FISCAL POLICY

Presented by: Ayesha Abdul Wahid

Haseeb Nagaria
shahroze Arshad
Rahima Tanseer
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 Lipsey: Govt. revenue raising and
Govt. revenue spending activities are called Fiscal
policy.
According to M.W.Lee: Fiscal policy considers (i)
imposition of taxes, (ii) Govt. expenditures. (iii)
Public debt and (iv) Management of public debt.
Controlling the level of
employment

Controlling inflation

Achieving the desirable level of
income distribution

Controlling the level of
consumption in the economy


Proper utilization of economic resources

Increasing foreign exchange reserves

Reducing burden of foreign debts

Control on concentration of wealth

Promoting trade and industrial development

Expansionary fiscal policy
Expansionary fiscal policy is designed to stimulate the
economy during or anticipation of a business-cycle
contraction.
This is accomplished by increasing aggregate
expenditures and aggregate demand through an increase
in government spending (both government purchases
and transfer payments) or a decrease in taxes.
Expansionary fiscal policy leads to a larger government
budget deficit or a smaller budget surplus.
Contractionary fiscal policy
Contractionary fiscal policy is designed to restrain
the economy during or anticipation of an inflation-
inducing business-cycle expansion.
This is accomplished by decreasing aggregate
expenditures and aggregate demand through a
decrease in government spending (both government
purchases and transfer payments) or an increase in
taxes.
Contractionary fiscal policy leads to a smaller
government budget deficit or a larger budget
surplus.
Integrated Energy
Modernization of Infrastructure
Indigenous Resource Mobilization
Institutional Reforms and Governance
Value-addition in Commodity Producing
Sectors
Export promotion and Private Sector Led
Growth
Social Capital

Private sector as an engine of growth
An efficient professional and accountable
public sector
Corporate governance based on OECD
guidelines
Macroeconomic stability with inclusive growth
Political stability and peaceful Pakistan.
To have good quality of life and high living
standards compatible with emerging
economies like Malaysia.

To achieve an annual growth rate of 7 to 8
percent by 2025.

To bring about structural transformation of
economy from low productivity to high
productivity in all real sectors.
To build institutions and social capital
commensurate with requirements of high
growth economy.

To have energy, food and water security.

To put private sector as driver of growth and
ensuring enabling through better public
management and good corporate governance.

TOOLS OF FI SCAL POLI CY


1- REVENUE

Example TAXES





2- EXPENSES

Example
GOVERNMENT
EXPENDITURE

SOURCES OF
REVENUES
SOURCES OF
EXPENDITURE
Tax Revenues
Non-tax Revenues
Current
Interest
Pension
Grants
Defense
Public order & safety
Development
Federal
Provincial
Other development
& net lending
Fee levied by the government on product,
income or activity.

Purpose of Tax
To finance government expenditure as well as
public goods and services.
Difference between potential and actual tax
collection.
Causes of Tax Evasion
Weak system
Consequences of Tax Evasion
Dependency on IMF and other donors.
Unjust tax system.
Indirect taxes have been increased.
Regressive Taxation
Performance on Tax collection

Rs.2.7 trillion estimated

Shortfall in last Quarter
was 70 billion

Tax collection comparison
(34%)

Current Issues
Three measure are being pondered:
- Equal to shortfall in revenue, or
- Withdrawal of tax exemptions or
- Cut in development expenditures.

Government woes to push budget deficit to 6.3%.


Tax to GDP ratio 8.8%

Narrow Tax base

Massive Tax Evasion

Administrative Weaknesses

Some sectors under Taxed, Some not taxed at all.

