Frozen the salaries and pension of government employees: Is this a prudent decision and what will be the impact on overall country’s economic conditions?

1. Institute of Management Studies
University of Peshawar
Taxation Management Comprehensive BBA
On June 12, 2020 Finance Division, Government of Pakistan announced annual budget for fiscal year 2020-
21. The year 2019-20 was projected as a year of positive economic growth caused by target driven policies
and goals. In the first half of this fiscal year, the government took an austerity driven, revenue generating
and fiscal deficit reduction strategy. This projected the growth of GDP at 3.0percent.During the Mid-Year
FY 2019-20, Pakistan’s economy moved progressively along the stabilization and adjustment path.
A steady policy mix appeared to adequately address the macroeconomic imbalances. Structural
adjustment process picked up momentum with the initiation of the IMF’s Extended Fund Facility
program of US $ 6 billion. However, the economic canvas changed drastically in the latter four
to six months with increasing effects of the Covid-19 outbreak on economy. Post Covid19, it is
expected that the Budget Deficit will increase to around 9 percent of gross domestic-product.
Projection of economic growth reduced from around 3% to -0.38% of GDP, while over-all
budget deficit is revised upwards from 7.1% to 9.1% of GDP, FBR revenue loss projected at Rs
900 billion, exports and remittances were adversely affected, and non-tax revenue was
decreased. The growth rate for FY 2020 is estimated at -0.38 percent on account of subdued
performance in industry and services sector which stood at -2.64 percent and -0.59 percent,
whereas agriculture sector performed relatively better and grew by 2.67 over the previous year.
The government’s focus is now aimed at increasing public health spending and strengthening
social safety nets for the vulnerable population. Over the medium-term a number of important
policy measures will be taken.
These policy measures will broadly include reduction of budget deficit through increase in
government revenues, maintaining the policies of; no borrowings from State Bank of Pakistan
for budget financing, flexible exchange rate, structural reforms in public entities including where
necessary privatization reforms in energy sector (electricity and gas), increase in public
investments in management of water, implementation of projects under China-Pakistan
Economic Corridor, strengthening energy transmission and distribution systems, implementation
of national tariff policy, implementation of special economic zones, etc. The budget philosophy
and strategy for FY 2020-21 year budget by the government includes striking a balance between
corona expenditure and fiscal deficit, keeping primary balance at sustainable level, protection of
social spending to support the vulnerable segments of the society, successful continuation of IMF
program, keeping development budget at adequate level to inject economic growth and revenue
mobilization.
Funding for special initiatives led by the Prime Minister like KamyabJawan, Sehat Card, Naya
Pakistan Housing scheme etc have also been protected. In wake of Covid-19 and additional
measures by the government to improve the economic outlook, no new taxes shall be introduced
in 2020-21 budget. FBR collection however, will increase through improvement of tax system,
broadening tax base and strengthening of administrative controls. Other measures include
withdrawing tax exemptions, rationalizing concessionary regime, simplifying tax rules and
ensuring tax compliance. It is imperative that the government adopt a policy for fiscal

