 10 percent formula is applied, it will cause a substantial loss of 1.6 percent of GDP in tax collection. That is two times more than the entire budget on providing basic health facilities to the 180 million who live in the country. The government of Pakistan is almost bankrupt and unable to provide basic health, education and clean drinking water and PML-N is advocating unprecedented tax cuts for the rich?

But the wizards don’t stop there. Through constant ‘self praise’, the PML-N has attempted to create a myth regarding its ‘revolutionary’ policies, which according to Nawaz Sharif led to Pakistan becoming an Asian Tiger in the 1990s. Zubair Mohmmad says that the PML-N government achieved the ‘highest’ growth rates for ‘any civilian government in our history’. Unfortunately, facts indicate otherwise.

SBP Handbook of Statistics 2010 shows that the Nawaz Sharif government’s economic performance was the worst amongst all civilian or military government in Pakistan’s. Average growth during Nawaz Sharifs two stints in power was only 4.1 percent, which is significantly lower than Ziaul Haq (5.9 percent), Musharraf (5.1 percent) and even lower than Benazir Bhutto’s two stints in power (five percent).

PMLN performance was not only bad but it also deteriorated during Nawaz Sharifs second stint in power during February 1997 to October 1999. The economy expanded at only 3.1 percent during this time, which is the lowest pace of growth for any government on record. To give you perspective it is exactly as bad as the performance of the current PPP led government, with average growth of 3.1 percent between FY09 to FY13. So while the PML-N rightly criticises the dismal performance of President Zardari’s five years in power, it compares its own equally woeful performance with the Asian Tigers?

Then the ‘wizards’ spin the story about the motorway and other megaprojects. We are also reminded that during the PML-N’s governments, there was no energy crisis, the government collected higher tax than it does today and there was no terrorism in Pakistan. But the central question that remains is: why, despite these mega projects and despite being better placed to run the economy, did the PML-N government manage to perform as poorly as the current government, with growth of only 3.1 percent?

The PML-N then comes out with a long list of excuses, the favourite being the 1998 nuclear tests. The party lays the entire blame of its poor performance on Pakistan going nuclear. However, a careful analysis of SBP data shows that growth actually picked up in FY99 – the year starting July 1998 or just two months after the nuclear tests. Growth picked up in FY99 to 4.2 percent compared to 1.7 percent in FY97 and 3.5 percent in FY98. Unfortunately for PML-N, hard verifiable official data shows that the Sharif government’s performance was dismal even in the years before the May 1998 nuclear tests.

Yet, despite this outstanding record, we are still fed concocted tales of PML-N having the “most experienced economics team on its side, which has delivered in the past and has the capacity to turn around our ailing economy”. With by far the worst performance of any civilian or military government, the ‘experience’ of the PML-N’s financial wizards is exactly the reason why Nawaz Sharif should replace them immediately.

The writer is an expert on economic policy. Tweets @SayemZA