LAHORE - Speakers at the annual pre-budget seminar 'Challenges to the Economy held under the aegis of Nawa-i-Waqt Group in collaboration with MCB Bank on Saturday stressed upon the government to adopt austerity measures at the highest level, increase direct taxes at the expense of indirect levies, defer VAT and adopt long and short-term policies to provide relief to the inflation-hit public. Criticising the government for incorporating unrealistic income sources in the budget, they stressed upon the need to present true picture of the economy before the masses. Addressing the seminar, Senator Ishaq Dar strongly criticised the imposition of Value Added Tax (VAT), saying, It is indirect tax. It is going to create high inflation in the country. It will also hit the people hard. He said that the VAT is going be a failure from the day first. According to him, 16 per cent GST would swell to about 23 per cent is replaced with VAT. He said that the government has assured the IMF that they are going to implement VAT from July 1, 2010. It should be deferred at least for two years, he suggested. We have to increase direct taxes not the indirect taxes, he maintained. He said that during their last regime the trade deficit was Rs 170 billion, which has swelled to Rs 750 billion. This is not sustainable, he warned. He said that the government should slash non-development expenditure rather than curtailing development expenditure. He said that the cabinet should be small in size and they had recommended this in the 18th Amendment that cabinet members should not be up to 35. He said that the government lacks proper delivery system. He also informed that the government has slashed PSDP to Rs 300 billion, which could lead to slow down growth and infrastructure development. But to my opinion, it (PSDP) is not going to be more than Rs 250 billion, he added. Mr Sartaj Aziz, while addressing the participants, said that during the current year the financial situation is better than the last year as far as foreign exchange reserves (above $15 billions) and Current Account Deficit is concerned. He said C/A deficit has come down due to decrease in import of machinery. Still negative factors behind the scene are very serious, he said, adding, the exports have not been grown and on the whole the overall competitive situation pick in exports as compared to that of China and India is worrisome. The other worrying factor is increase in liabilities, which shoot up from $44 billion to $47 billion, he added. He said that due to Swat Operation, the security budget has gone up to Rs 400 billion. He also said that non-development budget has increased. Mr Sartaj Aziz also informed that the IMF stabilisation programme has cut down fiscal growth rate to two per cent and under such circumstances the unemployment rate would increase further when inflation is already high. If growth rate is low, your unemployment and inflation goes up, he warned. It is very explosive situation, he added. If you continue with the IMF, they require continuation of monetary control that means unemployment, poverty, and inflation stay rising, he maintained. He further said that the government would transfer probably Rs 200 billion to the provinces under the NFC. He said that there are additional hole in the budget that has not been reflected the overall budget deficit. Those liabilities remain that is Rs250 billion since we are still subsidising the electricity therefore every time we pay for it that adds up to the circular debt. The deficit of the government corporations including PIA would further increase the debt. He said that the development budget has already been cut by 40 per cent. He said that next year the target is Rs 1700 billion and debt service is going to be about Rs800 billion. Former Governor State Bank of Pakistan Dr Ishrat Hussain said the lack of implementation capacity is a serious problem at the governance level. He also said that the gap between the peoples expectations and the governments capacity to deliver should be bridged. Corruption at all levels including federal, provincial governments and the local government level should be eradicated by evolving strict and comprehensive monitoring and accountability system. He also stressed upon the need of political consensus and said that continuation of economic policies could help revive national economy. If there is lack of delivery capacity then powers especially the financial ones should be transferred to the local government by empowering them in true sense, he added. He said that the third deficit is that of sharing between the elite and other people in the country. He said that the rich people should be taxed rather than the poor and aggressive indirect taxation policy should be avoided. We should put our house in order first he said. Nazaria-i-Pakistan Trust Vice Chairman Dr Rafique Ahmed, said that basic challenge being faced by the economy was resource generation and to generate the resources, richer classes should be taxed properly. Underlining the need for fundamental reforms in the taxation system, he proposed that real estate, agriculture and corporate sector should be taxed properly, as all the classes of the society should carry the weight of taxes equally. A fearless media campaign and enthusiastic public support was vital for establishing a taxation system, which bring all segments of society into tax net on equal basis in order to generate the resources, he suggested. Dr. Rafique said that Value Added Tax (VAT) was not appropriate for under developing and poor countries and such taxes could play havoc with the lives of the people. Improving the system of direct and indirect taxation was need of the hour and the policymakers should seriously review their polices in this regard, said Dr Rafique. He said that tax to GDP ratio was decreasing by every passing year and at the current ratio was 9.6 percent, while in India it was 17.7 percent and in the developed world the ratio was 30 to 33 percent. Quoting the example of Liaqaut Ali Khan governments budget that was termed as 'poor mans budget, he said that the current policy makers should follow this example in order to bring a budget, which reflects the aspirations of the people. First Women Bank President Mrs Shafqat Sultana while speaking on the occasion said that fair taxation system was the need of the hour, while the upcoming budget should reflect the needs and demands of the people of this country. Import duties should be increased, while the Pakistani embassies should play proactive role for increasing our exports, proposed Mrs Shafqat. She also proposed that pay and pension should be increased keeping in view the rising inflation, while non-development funds of the govt should also be cut down. She said that our approach regarding growth of economy should be in line with the global trends, while Benazir Income Support Programme (BISP) and Bait-ul-Maal assistance was not sufficient for reduction of poverty. Energy crisis was a major hurdle for economic activity and our policy makers on energy should utilize at priority the coal reserves for generation of power, as Pakistan was the 4th largest coal rich country in the world and coal could become a major source of energy mix to counter