FISCAL POLICY

Assignment No:













AHSAN ZAFFER

4/13/2014

FISCAL POLICY

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Fiscal Policy
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. Fiscal policy
significantly impacts the economic direction of any country through various measures such as
taxation, public expenditures and public borrowing. The effectual implementation and
adjustment of these fiscal measures determines the resource allocation, its distribution,
economic stabilization and development. Therefore, sound fiscal policy is considered to be a
decisive component not only for a sustainable economic growth but also for better fiscal
management both in developed and developing countries. It has also been recognized that
better fiscal management can effectively mobilize savings and efficiently allocate the resources
to achieve the development goals.
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
Public Debt
The portion of total debt which has a direct charge on government revenues is taken as public
debt. Public debt is a measure of government indebtedness. It includes debt denominated in
rupee as well as foreign currency. Public debt comprises of domestic and external debt. Each of
these types of debt has its own benefits and drawbacks, with a trade-off between costs of
borrowing and exposure to various types of risks that needs to be balanced in order to ensure
ample and timely access to cost efficient funding. As at end-March 2013, public debt reached at
Rs.13,626 billion, an increase of Rs.959 billion or 8 percent higher than the debt stock at the
end of last fiscal year. Public debt as a percent of GDP reached at 59.5 percent of GDP by end-
March 2013 compared to 59.8 percent during the same period last year.
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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 Policy Development
It has been widely recognized that a prudent fiscal policy (low level of fiscal deficit and public
debt) plays a significant role not only in reducing the risks of economic crisis but can also
improve countrys fiscal capacity to finance larger fiscal deficit without endangering economic
stability and debt sustainability. Since the inception of global financial crisis in 2008-09,
countries around the world dealt with the issue of consolidating their budgets while at the same
time sustaining the economic growth.
However, recent improvement in global economic situation has somewhat lowered short-term
fiscal risks. Still concentrated efforts are required to contain the spending at reasonable level.
Over the years, Pakistans fiscal policy remained under immense pressure owing to continued
security related issues, greater than targeted subsidies, flood related expenses and global
financial crisis. Although, Pakistans economy was not directly affected from financial crisis,
however, in confluence with unplanned expenditures mentioned above during the past five
years resulted in mounting fiscal pressures. Besides, the government borrowed heavily from
external and internal resources in order to finance the fiscal deficit, due to which a huge amount
of money was paid towards interest payments. All thesefactors relentlessly affected Pakistans
fiscal capacity to finance the fiscal deficit. Nevertheless, during the past three years the efforts
to contain the fiscal deficit within reasonable limit through an expenditure management
strategy, austerity measures and reforms in Public Sector enterprises have yielded the result.
Moreover, during past two years the government consolidated the outstanding power sector
debt of worth Rs. 511 billion (Rs 120 billion in 2010-11 and Rs 391 billion in 2011-12.). This
one of settlement during 2010-11 and 2011-12 will be helpful in making substantial savings on
interest payments in coming year.

