Fiscal Policy of Pakistan

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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 Pakistan

 self reliance  expansion of exports  containment of import of luxury and non-essential goods  promotion of investment  reduction in income disparity.

Fiscal Performance during 2007-08

 The 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 2008-09

 The 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. .

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 population 2. Borrowing money from the population, resulting in a fiscal deficit. 3. External resources: Foreign grant and loans 4. Privatization proceeds 5. 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
00 Rs (in Billion) 80 60 0 0 00 006-07 Year 007-08

collection

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
Rs (in billion)

Year

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 Pakistans tax system which is:  Complex  Inefficient  Unfair

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
I % % % % % % 9 i

Why Pakistan is Facing budget shortfall

 Increase in nondevelopment expenditure.

Subsidies in billion 4 35 3 25 2 15 1 5 2 2 -

Why Pakistan is Facing budget shortfall (Cont.)

N
600 400 R b 200 0 1 2006-07 2007-08 250 278 D f t 2 370 503 t

-D v

pm

t xp

d tu

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 Officials Law 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 taxes  Increase the price of utilities  Decrease 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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