Introduction

Fiscal policy refers to the taxation, expenditure and borrowing by the

government. it is a part of government policy, which is concerned with
raising revenue through taxation and other means and deciding on the
level and pattern of expenditure

Fiscal policy is the economic term that defines the set of principles and
decisions of a government in setting the level of public expenditure and
how that expenditure is funded.
Fiscal policy and monetary policy are the macroeconomic tools that
governments have at their disposal to manage the economy

Fiscal policy is the deliberate and thought out change in government

spending, government borrowing or taxes to stimulate or slow down the
economy.
It contrasts with monetary policy, which describes policies concerning
the supply of money to the economy.

Fiscal policy is described as being neutral, expansionary, or

contractionary.
An expansionary fiscal policy occurs when the government lowers
taxes and/or increases spending; thus expanding output (national
income)
An expansionary fiscal policy will expand the economy's growth.

A contractionary fiscal policy occurs when the government raises

taxes and/or lowers spending; thus lowering output (national income). A
decrease in government purchases or an increase in taxes shifts the
aggregate demand curve to the left. A contractionary fiscal policy will
constrict the economy's overall growth.

The principal objectives of fiscal policy

1 To mobilize resources for economic growth, especially for the public
sector.
2 To promote economic growth in the private sector by providing
incentives to save and invest.
3 To restrain inflationary forces in the economic in order to ensure
price stability.
4 To ensure equitable distribution of income and wealth so that fruits of
economic growth are fairly dist

INSTRUMENTS OF FISCAL POLICY

I. BUDGET:-
Keeping budget in balance, in surplus or deficit, is in itself a fiscal
instrument. When the government keeps its total expenditure equal to
its revenue, as a matter of policy, it means it has adopted a balanced
budget policy. When the government spends more than its expected
revenue, as a matter of policy, it is pursuing a deficit-budget policy.
And when the government follows a policy of keeping its expenditure
substantially below its current revenue, it is following a surplus budget
policy.
II.TAXATION
A tax is a non quid pro quo payment by the people to the government.
By this definition, taxation means non quid pro quo transfer of private
income to public coffers by means of taxes. Taxation takes many forms
in the developed countries including taxation of personal and corporate
income, so-called value added taxation and the collection of royalties or
taxes on specific sets of goods. Government may want to smooth out
the nation's income in order to minimize the pejorative effects of the
business cycle or they may want to take steps designed to increase the
national income. They may also want to take steps intended to achieve
specific social objectives deemed to be appropriate by the political or
legal process. Sound tax system, with moderate rates and a broad base,
is an integral part of the prudent fiscal policy. The expansion in the tax
base is sought to be achieved through expansion
in the scope of taxes, specifically service tax, removal of exemptions and
improvement in tax administration. With a decline in non-tax revenue
receipts as a proportion of overall revenue receipts, the burden of fiscal
corrections is expected to be mainly on tax revenues. However, the
measures to increase the tax-GDP ratio must be
harmonized with the overall growth objective. The strategy seeks to
increase tax compliance, improve the efficiency of tax administration
and with intense focus on recovery of arrears of tax revenues and
prevent further build-up of such arrears. Agricultural taxation: This
economic surplus mainly goes to rich farmers, landlords, intermediaries
in the absence of suitable taxation on agriculture. It has potential
surplus & to achieve maximum utilization of land through devising a
system of land taxation which would penalize poor use of good land.

III.PUBLIC EXPENDITURE
Suppose the government spends more on an electricity project for which
the contract is given to a PSU like BHEL. Then the money that the
government spends comes back to it in the form of BHEL's earnings.
Similarly, suppose that the government spends on food-forwork
programmers, and then a significant part of the expenditure
allocation would consist of food grain from the Public Distribution
System which would account for part of the wages of workers
employed in such schemes. This in turn means that the losses of the
Food Corporation of India (which also includes the
cost of holding stocks) would go down and hence the money would find
its way back to the government. In both cases, the increased expenditure
has further multiplier effects because of the subsequent spending of
those whose incomes go up because of the initial expenditure. The
overall rise in economic activity in turn means thatthe government’s tax
revenues also increase. Therefore there is no increase in the fiscal deficit
in such cases.