The efforts to achieve fiscal sustainability were challenged during the past five years due to
power crisis, unprecedented floods, low tax to GDP ratio, high interest payments, untargeted
subsidies and resource drain through PSEs. Despite all these challenges, Fiscal deficit was
successfully brought down from 7.3 percent in 2007-08 to 6.8 percent in 2011-12. During July-
March, 2012-13 fiscal deficit stood at 4.6 percent against 6.4 percent of GDP. Moreover, during
the current fiscal year various measures to increase the revenues expected to generate
additional tax revenues of Rs 41 billion.
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a) The sectors with zero rating facility have been brought under tax as 2 percent sales tax was
imposed on local supplies of five leading export sectors (Sports, Surgical, Carpet, Textile and
Leather.
b) Standardized withholding tax regime at the import stage by imposing a uniform rate of 5
percent tax on the imports of commercial and industrial importers, mobile telephone sets,
silver, all fibers, yarns, fabrics and goods covered by the five leading export sectors.
c) Broadening of Sales tax withholding regime.
d) Withdrawal of concessionary rate of 5 percent on tea.
e) Enhancement of rate from 2 to 5 percent on import of cooking oil/vegetable ghee.
f) Clearance of smuggled vehicle.
FBR tax collection for the fiscal year 2012-13 was targeted at Rs.2,381 billion which was 26.4
percent higher over the actual collection of Rs.1883.0 billion during 2011-12. During the first
ten months of 2012-13, FBR tax collection stood at Rs.1,505.2 billion posting a weak growth of
5.5 percent due to energy/gas shortages, security issues, failure to implement tax reforms and
decline in imports. During July-April, 2012-13, among the four federal taxes, the highest growth
14.9 percent has been witnessed in custom duty, followed by sales tax (5.4 percent) and direct
tax (4.7 percent). The growth in sales tax was significantly affected due to the transfer of
services to provinces. For July-April, 2012-13 direct taxes have been a major source of FBR tax
revenue collection, contributing 36.8 percent of total receipts. Net collection was estimated at
Rs. 553.7 billion. Indirect taxes grew by 6.1 percent during July-April, 2012-13 and accounted
for 63.2 percent of the total FBR collection. Net collection was estimated at Rs.951.6 billion.
Total expenditure of Rs 4,484.2 billion was estimated for the full year, comprising of Rs.3,452.2
billion of current expenditure (77 percent of total) and Rs. 1,032.0 billion of development
expenditure and net lending (23 percent of total). During July-March, 2011-12 total
expenditures amounted to Rs.3,188.1 billion against Rs. 2,641.9 billion in the same period last
year showing an increase of 20.7 percent. Current expenditures stood at Rs. 2,642.0 billion and
development expenditures and net lending recorded at Rs. 445.8 billion during July-March,
2012-13. Total revenues reached to Rs. 2,141.9 billion during July-March, 2012-13 against
Rs.1747.0 billion in the same period of last year posting a growth of 22.6 percent. Within
revenues, tax revenues stood at Rs. 1,557.6 billion and non tax revenues remained at Rs. 584.3
billion during the same period of fiscal year 2012-13.

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

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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.
Noninterest 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
Types of Fiscal Policy:
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
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:
Taxation of the population
Borrowing money from the population, resulting in a fiscal deficit.
External resources: Foreign grant and loans
Privatization proceeds
Change in provincial cash balance

Types of Taxes:
Direct:
In Pakistan, income and corporate taxes are the only form of direct taxes; other forms like social
contributions and wealth tax are non-existent. In order to upgrade the tax structure in Pakistan,
there is a need to expand the base of direct taxes and improve the tax collection machinery to
reduce leakages. In our view, the major reasons for low tax compliance are procedural
difficulties, tax exemptions and the incentives of tax officials. Currently, only 1 percent of
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Pakistans population pays income tax, compared to 3 percent in India and 40 percent in the
US.12.
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

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
A commodity-wise break-up of sales tax collection suggests that the major contribution to its
growth came from domestic sales tax on cement, sugar, natural gas, and fertilizers. While
domestic sales tax collection grew by 15.3 percent, sales tax on imports increased by 39.4
percent, primarily due to the removal of exemptions and higher imports of POL products, edible
oil, automobile and machinery. Another factor that contributed to the high growth in sales tax
was the increased vigilance by FBR over rebates and refunds. Having said this, the bulk of sales
tax comes from specific items, which means there is significant potential from documentation
and computerization of businesses. Custom duties also grew strongly and contributed Rs 218.2
billion, which was 5.7 percent higher than target. Although custom duties have given way to
sales tax as a major contributor to the national exchequer it is still an important policy
instrument, both as a source of revenue and as regulator of international trade.
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.
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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

Revenue measures during 2012-13:
The sectors with zero rating facility have been brought under tax as 2 percent sales tax was
imposed on local supplies of five leading export sectors (Sports, Surgical, Carpet, Textile
and Leather.
Standardized withholding tax regime at the import stage by imposing a uniform rate of 5
percent tax on the imports of commercial and industrial importers, mobile telephone sets,
silver, all fibers, yarns, fabrics and goods covered by the five leading export sectors.
Broadening of Sales tax Withholding regime.
Withdrawal of concessionary rate of 5 percent on tea.
Enhance scrutiny sales tax refund.

