Fiscal Policy of Pakistan Presented by: r

Introduction The term fiscal policy refers to the expenditure a government undertakes to prov ide goods and services and to the way in which the government finances these exp enditures.

Definition What is a Fiscal Policy? According to Samuelson, Fiscal Policy is concerned with all those arrangements wh ich are adopted by the Government to collect the revenue and make the expenditur es 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 De bt

Objectives of fiscal policy in Pakistan self reliance expansion of exports containment of import of luxury and non-essen tial 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 ag ainst 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% i n 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 point s of GDP The elimination of oil subsidies by December 2008 and electricity subsi dies by June 2009.

How Does Fiscal Policy works Fiscal Policy is based on Keynesian theory which states that government can infl uence macroeconomic productivity levels by increasing or decreasing tax levels a nd public spending. .

Types of Fiscal Policy 1. Expansionary: An increase in government purchases of goods and services, a de crease in net taxes, or some combination of two for the purpose of increasing ag gregate demand and expanding real output 2. Contractionary: A decrease in govern ment purchases of goods and services, an increase in net taxes, or some combinat ion of the two for the purpose of decreasing aggregate demand and thus controlli ng 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 procee ds 5. Change in provincial cash balance

Types of Taxes 1. Direct: Direct tax is the one paid directly to the Govt. by the persons (natu ral or juristic) on whom it is imposed Income Tax Corporate Tax Transfer Taxes-e state 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 re tail store) from the person who bears the ultimate economic burden of the tax (s uch 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 corporati on 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 acti vities such as drugs, hoarding, black money, etc. No fear of punishment Complex tax structure Some economic sectors are exempted: Agriculture, real estate and c apital gain

Tax payers see their taxes being used to further rich citizens interests. Uncontro lled inflation and high cost of living. Low level of literacy among taxpayers Ta x 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 whi ch is: Complex Inefficient Unfair

Principles of Tax Policy Widening the tax base Lowering tax rates Taxing all value additions including se rvices, not just manufacturing sector Establish an effective and efficient tax s ystem. 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 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 taxes Increase the price of utilities Decrease in developm ent spending

Conclusion Pakistan fiscal position worsened because of unexpected events occurred on domes tic and external scene. High proportion of revenues being spent on defense and i nterest payments. Lower industrial productivity leads to lower tax collection be cause of high interest rates. Pakistan needs to increase tax base by imposing ta x on agriculture and capital gain to increase revenue.

THANK YOU