IV. GOVERNMENT BORROWING:

overnment borrowing is another fiscal Method by which savings of the
community may be mobilized for economic development. In developing
economies, the government resort to borrowing in order to finances
schemes of economic development. Government or what is also called
public borrowing becomes necessary because taxation alone cannot
provide sufficient funds for economic development. Besides, too heavy
taxation has an adverse effect on private saving and investment.
. Fiscal Policy Can Be Divided In Two Types.
I) DISCRETIONARY FISCAL POLICY FOR STABILISATION
By discretionary policy we mean deliberate change in the Government
expenditure and taxes to influence the level of national output and
prices. Fiscal policy generally aims at managing aggregate demand for
goods and services.
II) NON_DISCRETIONARY FISCAL POLICY: AUTOMATIC
STABILIZERS
. In this Non-discretionary fiscal policy, the tax structure and
expenditure are so designed that taxes and government spending vary
automatically inappropriate direction with the changes in National
Income. That is, these taxes and expenditure pattern without any special
deliberate action by the government and parliament automatically raise
aggregate demand in times of recession and reduce aggregate demand in
times of boom and inflation and there by help in insuring economic
stability.
These fiscal measures are therefore called automatic stabilizers or built-
in stabilizers. Since these automatic stabilizers do not require any fresh
deliberate policy action or legislation by the government, they represent
non-discretionary fiscal policy. Built-in-stability of tax revenue and
government expenditure of transfer payment of subsidies is created
because they vary with national income. These taxes and expenditure
automatically bring about appropriate change in aggregate demand and
reduce the
impact to recession and inflation that might occur in an economy at
sometimes. This means that because of existence of this automatic or
built-in-stabilizers recession andinflation will be shorter and less intense
than otherwise is the case. Important automatic fiscal stabilizes
compensation, welfare benefits corporate dividends.

Limitations of fiscal policy

1. Formulation of an appropriate fiscal policy requires reliable
forecasting of the target variables, like GNP, consumption, investment
and its determinants, technological changes, and so on. But no one has
yet discovered a foolproof method of economic forecasting.’
2. The Overall effect of changes in the policy instruments, like, changes
in government spending and taxation is determined by the rate of
dynamic multiplier. Forecasting the multiplier is in itself an extremely
difficult task and a time consuming process. Therefore, by the time the
full impact of one policy change is realized, economic conditions change
necessitating another change in the fiscal policy.
3. A decision and execution lag in case of discretionary fiscal policy
makes both working andefficacy of fiscal policy shrouded with
uncertainty.
4. Working and effectiveness of fiscal policy in underdeveloped
countries is severely limited by a) low levels of income, b) small
proportion of population in taxable income groups, c) existence of large
non - monetized sector, d) all pervasive corruption and inefficiency in
administration,especially in tax collection machinery.
5. Countries which are excessively dependent on fiscal policy for their
economic management, the governments are often forced to have
recourse to internal and external borrowings and deficit financing.
Excessive borrowings take such countries close to debt trap and deficit
financing beyond the absorption capacity of the economy accelerates the
pace of inflation,which further creates other control problems.

FISCAL DEFICIT
Fiscal deficit occurs when an entity (often a government) spends more money than it
takes in. An accumulated deficit over several years (or centuries) is referred to as the
government debt. Often, a certain part of spending is dedicated to paying of debt with
certain maturity, which can be refinanced by issuing new government bonds. That is, a
fiscal deficit leads to an increase in an entity's debt to others. A deficit is a flow. And a
debt is a stock.
The elements of the fiscal deficit are:
(a) The revenue deficit, which is the difference between the government’s
current (or revenue) expenditure and total current receipts (that is,
excluding borrowing)
(b) Capital expenditure.
TYPES OF FISCAL DEFICIT
Different figures for the budget deficit are quoted by different people due to the different
definitions in use and also because of problems of measurement. There are three different
figures that can be generated and used, depending on expediency.
 Revenue Budget Surplus/ Deficit
 Overall Budget Deficit
 The Primary Budget Deficit
REVENUE BUDGET SURPLUS/DEFICIT
A revenue surplus or deficit of the budget is equal to the difference between net revenue
receipts and current expenditure minus the repayment of foreign debt. Net revenue
receipts are equal to the gross revenues of the federal government minus the transfer to
the provinces. The revenue surplus shows the extent of public sector savings, where a
surplus implies positive saving by the government, and a deficit negative saving. This
revenue surplus or deficit is the bridge between the revenue and capital account of the
government.
In case of Pakistan, public saving has been negative for many years, thus a revenue
deficit of the budget. An increase in revenue budget deficit shows that the government is
using its borrowings increasingly to meet current expenditure, especially the salaries of
government employees.