Agriculture

Services

Regressive taxation rather than progressive

Tax buoyancy is an indicator to measure
efficiency and responsiveness of revenue
mobilization in response to growth in the Gross
domestic product or National income.
A tax is said to be buoyant if the tax revenues
increase more than proportionately in response
to a rise in national income or output.
Usually, tax elasticity is considered a better
indicator to measure tax responsiveness


Deficit financing refers to the
borrowing undertaken by the
government to make up for the
revenue shortfall.
Rise in government expenditures
No rule based fiscal policy
Low savings
Rapid population growth
1) Bank borrowing

- The SBP issues new currency notes in the
amount being lend to the Government .
-The Government draws upon the cash
balances of the past for fulfilling the budget
deficit.

The effect of deficit financing through bank
borrowing is that it increases money supply
in the economy and creates inflationary
pressure

2) Non-bank borrowing - Domestic Borrowing.
funds to bridge the deficits in the budget are
mobilized through the T-Bills, Short Term
Federal Bonds, etc
This increases domestic interest rates, and
discourages private investment in the nation

3) External borrowing
The consistent large fiscal deficits have forced
the government of Pakistan to borrow from
foreign lenders
This has a negative effect on exchange rate
around 40 percent of the addition in public debt originated
from PKR depreciation, which inflated the external debt
during Q1-FY14. More specifically, Rupee depreciation
against US Dollar resulted in Rs 348.3 billion increase in the
Rupee value of external debt

As regards the domestic debt, the increase came primarily
from budgetary borrowings from SBP to finance the fiscal
gap. However, it should be noted that the increase in
domestic debt far exceeded actual budgetary requirements
during the quarter; financing of the government from
domestic sources was Rs 314.1 billion,25 but domestic debt
shows an increase of Rs 634.0 billion during the quarter. This
difference arose mainly because the government borrowed
more funds than it actually required, and placed the
additional funds in its deposits held by SBP

(1) It mobilizes additional resources for
economic development.
(2) It helps in utilization of unutilized and
under-utilized resources of the country.
(3) It helps in building up social and economic
overheads.
(4) It helps in ensuring higher level of
employment in the country by productive use
of resources.

1) interest rate increases which hinders
private investment
When the government borrows funds, it
competes with the private business for
attaining funds. The additional demand for
funds raises interest rate in the money market.
2) In case the deficit financing is financed by
printing of money by SBP, It
creates inflationary impact on the economy,
which
(a) discourages foreign investment
(b) Reduces exports
(c) Increases imports
(d) Increases inequality in the distribution of
income
(e) Lowers saving rate in the economy and
(f) Encourages wasteful expenditures.

Introduction
Numerous Challenges both external and internal

Importance of Prudent Fiscal Policy
Fiscal Performance of the Country improved
between 2003-2007

Deterioration of Fiscal Performance after 2007
Slowdown in Growth
Fiscal Deficit widened to 8% on account of over
estimation of Budgeted Tax Revenue,
underestimation of subsidies and Interest
Payments and settlement of Circular Debt.
Revenue increased by 16.2%.Tax Revenue
showed a significant slowdown due to
1. Reducing FED rate on Sugar from 8% to 0.5%
2. Reduction in sales tax rate on electricity for
steel melters etc
3. Duty Reduction on Imports
4. Lowering of Withholding tax


Expenditures increased by 22.4% compared to
14.2 % increase in FY12
Debt Servicing accounts for quarter of total
expenditures.
Subsidies are the second largest expenditure.
PSDP was cut down below its budgeted target
to limit the fiscal deficit
Goal
1. Price Stability
2. Switching over to targeted subsidies
3. Generating more Revnues
Taxing all the sectors of the economy and
limiting or eliminating exemptions
Restoring wealth tax
Overcoming the problem of under invoicing of
imports
Tax Administrative reforms
Fiscal Deficit remained at 3.2% as compared to
4.7% last year during the same period
Ensuring Fiscal Sustainability by phasing out of
electricity subsidies,restructuring/privatization
of PSE and raising revenue
Reforms in PSE
Restructuring Plan for Pakistan Steel Mill
Bail out Package for PIA
Grant for Pakistan Railway
Privatization of 31 PSEs
Fiscal Deficit expected to reduce to 6%
Tax Reforms
Enhancing resource mobilization and
increasing tax to gdp ratio
Broadening the tax Base
Administrative Improvement Initiatives
Tax Payers Facilitation
Strengthening Tax Audit

