Budget deficit:

A budget deficit occurs when an individual, business or government budgets more spending
than there is revenue available to pay for the spending, over a specific period of time. Debt is
the aggregate value of deficits accumulated over time.
 History of budget deficit in Pakistan describes here, it was 6 percent of GDP during
the decade of 1970s. Muhammad Ramzan Sheikh, Muhammad Zahir Faridi and
Khadija Tariq (2010) analysed, “domestic debt and economic growth in Pakistan: an
empirical analysis. They used the annual data from the year 1972-2009. They resulted
that there is an inverse relationship between domestic debt servicing and economic
growth.
 7.6 % of GDP in 1980s. Gohar Fatima, Ather Maqsood Ahmed and Wali-Ur-Rehman
(2011) analyzed, “fiscal deficit and economic growth: an analysis of Pakistan’s
economy”. They used the time series data from the year 1980-2009. They resulted
that fiscal deficit effects economic growth directly and indirectly.
 Pakistan is faced a chronic budget deficit in 1990s.In the half of 1990s this chronic
deficit was declined 6.4 percent of GDP by the use of reduction in developmental
expenditure. Pakistan sustained a large budget deficit during the 1990s owing to the
stagnation of fiscal effort over the last fifteen years.
 In the second half of the 1990s, deficit declined to 6.4% of the GDP through
reductions in development expenditures. In other words, this reduction was not
achieved by enhancing tax efforts (Tax-to-GDP ratio) but mainly at the cost of
loosing future growth potential, i.e. reduction in development expenditures. This
reduction was also not sustainable and it again increased in the current fiscal year.
Pakistan’s tax system is still characterized by a narrow and punctured base. Its
reliance on distortionary.
 Realizing the imperfection of Pakistan’s tax structure a concentrated reforms effort
was initiated in the early 2000. Total revenue was from 13.3 percent of GDP in 2000-
01, 14.2 percent of GDP in 2001-02. These increase in revenues become possible
because of the prudent tax policy of the Government. Total expenditure continuously
decreasing from financial year 2000-01.rise in revenues and reduction in expenditures
reduce the gap between revenue and expenditures and fiscal deficit reduced to 3
percent of GDP in 2000-05 from 5.2 percent of GDP in 1990.
 Like most developing countries, a large and growing budget deficit in Pakistan is one
of the major outstanding economic problems. It is held responsible’ for high inflation,
low growth, a current account deficit and crowding out of private investment and
consumption (Chudhary and Abe, 1999). Budget deficit in Pakistan has varied
between 5.4 to 8.7% of GDP during last two decades. On average, it was 6% of GDP
during the decade of 1970s. It was 7.6% of GDP in 1980s. During the year 2001-02, it
has again surpassed 7% of GDP. For the sustainability of deficit several revenue
measures were introduced in the successive budgets, along with reduction in
development expenditures, however, all in vain.
 The major conclusion drawn from this study is that the government budget deficit has
significant impact on money supply and this in turn has exerted a significant influence
on the inflation and balance of payments. In other words, the government has forced
the central bank to print more money to finance the growing budget deficit. This in
 turn has exerted upward pressure on prices. On the other hand, changes in money
supply have affected the trade balance through exports and imports, which in. turn
influenced the foreign exchange reserves. These results suggest that in order to reduce
inflation and balance of payments deficit there is a need to manage monetary, fiscal
and exchange rate policies simultaneously.
 some political factors determining budget deficit in Pakistan. It examines the short
and long-run relationship between the Budget deficit, democracy and cabinet size for
Pakistan's economy. The bounds testing approach to co-integration and (ECM) error-
correction models, developed within an autoregressive distributed lag (ARDL)
framework is applied to annual data for the period 1976 to 2009 in order to investigate
whether a long-run equilibrium relationship exists between the budget deficit and
these factors. The result of the bounds test indicates that there exist long-run
relationship between the budget deficit and political variables. The results provide
strong evidence that large government size will significantly add to the budget deficit.
The democracy can help in reducing budget deficit but shows a weaker influence in
case of Pakistan for the sample period.