OVERALL BUDGET DEFICIT

This is the most commonly used indicator to refer to the state of a country’s public
finances, and measures the difference between the total expenditure of the government
and its resources. It measures current expenditure plus development expenditure minus
repayment of foreign debt minus net revenue receipts minus the contribution by
autonomous bodies minus the amount earned by disinvestment of shares.
THE PRIMARY BUDGET DEFICIT
The primary budget deficit measures the impact of all discretionary changes of the
government in any year. It is calculated by subtracting the interest payments on domestic
and foreign debt from the overall budget deficit.

Financing fiscal deficit

External borrowing
o Debt flow
o Non debt flow
Domestic borrowing
o debt
 Bank borrowing
 Non-bank borrowing
o Equity
o Privatization proceeds
REASONS FOR PAKISTAN’S FISCAL DEFICIT
Pakistan’s public finances and fiscal deficit as follows:
 Total expenditure exceeds total revenue, and the growth in expenditure
is greater than that in revenue.
 Current expenditure alone exceeds total revenue.
 Development expenditure has been falling, while current expenditure has grown.
 Defense expenditure has been very high, and much higher than even development
expenditure.
 Interest payments along with defense expenditure constitute more than half of
annual expenditure.
 The main source for financing the fiscal deficit has been non-bank borrowing,
rather then bank borrowing.
 Domestic debt is greater than foreign debt.
 The financing of the deficit is very substantially from domestic sources rather than
from foreign sources.

 The fiscal deficit of the government of Pakistan has been around 8 percent of GDP
 Total revenue has remained, with some variations over time, more or less the same
 Total expenditure has fallen,
 a high degree of debt The highest proportion ever, 8.3 percent of GDP, w
 Development expenditure has been fallen very dramatically
Analysis of pak fiscal policy
To start with, we understand that full year current account deficit is projected at USD 185 billion. Around USD 2.5
billion debt servicing liability has to be cleared during the next two quarters. Import payments have continued to
grow on the back of strong domestic demand, growing private consumption and machinery and raw material
requirements of infrastructure projects. Gradual increase in global commodity prices particularly energy prices will
put further pressure on the balance of payments.
Pakistan’s budget deficit has been initially estimated at hovering around 7.5
percent of Gross Domestic Product (GDP) against the revised target of 7
percent for the last financial year 2020-21 mainly because of revenue
shortfall and increased expenditure.
. All this is happening at a time when circular debt in the energy sector and losses of public sector enterprises are
stubbornly high.

The debt servicing and expenditure on law and order leave little for actual development spending on infrastructure,
education and health related goals. This would remain a cause of concern as Pakistan may not be able to make the
promised investments towards sustainable development goals.

The provincial governments have yet to demonstrate significant improvements in post-devolution outcomes
indicators in social sectors. It is a matter of shame that according to Unicef, the stunting rate for under-5 years of age
in the country is as high as 44 per cent. This is the third highest rate globally.
According to WHO, the mortality rate of the same age cohort is as high as 94 per 1000 live births with diarrhoeal
diseases. Overall infant mortality stands at 78 out of 1000 and maternal mortality is estimated at 276 in 100,000. A
weak healthcare system is prime reason for such outcomes and will also have implications for the productivity of
future labour force in Pakistan.

We should bear in mind that the above mentioned milieu is not entirely due to lack of resources. It is also a function
of efficiency and effectiveness of public spending. The efficiency and effectiveness considerations allow us to make
the most out of scarce public sector monetary and non-monetary resources.

