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
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 Tax collection

400
Rs (in Billion)

380
360
340
320
300
2006-07 2007-08
Year
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

1000
Rs (in billion)

500
0
2006-07 2007-08
Year
Who collects tax revenues?

Government of Pakistan

Ministry of Finance Ministry of Foreign Affairs Ministry of Agriculture

Inland
Revenue
Revenue Division Service
Federal Board
Of
Revenue
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:
 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

Inflation

25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2005-06 2006-07 2007-08 2008-09
Why Pakistan is Facing budget shortfall

 Increase in non-
development Subsidies in billion

expenditure. 400
350
300
250
200
150
100
50
0
2006-07 2007-08
Why Pakistan is Facing budget shortfall
(Cont.)

Increase in Non-Development expenditure

600

400
Rs in billion
200

0
1 2
2006-07 250 370
2007-08 278 503
Defence Interest
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.
THANK YOU