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

Why Pakistan is facing budget shortfall?
Tax collection of 1.25 trillion rupees, increase in basic sales tax and modified import duties on
300 luxury goods may not prove very effective due to high political, economic and international
pressures.
Meeting the deficit target would require drastic efforts which dont seem realistic in the current
circumstances. The governments statements are too optimistic to be trusted because there will
be too many slippages, especially apex tax collecting body.
Government needs to narrow the budget deficit to reduce reliance on loans from the State Bank
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of Pakistan, which have pushed inflation to a 30-year high of 19.3 percent, said Mughal adding
that its like printing excessive money.
The Government decision to float bonds on the stock market rather than borrow from the central
bank will be counterproductive until the political turmoil is settled.
Spending will jump 30 percent to 2.01 trillion rupees next fiscal year from 1.55 trillion rupees in
the previous 12 months. Outlays on subsidies on items including food, power and fertilizer are
forecast at 295 billion rupees. Cling coalition is facing challenges from a wider budget shortfall
and slowing economic growth. Food shortages in recent months have stoked consumer prices
and caused unrest in country where two-thirds of the population survive on less than USD 2 a
day.
Country needs more foreign investment to encourage economic growth which will weaken this
year to as low as 5.5 percent after averaging 7 percent in the five years from 2004. Government
has reduced duties on some raw materials to boost manufacturing and provide incentives for
investment in agriculture aiming to boost two sectors that underperformed this fiscal year.
The State Bank of Pakistan on May 23 unexpectedly raised borrowing costs by 1.5 percentage
points to 12 percent, the second increase this year, to curb inflation

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.

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Salient points of Pakistan Budget 2013-2014

The average rate of inflation stood at 13 percent in last five years.
The burden of national debt witnessed a whopping increase of 250 percent to reach
Rs14284 billion.
Dollar rose to Rs100 from 60.
The average rate of inflation remained 13 percent in past five years
Pakistans circular debt increased to 250 percent in past five years
Growth rate remained 1 pc
Dollar valued soared to Rs100 from Rs60
Pension increased to 10 percent. The minimum pension will be Rs5000 from Rs3000
Rs75 billion allocated from Income Support Programme
Proposal for 75 bn allocation for Income Support Program
Growth rate stood at 1 percent
Plan to give 5 Rs 5 lac Qarze Hasna.
Prime Minister House expenditures being brought down by 45 percent.
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Tax exemption of luxury cars to be abolished.
Pakistans economy suffered a loss of 2 percent each year due to energy crisis.
Sale tax being increased from 16 pc to 17.
Circular debt amounting to more than Rs500 billion will be eliminated in 60 days.
Ban on purchase of new vehicles for Prime Minister office.
Prime Minister Laptop scheme to be initiated
Five percent additional tax imposed on non-registered power consumers.
Exemption of 25 percent on 1800 cc to 2500cc vehicles.
Customs duty on water filtration equipment to be decreased.
Pension being increased by 10 percent.
People works program renamed as Tamir-e-Watan Pakistan program.
Ministers discretionary funds abolished.
Economy grew by around 3.
Economy was on auto pilot.
1481 billion tariff subsidy paid.
1200 cc hybrid cars exempted form duty tax.
Non registered power consumers 5 % sales tax.
1800-2500 cc cars 25 % concession.
1200-1800 cc cars 50% duty reduction.
3G license auction soon.
SBP borrowing to de reduced.
Targeted inflation rate for FY 2013-14 is 9.5.
Pension up by 10% from 3000-5000
GDP target for FY 2013-14 is 4.8 percent.
Tax revenue target: 2.475 billion.
Non-tax income: 800 billion
Power subsidy: 185 billion.
Small business loans up to Rs200,0000 with 8% markup.
Investment ratio to be increased by 20 percent.
Income Support Program: 75 billion.
Qaraz-e-Hasna (Soft loan): Rs500,000.
Fiscal deficit targeted at 8 percent of GDP.
The entire subsidy policy to be reviewed.
Rs340 billion earmarked for development projects






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Fiscal year 2014 budget strategy: policy measures to improve ST collected
identified
The Federal Board of Revenue has identified policy measures to improve sales tax
collection in next fiscal year (2013-14). These measures envisage fixation of sales tax
values for different sectors, expansion of list of items to charge sales tax on the basis of
printed retail price and imposition of ''further tax'' on supplies to unregistered persons.