2. consolidation for debt reduction over the medium-term. However, social spending shall continue
to be focused towards helping the most vulnerable segments of the society. Federal government
is accordingly pursuing a multipronged strategy with focus on increasing tax revenues, reducing
unnecessary expenditures, spending for the economic growth of the vulnerable sector and
increasing the country’s foreign exchange earnings.
In budget statement the federal government announced its decision to not increase salaries and
pensions of government employees for the upcoming fiscal year during the presentation of the
Budget 2020-21.
Req: Frozen the salaries and pension of government employees: Is this a prudent decision and
what will be the impact on overall country’s economic conditions?
ANSWER
The pandemic of Covid-19, has resulted in a major financial crunch across the globe, posing
grave socio-economic challenges, especially for the developing/emerging countries. Initially
conceived as a health challenge, Corona turned out to be an economic threat having the potential
of destabilizing the international economic system. Pakistan is no exception and Corona has
drastically changed the whole scenario.
Pakistan’s fragile economy was on way of stabilization before the health crisis of Corona virus
pandemic but this outbreak inflicted huge losses and derailed it towards negative growth of
0.38% GDP. Extended lock down, business closures, travel bans and social distancing resulted in
slowing down of economic activities, thus negatively impacting the growth patterns, fiscal and
current account projections, and investments in Pakistan. Corona caused unemployment of more
than 20 million people and 56.6% of population were thrown outside of social and economic
security net.
The Government stood up to the socio-economic challenge by reaching out to the vulnerable
segments of the society and business community to neutralize the negative impact of lock down
and unemployment by approving a Corona Stimulus Package of more than Rs. 1,200 billion.
Out of total amount Rs. 875 billion has been funded through the Federal budget. This resulted in
an increase in expenditure of the Federal Government for which supplementary grants were
approved by the Federal Government.
The government obtained loans and grants to bridge the gap between the receipts and
expenditure. The major party involved in external financing is IMF, whose Extended Fund
Facility program granted US $6 billion to Pakistan.
Pakistan has been facing long-standing economic challenges, including low revenue
mobilization, high fiscal deficit and indebtedness, low spending on education, health, and social
programs, and a weak external position. The Corona pandemic is a nail in coffin which resulted
in severe reliance to external financing institutes, the IMF program as the yardstick, the
government unveiled a budget built around austerity and belt-tightening.

3. On June 12, 2020 Finance Division, Government of Pakistan announced annual budget for fiscal
year 2020-21, which was a crisis budget in the backdrop of challenges posed by Corona and the
ensuing financial crises. The federal cabinet decided not to raise salaries and pensions in fiscal
year 2020-21 as opposed to Pay and Pension increase of Rs. 79,000 million in financial budget
2019-20.
The government has frozen the salaries and pension under the IMF demand to restrict non-
development budget amid increasing fiscal indiscipline whereby the budget deficit and primary
deficit is sky rocketing. So that it could aim at bringing budget deficit from 9.1% to 7.1% of
GDP and primary deficit (total deficit excluding interest payments) of Rs 184 billion or negative
0.55% of GDP for next budget. According to sources, the Finance Division has estimated that in
case salaries and pensions are increased by 10% the government will have to bear an extra
burden of Rs. 25 billion.
On the other hand, for providing relief to the people, no new tax has been levied. For social
safety net including poverty alleviation, the government will support its investments in Ehsaas
Program, which has several components ranging from stipends for poverty reduction, education
stipends for deserving students of poor families, homes for the elderly, shelter homes (panahgah)
for needy persons and Sehat Sahulat health insurance scheme for the poor. The program also
focuses on other vulnerable population like labor, and disable children. Housing initiatives
including Naya Pakistan Housing project have been funded. The special initiatives led by the
Prime Minister like Kamyab Jawan, Sehat Card, Billion tree Tsunami etc. have also been
protected.
Due to this pandemic, tax collection has become extremely difficult. Loss in revenue collection
is estimated around Rs. 900 Billion on this account. All these reasons have resulted in decrease
in federal budget.
Owing to the prevailing tight fiscal situation, growing public debt that may hit 90% of the total
value of the national economy, Pakistan's decision to seek debt relief from G-20 countries and
the aforementioned scenario, it is a prudent decision to not raise the salaries and pension of
government employees. So that preserved fiscal space will be able to provide tax relaxations and
sizeable increases in expenditure allocations, especially on health services, to mitigate Covid-19
effects.
But all that glitters is not gold, just like any salaried person government employees are affected
by pandemic, a current hike owing to devaluation of Pakistani Rupee, the impact on the
Consumer Price Index, and an increase in utility bills and inflation are in dire need of an increase
in their salaries. There is need of removal of disparities in the federal government employees pay
and allowances to bring uniformity in salary structures. The pension payment system needs
reforms to reduce long-term pension’s liability, transparent disbursement along with
rationalization pension and salary bills.