the power crisis to accelerate the economic activity. She asked the government to allocate more funds for the education sector, as dynamic economy could only begin with good education. Agriculture sector requires special attention, while agro-based industry should be promoted in the developed areas of the country in order to generate economic activity, she suggested. Mrs. Shafqat also suggested constructing modern living facilities for the middle and the poor classes on the lines of posh localities, while the stated housing facilities should be sold on low rates. Prominent Economist Dr Shahid Siddiqui said that the economy of Pakistan was facing serious challenges and it required immediate attention of the ruling elite. He said that bad governance and dictators have played havoc with the economy of the country. Terming the performance of the economy during the last two years as worst in the history of the country, he said that even the targets agreed with International Monetary Fund has not been achieved. The rise in total domestic and foreign debt has been at the highest level in the history of Pakistan, he said, adding that the government has taken 11.3 billion dollars from the IMF in last two years. The British Foreign Minister on record had said that they had bargain that Pakistan would be doing whatever it could do in the war on terror in return of this loan. He said that Pakistan has lost about 43 billion dollars in last eight and a half years in the so-called war on terror. There is misconception about the Friends of Democratic Pakistan. They had given no amount to Pakistan. A judicial commission should be formed to probe that how and why the people of Pakistan were cheated by making budget on the basis of money to be received from the so called FoDP, he said. He said that saving to GDP ration, tax to GDP ratio and investment to GDP ratio in the country was lowest in the region. He said that over 1800 billion rupees were annually lost due to corruption, tax evasion, embezzlement of funds and bad governance. Giving solutions of the prevailing economic problems, he said that everybody earning 300,000 or above must be taxed, inflation should be controlled, a law should be made that all civil and military officials must educate their children in government schools, expenses of President, Prime Minister, Ministers and other government functionaries should be slashed by 70 per cent. He said that the country was rich of resources and talent and it only required good governance and control on corruption. KM Azam observed "Corruption in Islamabad goes to Washington. It should be localised so it can stay in the country." He said I know a couple of incidents when bureaucracy discouraged foreign investors, he recalled. He said that religion, politics and history were also important issues. He said that trend in Muslim history was toward dictatorship and not democracy. He said no democratic ruler but only military ruler could save the country from war on terror. Minister for Privatisation Senator Waqar Ahmad said over a period of time, we failed to generate our own resources and banked on the foreign lenders and this trend, he said, failed us to lift our economy. He also laid stress on restructuring of the capital institutions and others. He voiced for lowering down the high interest rate to step up economic activity and to address the unemployment issue. Mentioning about the margin financing, he said the government is going to float convertible and exchangeable bonds in the market, which hopefully would attract foreign investment. He named PIA, Railways, Utility Stores Corporation among eight institutions which he had are going be restructured which means, no political interference in their affairs regarding which, he added, the prime minister had also ensured him. Senator Waqar said the government is addressed the major political and constitutional issue and had also successfully countered terrorism so it was on the road to improvement and development. He hoped that the next budge would be poor friendly containing relief for the masses. As to the VAT, he said, it was committed by the outgoing Finance Minister with the IMF however, he added, the poor segment would not be burdened through this tax. Dr Aisha Pasha, Director Institute of Public Policy, Beaconhouse National University said that Pakistans economic growth rate was very low as compared to regional countries, saying that it should be at least 7 per cent. She said that low tax ratio was one of the main reasons for low growth rate. She said through better management Pakistan could double the revenue collection through tax. Dr Aisha ruled out the perception that VAT would increase inflation. Aisha said that to make VAT impostion a success, it was vial to bring improvement in the FBR as it was allegedly in the grip of corruption. For revenue generation, she found Afghan Transit Trade a good source. She said tax on services, real estate and luxury items be the focus of VAT. She also called for streamlining the direct taxation to increase resources. Addressing the seminar, banker Tariq Jamil said that senior civil servants should also make some contribution to this effect. All grade 22 and 21 civil servants, he said, should take a voluntary pay freeze (forgo any salary increments for at least one year). The size of government in terms of number of employees should be reduced, but solid and actionable programmes for increasing efficiencies based on extensive use of information systems be implemented. He was of the view that painful decisions must begin as a transparent and sincere attempt to show that we are ready to put our house in order. He further stated that it was also apparent that in the current set of expectations that limited relief will be available for the common man, which, he said, was evident by the government to replace the present general sales tax with the much dreaded Value Added Tax (VAT), opposed by most leading economists. It is being stated that introduction of VAT will not only lead to significant increase in the inflationary pressures but may also not cause any significant increase in the revenue generation. It is also understood that in order to enlarge the tax net, Government may impose several new taxes, which may also impact new segments of potential tax-payers. All this does not auger well for the common man and may actually increase the burden of overwhelming poverty. Tariq also spoke about re-fixing of tax slabs for women, senior citizens to ease hardship faced by the individual taxpayer. He said agriculture sector should receive special attention by the Finance Advisor, as it is necessary to initiate a broad consultation with the stakeholders engaged in this sector. About transport sector, he said that any major turnaround in the economy will require this sector to remain viable and stable, as any major hikes in the cost of transportation may be counterproductive. Qais Aslam pleaded for reduction in share of indirect taxes vis-a-vis direct taxation, besides broadening the tax net. He said indirect taxes were a huge burden on the common man. He also stressed considerable cut in non-development expenditure and creation of more jobs to divert more resources to the poor sections of society.