Sources told Business Recorder on Wednesday that the FBR has chalked out a budget
strategy to be implemented for achieving the desired goals during current fiscal year and
next fiscal year (2013-14). The FBR intends to implement these policy measures for
increasing sales tax collection during current fiscal year and 2013-14. The first policy area
is the review of exemption or zero-rating regime.
The FBR will withdraw sales tax zero-rating on domestic supplies other than export sector.
Another measure is the incorporation of all remaining zero-rating and exemptions granted
through Statutory Regulatory Orders (SROs) in the Fifth and Sixth Schedule of the Sales Tax
Act1990.

The FBR has implemented the ''Risk Management System'' for addressing menace of illegal
input adjustments and refunds. The FBR has developed and launched the risk management
system (RMS). The FBR is safeguarding government revenues by checking illegal input
adjustments, and refunds payments, by generating discrepancy reports on the basis of
RMS.

Sources said that the FBR will improve valuation of domestic supplies and identify sectors
for fixation of values for calculation of sales tax. Sales tax would be charged on the basis of
fixed values to check evasion in different sectors.

Sources said that the FBR intend to take measures to expand the Third Schedule of the
Sales Tax Act 1990 for revenue maximization. In this regard, more items sold in retail
package would be brought into the Third Schedule of the Sales Tax Act 1990 for taxing
these items on the basis of retail prices. The FBR would continue with the policy retaining
Third Schedule of the Sales Tax Act 1990 under which manufacturers are paying sales tax
of all the stages of value addition of consumer items having printed retail price. On the
sales tax side, the FBR is planning to impose ''further tax'' on supplies to unregistered
persons.

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ISLAMABAD:
Federal authorities have proposed Rs506 billion for development spending in the upcoming
financial year (2014-15), which is 6% less than the original development budget of the
current fiscal year continuing the policy of giving less priority to development spending in
its second year of rule.
The Ministry of Finance has formally indicated Rs506 billion for the Public Sector Development
Programmed (PSDP) in the financial year 2014-15, which will commence from July.
According to Ministry of Planning and Development officials, the Pakistan Muslim League-
Nawaz government had announced Rs540 billion for the PSDP for the current fiscal year. The
proposed budget is Rs34 billion or 6.3% less than this years development budget.
So far, the indications are that the actual development spending will remain significantly lower
than the budget approved by Parliament.
The reduced development spending will have serious implications, as the government spending
for development purposes is one of the main contributors to economic growth. Economists like
Dr Nadeem ul Haque, the former Deputy Chairman of the Planning Commission, have been
advocating that austerity should be eschewed for the sake of economic growth. The new
development budget envelope has been indicated to the Ministry of Planning and Development
that will now work out the proposed development budget ceilings of each federal ministry and
department.
However, Prime Minister Nawaz Sharif is the authority to approve a development budget higher
than the indicative one during the National Economic Council meeting, which takes place days
before the budget is presented in Parliament.
The development budget has been indicated under the three-year Medium-Term Budgetary
Framework (MTBF) a document that indicates the budget of the new fiscal year in addition to
setting rolling targets of the next two financial years.
From July through December 2013-14, the government had spent Rs120 billion on development
programmes, restricting the expenses to 22% of the annual development budget of Rs540 billion.
According to standing financial management instructions prescribed by the finance ministry, the
government is entitled to spend 40% of the annual budget in the first half of the fiscal year, while
the remaining is spent in the next half.
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The federal government resorted to reducing the development budget after it failed to curtail the
non-development spending, which increased to almost half of the total budget in the first half of
the fiscal year.
Of the Rs540 billion development budget, an amount of Rs115 billion had been allocated for
new initiatives. In fact, the Ministry of Finance has not yet formally indicated the availability of
the Rs115 billion, said Asif Sheikh, the planning ministry spokesperson.
The federal government has linked the availability of Rs115 billion with the Federal Board of
Revenues ability to achieve Rs2.475 trillion annual tax target, a goal that the FBR is surely set
to miss. The FBR has so far posted an average growth rate of 17% while it needs 28% to collect
Rs2.475 trillion revenues.
Officials said that after witnessing the results of the first seven months, the federal government
was expecting that FBR may not collect more than Rs2.345 trillion. The reduction in collection
will also have adverse implications on next years budget, they added.
Published in The Express Tribune, February 26
th
, 2014.


