Economic Reform Package presented on January 23rd, 2019 promises to provide maximum benefits to the businessmen with special focus on tax exemptions on raw material to create an environment of ease of doing business. This will no doubt accelerate the motion of economic wheel by strengthening the domestic industry, consequently creating employment opportunities. The reforms will have a long-term positive effect on the economy as government is also supporting the joint ventures of foreign investors and local industry. Furthermore, the package seems to be a way towards progressive taxation, a well-accepted tool to reduce inequality in any economy. In Commitment to Reduce Inequality (CRI) Index by OXFAM, Pakistan, although has been ranked as the least performing country in South Asia yet, one of the most committed countries on progressive taxation. It also seems to aid in breaching the gap between rich and poor by further strengthening Pakistan’s bold commitment to achieve Sustainable Development Goal 1 of poverty.

A broad base presumption behind tax cuts is overall increase in the size of economy but this change should be revenue neutral or it should support revenue in near future because otherwise these tax cuts will raise the federal budget deficit and reduce national savings. The economic literature suggests financing the tax cuts by future cut in spending or future tax increase. But this is the beauty of a progressive tax structure, if adopted fully, that it takes care of the deficit and maintains equity as it is based on income and consumption proportion. In the current Economic Reform Package, tax allocations and cuts are rational, as the economy is injected with borrowing from different sources to maintain the national income levels. Only in the first quarter of the current fiscal year, the total debt and other liabilities are 80.3 percent of GDP while in 2018 they were 86.9 percent against 78.6 percent in 2017.

This assures that the present economic scenario in the country will no doubt attract the foreign investors and multinational companies that will further add in the size of economy but being an environmental economist, this makes me to contemplate that we are only looking at the bright side of the picture by totally ignoring the potential loss of the “Green Hues” from the landscape. Although, current policies support the “industrial flight hypothesis” but it also leads to the relaxed environmental regulations turning Pakistan a “Pollution Haven” for the foreign investors and multinational companies. A pollution intensive domestic industry also makes us to accept “Pollution halos hypothesis”. This leads to conclude that the economic growth in the country has always been at the cost of environmental damage and current tax reforms reveal that it is going to be like this in future.

Although progressive taxation on energy consumption will help in cutting down the carbon emissions at national level but along with this there should be heavy fines on the industries not properly adopting the effluent waste management mechanisms and other environmentally safe technologies. Along with this there is a common perception to put all the responsibility of emissions on industrial sector ignoring the agriculture sector, the second largest emitter in the world. In Pakistan also, any public finance planning regarding environment revolves only around industrial sector without keeping in view that the World Resources Institute, counts Pakistan among the top ten countries, account for 51 percent of total global agricultural emissions. So, this is the need of hour to consider agriculture sector also. One option to earn more “green revenue” in the short run is to issue pollution permits and levy taxes on both domestic and international firms after certain level of pollution emissions that can be used on resource conservation and environmental preservation as many developed and developing countries do. As the contribution of “Green Tax” in total revenue of European Union in 2016 remained 6.3 percent while Korea earns 10.56 percent of its total revenue through environmental taxation. In Asian region China is earning 3.59 percent of its total revenues through taxing environment related activities while in South Asian countries India earned 12.65 percent of its total revenue through environmental taxation with 0.88 percent share in Gross Domestic Product in 2016.

Although one great limitation is the lack of data availability, a prerequisite for sound evidence based environmental tax reforms in industrial and particularly in agriculture sector. So, the prerequisite is to create a firm level data base in industrial sector and particularly farm level data base in agriculture sector. Only after the availability of these data sets environment can be given due consideration in any budget documents and finance bills that will ensure a sustainable green growth and development in the country but in the short run government should try to integrate environmental concerns in the economic activity in order to minimise its negative impacts on environment by using available information. Though, in this era of climate change, Government’s initiative on reforestation is the major mitigation effort but there must be some control measures also to avoid the further deterioration of the environment. The Climate Change policy discusses the tax exemptions as an incentive for less pollution emitting firms but what about the firms whose emissions are beyond the acceptable limits or who are not adopting effluent waste management technologies? The community of environmental economists was anticipating that the economic reforms package will take care of this gap. Now it is expected that the government will give due considerations to the environmental concerns in any further public finance planning and will bridge the gap left unaddressed in tax reforms package.

 

The author is Research Fellow at Punjab Economic Research Institute, Lahore.