Total Expenditure expected to reduce to 20.4%
of GDP




Table 4.3: Trends in Components of
Expenditure
Year Total Current Interest
Defenc
e
Developme
nt
Non
Interest
Expenditure
Expenditur
e
Payment
s (D)
Expenditur
e
Non-
Defence

(A) (B) (C)

(E) Exp
(A-C-D)

2005-06 17.1 12.6 2.9 2.9 4.4 11.2
2006-07 19.5 14.9 4.0 2.7 4.7 12.8
2007-08 21.4 17.4 4.6 2.6 4.2 14.2
2008-09 19.2 15.5 4.8 2.5 3.6 11.8
2009-10 20.2 16.0 4.3 2.5 4.1 13.4
2010-11 18.9 15.9 3.8 2.5 2.8 12.6
2011-12 19.6 15.6 4.4 2.5 3.7 12.7
2012-13 21.4 16.3 4.4 2.4 3.5 14.6
2013-
14B 20.4 15.2 4.4 2.4 5.1 13.5

2013-14 July-March Growth
B.E 2013-14 2012-13
A. Total Revenue 3,646.7 2,477.4 2,124.9 16.6
a) Tax Revenue 2,768.1 1,786.2 1,527.8 16.9
Federal 2,598.1 1,650.0 1,418.3 16.3
of which FBR Revenues 2,475.0 1,574.8 1,335.2 17.9
Provincial Tax Revenue 170.0 136.2 109.6 24.3
b) Non-Tax Revenue 878.6 691.2 597.0 15.8
B. Total Expenditure 5,297.2 3,289.0 3,171.1 3.7
a) Current Expenditure 3,963.0 2,904.6 2,642.0 9.9
Federal 2,778.0 2,083.2 1,887.1 10.4
- Interest 1,153.5 909.1 772.2 17.7
- Defense 627.2 451.7 405.8 11.3
Provincial 1,185.0 821.4 754.9 8.8
b) Development Expenditure & net
lending 1,334.3 555.8 445.8 24.7
PSDP 1,155.0 393.0 407.4 -3.5
Other Development 171.8 77.0 37.3 106.6
c) Net Lending 7.5 85.9 1.1 -
e) Statistical discrepancy - -171.3* 83.3 -
C. Overall Fiscal Deficit 1,650.6 811.7 1,046.2 -22.4
As % of GDP 6.3 3.2 4.7 -
Financing of Fiscal Deficit 1,650.6 811.7 1,046.2 -22.4
i) External Sources 168.7 -50.1 -4.1 -
ii) Domestic 1,481.8 861.7 1,050.3 -18.0
- Bank 975.0 436.9 856.7 -49.0
- Non-Bank 506.8 424.8 193.7 119.4
GDP at Market Prices 26,001 25,402 22,489 13.0
Source: Budget Wing, Finance
Division

Non tax revenue also includes Universal
Support Fund and the Coalition Support Fund
Total Expenditures registered a decline in the
second and the third quarters
Subsidies remained lower than the previous
period
Ceasing Secret service expenditures of all Ministries /Divisions/ Attached
Departments /Autonomous Bodies except Intelligence Agencies.

Discontinuation of Discretionary funds for Prime Minister and Ministers.

Allocation of PMs House/ PM Office reduced voluntarily by 40 percent. Moreover,
30 percent cut in current budget of Ministries/Divisions, except pay and allowances,
resulted in saving of billion rupees.

Working of foreign missions reviewed and being rightsized leading to expected
savings of Rs 2 billion annually.

Cabinet Committee on Restructuring has directed all Ministries / Divisions to review
for rationalizing their strengths for the purpose of rightsizing.

Fee/remuneration for government nominated directors in PSEs capped at Rs 600,000/ per annum.
Amount over and above will be deposited into government treasury