Fiscal Policy of Pakistan

Presented by: r

Introduction

The term fiscal policy refers to the expenditure a government undertakes to provide goods and services and to the way in which the government finances these expenditures.

Definition

What is a Fiscal Policy? According to Samuelson, “Fiscal Policy is concerned with all

those arrangements which are adopted by the Government to collect the revenue and make the expenditures so that economic stability could be attained/maintained without inflation and deflation”

According to Lee, fiscal policy considers: Imposition of taxes Government expenditures Public Debt Management of Public Debt

Objectives of fiscal policy in Pakistanself relianceexpansion of exportscontainment of import of luxury

and non-essential goodspromotion of investment reduction in income disparity.

Fiscal Performance during 2007-08The total revenue collected

during the year 2007-08 stood at Rs 1,499 billion against the budget estimate of Rs.1,476 billion, thus surpassing the target by Rs.23 billion, mainly on account of higher than targeted non tax revenues

Fiscal Projections for 2008-09The fiscal deficit is projected to

decline to 4.2% of GDP in 2008-09 from 7.4% in 2007-08.

The FBR is targeted to collect Rs.1360 billion in 2008-09.

Projections (cont)

Non‐interest current expenditure is projected to decline by 1.5 percentage points of GDP

The elimination of oil subsidies by December 2008 and electricity subsidies by June 2009.

How Does Fiscal Policy works

Fiscal Policy is based on Keynesian theory which states that government can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending.

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Types of Fiscal Policy

1. Expansionary: An increase in government purchases of goods and

services, a decrease in net taxes, or some combination of two for the purpose of increasing aggregate demand and expanding real output

2. Contractionary: A decrease in government purchases of goods and

services, an increase in net taxes, or some combination of the two for the purpose of decreasing aggregate demand and thus controlling inflation.

Methods of Raising Funds

Governments expenditure can be funded in a number of different ways:

1. Taxation of the population2. Borrowing money from the population,

resulting in a fiscal deficit. 3. External resources: Foreign grant and

loans4. Privatization proceeds5. Change in provincial cash balance

Types of Taxes

1. Direct: Direct tax is the one paid directly to the

Govt. by the persons (natural or juristic) on whom it is imposed

Income Tax Corporate Tax Transfer Taxes-estate Tax & Gift Tax Property Tax Capital Value Tax

Direct tax collection

Direct Tax collection

300

320

340

360

380

400

2006-07 2007-08

Year

Rs

(in

Bil

lio

n)

Types of Taxes (Cont)

2. Indirect:

An indirect Tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer).

Sales Tax Value Added Tax (VAT) Federal Excise Duty

Indirect tax collection

Indirect Tax collection

0

500

1000

2006-07 2007-08

Year

Rs (i

n bi

llion

)

Who collects tax revenues?

Government of Pakistan

Ministry of Finance Ministry of Foreign Affairs Ministry of Agriculture

Revenue Division

Federal Board Of

Revenue

Inland Revenue Service

Customs and

Excise Department

Structure of taxes

Common issue regarding collection of Taxes

Tax Evasion:

It is an illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability.

Causes for Tax Evasion

People do not want to disclose their true income

Too many unlawful business activities such as drugs, hoarding, black money, etc.

No fear of punishment

Complex tax structure

Some economic sectors are exempted: Agriculture, real estate and capital gain

Tax payers see their taxes being used to further rich citizens’ interests.

Uncontrolled inflation and high cost of living.

Low level of literacy among taxpayers

Tax pilferage has become the rule, and compliance an exception

Why Pakistan faces large revenue – expenditure gap?

The principal reason lies in the structural weaknesses of Pakistan’s tax system which is:

ComplexInefficientUnfair

Principles of Tax Policy

Widening the tax base Lowering tax rates Taxing all value additions including

services, not just manufacturing sector

Establish an effective and efficient tax system.

Overcome the culture of tax avoidance and evasion

Overview

Overview

Overview

Inflation

0.00%5.00%

10.00%15.00%20.00%25.00%

2005-06 2006-07 2007-08 2008-09

Why Pakistan is Facing budget shortfall

Increase in non-development expenditure.

Subsidies in billion

0

50

100

150

200

250

300

350

400

2006-07 2007-08

Why Pakistan is Facing budget shortfall (Cont.)

0

200

400

600

Rs in billion

Defence Interest

Increase in Non-Development expenditure

2006-07 250 370

2007-08 278 503

1 2

Why Pakistan is Facing budget shortfall (Cont.)

Too many factories are closed or in partial production for want of power and gas

Tax Evasion by well performing industries (cement)

Stock Exchange and Real Estate pay minimal tax.

Corruption by Tax OfficialsLaw and Order causing burden on the

Expenditure side by way of compensation to the affected and mobilization to send forces to such areas.

How Pakistan can avoid Surge in Fiscal Deficit?

CBR should impose new taxesIncrease the price of utilitiesDecrease in development spending

Conclusion

Pakistan fiscal position worsened because of unexpected events occurred on domestic and external scene.

High proportion of revenues being spent on defense and interest payments.

Lower industrial productivity leads to lower tax collection because of high interest rates.

Pakistan needs to increase tax base by imposing tax on agriculture and capital gain to increase revenue.

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