Fiscal Policy of Pakistan

Presented by:

Zaheer-Ud-Din 15175

Ali Akber Lone 15638

Bilal Tahir 15379

Talha Bukhari15038

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.

• Government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy.

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

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.

Instruments of Fiscal Policy

• Expenditures

• Revenues

Expenditures

Non-development Expenditures:• Defence (Rs.442.2 billion)• Environment Protection (Rs. 0.4

billion )• Health Affairs and Services (Rs.7.3

billion )• Housing and Community Amenities

(Rs. 1.8 billion )Total Non-development Expenditures for the FY 2010-11 were Rs. 1997.9 billions.

Expenditures (Continued)

Development Expenditures:• Internal Resources:

These sources are permanent debt, Floating debt, recoveries of loans and advances, non-investment of shares of public Corporation, saving schemes of the Federal Government.

• External Resources:External sources for development expenditures of the federal government are project Aid, Community Aid, Food Aid, Other Aid, Rupee Grant etc.

(Continued)

• Total Development expenditures for the FY 2010-11 were Rs. 766.5 billion.

Revenues

Tax Revenue:• Direct Taxes• Personal Tax (10-15 %)• Tax on Companies (39%)• Customs (37%)• Central Excise• Sales Tax (15%)

Non-Tax Revenue

• Income from Property and Enterprise (Rs. 169.8 billion )

• Receipts from civil Administration(Rs. 332.2 billion )

• Miscellaneous Receipts (Rs. 130.2 billion)The total revenue collected during the FY 2010-11 was Rs 2764.4 billion.

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

Common issue regarding collection of Taxes

Tax Evasion:

It is an illegal practice whereas, 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

Fiscal Projections for 2010-11

• The fiscal deficit is projected 4.6% of GDP in 2010-11.

• The FBR is targeted to collect Rs.1,952 billion in 2010-11.

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

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 .

– Stock Exchange and Real Estate pay minimal tax.

– Law and Order causing burden on the Expenditure side by way of compensation to the affected and mobilization to send forces to such areas.

Objectives of fiscal policy in Pakistan

• To achieve desirable price level

• To Achieve desirable consumption level

• To Achieve desirable employment level

• To achieve desirable income distribution

• To Development of infrastructure

• Foreign Exchange Earnings

Tools of Fiscal Policy

1. Discretionary Fiscal policy:a) Changes in government expenditure

i) The Multiplier Effect

ii) Formula for Spending MultiplierMultiplier = 1/ (1-MPC)

MPC = Marginal Propensity to Consume iii) The Crowding-Out-Effect

b) Changes in Taxes

Tools (Continued)

2. Automatic Stabilizers:i) Progressive Taxesii) Unemployment Allowancesiii) Stable Government Expendituresiv) Support Policy for Farm Prices

Fiscal Performance of Pakistan till 2010-11

(continued)

Fiscal Deficit till 2010-11

Fiscal Indicators till 2010-11

(Continued)

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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