Kieran Holmes applauds the UK government's decision to make further aid flows to Pakistan conditional on the basis tax reform, but says more needs to be done.

The recommendation made in a recent report (pdf) by the House of Commons international development committee (IDC) were both unusual and timely. It said future development assistance, or aid, from the UK to Pakistan should be conditional on Pakistan's willingness and ability to collect taxes from its own citizens.

The report states bluntly: "If the Pakistan government is unwilling to take action to increase its revenues and improve services for its people, it cannot expect the British people to do so in the long run. We cannot expect the citizens of the UK to pay taxes to improve education and health in Pakistan if the Pakistan elite is not paying income tax."

The reference to tax is not accidental. The IDC wants to see not only a bigger tax take in Pakistan but also more taxes coming directly from the Pakistan elite in the form of income tax. There is therefore a clear message that it is no longer acceptable for ordinary British taxpayers to finance the public expenditure that the Pakistan elite is unwilling to finance for themselves.

Pakistan is the biggest recipient of UK aid, receiving £267m in 2012-13, rising to £446m in 2014-15. The report describes Pakistan as an unstable, middle-income country with a large defence budget, high level of corruption, significant tax avoidance, evasion and non-compliance and low levels of expenditure on education and health programmes. Its current tax take is no more than 10% of its gross national income, indicating a frightful lack of tax compliance – it is reported that "over 70% of the elected representatives in Pakistan law makers, including many ministers do not pay tax."

The fact that Pakistan has a substantial nuclear arsenal is evidence enough that where there is a political will the state is able to operate effectively. Yet the police, the land and the tax administration operate as the most corrupt institutions in Pakistan precisely because they are of no use or interest to the elite as evidence recorded in the report makes clear. Furthermore the elite do not use the government schools and it is therefore not surprising that government-funded schools are in an extremely poor state.

The IDC report reflects the current thinking that there is a 'golden thread' to development expressed as the need to reinforce the rule of law, tackle corruption and increase tax collection. The IDC is adamant that DfID should not disengage from Pakistan in view of the levels of poverty in the country and its strategic geographic position combined with its nuclear capacity.

How then will DfID seek to leverage its resources to induce a change of attitude in the Pakistan regime?

First of all it must be realised that big as the British aid donation to Pakistan is, it is only half the value of remittances from the Pakistan diaspora. And even half of one additional percentage point of GDP added to tax revenues in Pakistan would dwarf both the UK aid and the remittances from the UK (Pakistan's GDP is estimated at $515bn for 2012). It is well known that properly planned and executed revenue enhancement projects can advance tax collections by several percentage points of GDP. They are extremely good value for money and produce a win-win scenario for donors and recipients alike.

There are many examples of revenue assistance projects supported by DfID and other donors that show dramatic increases of revenue collected, eg Uganda (5,000% increase over past 21 years), Rwanda (700% increase over 7 years to 2010) and Burundi (100% increase over the past 4 years). As an example of the efficiency of revenue assistance projects, DfID invested about £24m in the Rwanda Revenue Authority over a 12-year period to 2010. But RRA collects the equivalent of that entire investment every two weeks or so.

The IDC report rightly recommends that DfID engage on this issue with the incoming government once the results of the forthcoming elections in May are known, as experience shows that strong and committed political leadership is essential for tax reform. Britain will also need to engage strongly with the IMF and other donors to provide unified donor support for the reform agenda. Also needed is actively engaging with the Pakistani diaspora to properly explain its aid programme and seek their support. Finally, the report recommends that the Pakistan government remains committed to an anti-corruption agenda, led by the National Accountability Bureau whose principal officers, it recommends, cannot be dismissed by the president, government, parliament or the armed forces of Pakistan.

However, the report should have gone on to recommend establishing an effective modern revenue authority that uses modern business practices and is properly financed and supported with appropriate technical expertise.

The fact that revenue assistance projects are great value for money and they assist governments in bringing in significant revenues, much greater even than the value of the development assistance itself, indicates that this is a policy well worth pursuing.

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