 The Financial Stability Review (FSR) explains this as emanating “largely from
insufficient revenue generation due to lack of appropriate governance measures which
tend to encourage tax evasion and a substantially large and thriving undocumented or
parallel economy functioning alongside.” Rigidity in expenditures along with “poor
fiscal discipline” has been aggravated by weak cash management, in particular by a
lack of cash flow forecasting. As a consequence of the fiscal deficits, and given the
unpredictability of the financing requirements and availability, the government finds
it most feasible to borrow from the banking system, including from the State Bank of
Pakistan.
 The FSR provides various reasons for the economy’s historically weak fiscal
performance: (i) sluggish revenue growth, (ii) a narrow tax base and tax incidence that
is skewed toward the industrial sector and a small number of return filers, (iii) wide-
ranging exemptions and concessions, and tax evasion, and (4) reliance on indirect
taxes (State Bank of Pakistan, 2010). On the other hand, the expenditure side is
encumbered by defence and interest expenses not amenable to cuts. This is
compounded by a fragmented cash management and budgetary system that does not
generate reliable cash forecasts and effective control.
 Persistent budgetary deficits have pushed the total debt and liability stock to 69.5
percent of GDP, with the ratio increasing by 9 percent in just the three years
(2008,2009,2010). The fiscal year (FY) 2008 saw a large increase in the percentage of
the deficit being financed by internal sources, from 61.0 to 80.5 percent, of which the
central bank was the main source. This is explained by lower-than-targeted external
loan inflows and constrained access to international markets. The increased reliance
on internal borrowing continued through FY2010 with heavier contributions from
“nonbank” sources, which include prize bonds, treasury bills, and national saving
scheme. The bulk of this was raised through the second and third sources in FY2010.
The country appears to face constraints to external borrowing as well as long-term
domestic borrowing.
 But in the years 2010-11 were the biggest surplus budgets of the province and the
surplus were recorded with Rs50 billion in surplus, while it also showed in the
 documents that the three budgets of the K-P in Muttahida Majlis-e-Amal (MMA) era
were deficit.
 The party wise stands showed that there were three budget deficits during the MMA’s
time in government in K-P. In Awami National Party (ANP) time in government they
produced two budget deficits, while the Pakistan Tehreek-e-Insaaf (PTI) showed three
budget deficits in the provincial budget.
 The overall deficit for FY2014/15 was 5.3 percent of GDP, 0.3 percentage points
higher than the revised estimates. The declining trend represents a break from the
recent past, with deficits between 6 and 9 percent of GDP between FY2009-10 and
FY2012/13. The reduction in the deficit was achieved through curtailing the federal
development budget and above target non-tax revenues, while tax revenues continued
to fall short of targets. Energy subsidies remain large, although lower oil prices have
contributed to limiting the energy subsidy bill. Spending grew fastest at the provincial
level due to post 7th NFC award availability of higher resources, and devolution of
increased responsibilities. Total public debt stood at 64.6 percent of GDP at the end of
FY2014/15, a slight decline from the previous year. Domestic debt continues to
dominate the debt stock, despite healthy disbursements by the IFIs, the continuation
of the IMF program and the I I successful issuance of international bonds. Exports
declined in FY2014/15 and this decline was broad based, a result of both low
international prices of some of Pakistan’s export products as well as weak external
demand. Textiles, which account for about half of all exports, posted a significant
decline. Imports also declined, mainly due to lower international oil and commodity
prices, although to a lesser extent than exports. Non-oil imports increased
significantly, in particular metals, food, machinery and wood and paper products. As a
result, the trade deficit widened in absolute terms.
 Pakistan’s Fiscal Operations: Budget Deficit data was reported at -2,260.400 PKR bn
in Jun 2018. This records a decrease from the previous number of -1,863.800 PKR bn
for Jun 2017. Pakistan’s Fiscal Operations: Budget Deficit data is updated yearly,
averaging -929.400 PKR bn from Jun 2010 to 2018, with 9 observations. The data
reached an all-time high of 1,833.900 PKR bn in 2013 and a record low of -2,260.400
PKR bn in 2018. Pakistan’s Fiscal Operations.