Tax and Non-tax Revenues
Q1 billion Rupees
Actual Change
FY13 FY14 Abs. %
Tax
revenue
451.3 537.1 85.8 19.9
Direct
taxes
136.5 160.8 24.2 17.8
Taxes on
goods &
services
212.4 255.9 42.6 20.1
Excise
duty
22.0 24.7 1.7 7.6
Sales tax 190.3 231.2 40.9 21.5
Taxes on
internatio
nal trade
50.8 52.8 2.0 3.9
Other
taxes
28.7 42.8 14.0 48.9
Petroleu
m levy
22.8 25.8 2.9 12.9
Non-tax
revenue
240.8 292.7 51.8 21.5
Interest
and
dividends
16.0 60.6 44.6 283.5
SBP
profits
50.0 80.0 30.0 60.0
Defence
(incl.
CSF)
107.3 1.9 -105.3 -98.2
Dev.
surcharge
on gas
3.9 20.8 16.9 434.2
Royalties 14.8 19.2 4.3 29.3
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Miscellan
eous
49.1 110.3 61.2 124.7
of which
Universal
service fund
0 67.6 67.6
Total
revenue
692.1 829.7 137.6 19.9
Source: Ministry of Finance




Table 4.1: Summary of
Fiscal Operations - Q1
billion Rupees
Actual Growth (%)
FY13 FY14 FY13 FY14
Total
revenue
692.1 829.7 29.7 19.9
Tax
revenue
451.3 537.1 10.3 19.0
Non-tax
receipts
240.8 292.7 93.2 21.5
CSF 107.3 0.0
Total
expendit
ure
975.9 1,116.6 23.4 14.4
Current 812.4 868.4 23.7 6.9
Develop
ment &
net
lending
74.9 170.1 -14.6 127.3
Unidentif
ied
88.7 78.1 90.6 -12.0
Overall
Fiscal
balance
-283.8 -286.9 10.4 1.1
Financing through:
External
resources
-1.6 -27.2
Internal resources 285.4 314.1
Banking system 151.5 198.0*
Non-bank 133.9 116.1
As % of GDP
Overall fiscal
balance
-1.2 -1.1
Revenue balance -0.5 -0.1
Primary balance 0.1 0.1
*The data on financing from domestic banking system
reported by the Ministry of Finance is slightly different than
what is reported in monetary survey (Table 3.1). Please see
Data Explanatory Note No. 5 for details. Source: Ministry of
Finance



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Analysis of Fiscal Spending -
Q1
billion Rupees
Absolute % of BE*
FY13 FY14 FY13 FY14
Current
expendit
ures
812.4 868.4 33.9 30.7
of which
Interest
payment
312.8 301.1 33.8 26.1
Subsidies 58.0 59.0 27.8 24.5
Non-
interest
non-
subsidy
441.5 508.2 35.0 35.4
Develop
ment
expendit
ures
74.9 170.1 12.7 21.6
PSDP 30.3 44.9 8.4 8.3
Grants to
provinces
& other
exp.
incl.net
lending
44.6 125.2 4.2 13.2
Unidentif
ied
89.7 78.1 -- --
Total 975.9 1,116.6 32.7 30.9
Total
expenditu
res,
adjusting
for
circular
debt
settlemen
t
975.9 978.6 32.6 27.0
*BE: Budget estimates
Source: Ministry of Finance

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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