Pakistan’s public debt accumulated to reach 63 per cent of GDP by 2011-12. As a result, the total fiscal requirements to finance budget deficit and to roll over mature debt for 2012-13 reached over 35 per cent of GDP, the highest among the emerging market economies after Egypt (40 per cent) as well as among the advanced economies after Japan (54 per cent).
What causes the public debt?
The sustained and increasing national budget deficits are the primary reason for accumulated public debt. The size of budget deficits has increased from Rs. 89.97 billion in 1991-92 to Rs. 1369.71 billion in 2011-12, an average increase of Rs 373.01 billion during the said period. On an average, the budget deficits grew about 17 per cent during this period with a peak figure of 106 per cent in 2007-08 and a lowest figure of 1 per cent in 1991-92. As a percentage of GDP, on an average the budget deficits increased by 5.6 per cent during the period, with the peak figure of 8 per cent in 1992-93 and a lowest figure of 2.3 per cent in 2003-04.
The budget deficits are mainly because of extremely low level of revenues in the country. On an average, the national revenues were about 14 per cent of GDP during period from 1991-92 to 2011-12, which are lower than many developing countries such as Egypt (22 per cent), Kenya (20 per cent), Thailand (21 per cent), Malaysia (21 per cent) and Nepal (15 per cent) not to mention advanced nations like Germany (29 per cent), France (43 per cent) and Italy (38 per cent), etc. in 2011.
Like many countries of the world, taxes constitute major segment of Pakistan’s national revenues. But, in contrast to many similar economies, the tax-to-GDP ratio in the country remained low and stagnant at around 10 per cent to 12 per cent during the period 1991-92 to 2011-12 despite significant increase in GST revenue and income tax revenue due to tax policy changes. In 2011, the tax-to-GDP ratios of Egypt (14 per cent), Kenya (19 per cent), Philippines (12 per cent), Indonesia (12 per cent), Malaysia (15 per cent), Sri Lanka (12 per cent) and Nepal (13 per cent) were higher than 9 per cent of Pakistan.
The reasons for low tax revenue mobilization are well-cited and documented in the literature. Specific to Pakistan, the most common ones are considerable tax evasion, reasonably large size of informal economy and too many exemptions. For instance, the GST gap, which is the difference between GST actually collected and that which is potentially collectable, was computed to 63 per cent in 2002-03 and has increased to 75 per cent in 2010-11, largely attributable to the increased level of non-compliance, exemptions and excessive input tax adjustments.
The excessive and increasing public expenditure is another reason for widening budget deficits ergo debt accumulation. On an average, the public expenditures were about 20 per cent of GDP during the period 1991-92 to 2011-12, with the highest figure of 22 per cent in 1991-92 and 2007-08 and the lowest figure of 17 per cent in 2000-01 and 2003-04. However, the current expenditures were much more than the development expenditures. The current expenditures remained within a band of 14 per cent to 18 per cent of GDP, with a highest figure of 18 per cent in 2007-08 and a lowest figure of 14 per cent in 2003-04. In contrast, the development expenditures were significantly lower with highest figure of about 6 per cent of GDP in 1991-92 and lowest figure of about 2 per cent of GDP in 2000-01; needless to mention that the development expenditures promote economic growth, which, in turn, raises more tax revenues essential to balance the budgets.
Since the country does not have sufficient natural resources to provide for non-tax revenues, the taxes would continue to be the major instruments for raising revenues and balancing the budgets in the future. But, poor tax culture has been posing serious threats to implementing adequate and economically vibrant fiscal policy. Less than 30 per cent share of voluntary payments in gross income tax collection in 2011-12 provides better illustration of poor tax culture, despite the fact that the self-assessment scheme was introduced in the interest of the taxpayers.
The above discussion suggests that until and unless the government reexamines its fiscal policy, the people realize their national obligation of paying due taxes, the tax authorities enforce tax laws in transparent and indiscriminate manner, we would probably learn to live with higher level of debts in the future.