The efficiency consideration in public spending also requires high quality civil service. Unfortunately, most
administrations in Islamabad did not compliment budgetary reforms with civil service reforms. Yet, it is the public
administration that remains the sole instrument for governing public sector development schemes.

So, can the federal and upcoming provincial budgets influence the above mentioned situation? It is important to
understand that fiscal policy announced as part of the budgets allows the state to collect taxes and spend them to
influence: a) aggregate demand in the economy, b) promote exports, remittances and foreign direct investment, c)
redistribute incomes and wealth which in turn can reduce inequalities, d) invest in areas where markets may fail (e.g.
malnutrition), e) promote respect for sustainability, environment and climate change.

Moving forward, not all of the above can be expected in the short term, however, fiscal policy changes for 2018-19
should be aimed at enhancing competitiveness of exporting sectors (to reduce balance of payment difficulties) and
timely completion of ongoing infrastructure programme which may or may not be part of CPEC.

Likewise, provincial budgets need to focus on creating jobs through reducing cost of doing business for the private
sector, and direct more public resources towards social safety nets and environmental sustainability.

In a recent survey by Sustainable Development Policy Institute (SDPI), exporters highlight key issues in policy
which are hurting their competitiveness vis-à-vis the peer economies. A majority of these can be addressed through
national and sub-national budgetary policies.

These include: a) the need to reduce cost of power and gas through rationalisation of indirect taxes on both, b)
reduction in tax compliance costs, c) need to expedite customs and trade facilitation reforms, d) bringing down
transport, storage and warehousing costs, and e) directing fiscal support to potential and new exporters. Current
exporters have also not seen timely releases from export development fund and refunds held back by Federal Board
of Revenue.
While private sector should be promoted as the engine of growth, however, as the Institute of Cost & Management
Accountants of Pakistan notes that this is not possible until the tax authorities address the issues related to: a)
multiple audits faced by companies within single year with past audit cases not being closed in a timely manner; b)
putting a stop to the notices under Income Tax Ordinance, 2001 Section 122 and 177; c) harassment faced by
business persons in the shape of freezing of their bank accounts and at times physical arrest even when an appeal or
court verdict is awaited; d) ease the frequency with which e-filing of tax documentation is required; e) allow a
realistic minimum threshold for prescribed persons, registered for sales tax, from tax u/s-153 which, in turn, will
help micro and small enterprises.

The federal budget also needs to cater for specific needs of the provinces which, of course, can vary depending upon
the level of current development in a province. For example, SDPI’s survey reveals that exporters from Khyber
Pakhtunkhwa would have different expectations from the tax and government spending in comparison to their
counterparts in Sindh province.

Addressing special needs of under-developed regions in Balochistan, Gilgit-Baltistan, Khyber Pakhtunkhwa, Punjab
and Sindh will have favourable implications for social justice.

Another important question at this juncture is how to ensure sustainability of current wave of economic growth and
what could be the future growth levers. Our discussions with the business community reveal five key growth levers
that could also diversify the production and export base.

The first is to ensure a focus on promoting services sector exports. The services economy employs over 40 per cent
of labour force. The sub-sectors include IT, transport, storage, communications, financial and real estate and
personal services, retail and wholesale trade, education and health services. Until now none of the governments have
shown seriousness to implement services sector export development strategy. The startups in ICT sector and e-
commerce can go a long way in promoting brand Pakistan globally.

Second growth lever could be the construction sector. Within the overall construction sector we identify low-cost
housing as a potential short and medium term driver of growth and jobs.

Pakistan faces a shortage of around 10 million houses and the demand is still growing at the rate of 550,000 houses
per year. The demand exists in middle and low income segments. The government will need to improve policy,
facilitate regulation, and create financial derivatives for this sector.

Third, a key focus of the budget should be to make undocumented economy a driver of growth. Instead of freezing
bank accounts or imposing new withholding taxes on non-filers (in turn promoting a cash economy), policy
measures should be aimed at luring money inside Pakistan towards banking sector’s loan-able funds pool. There are
substantial private savings parked in real estates within Pakistan, undeclared 5 million local currency bank accounts,
undeclared foreign currency bank accounts, and bearer bonds and securities. Getting these savings out from bank
lockers to bank accounts can increase the capacity of the financial sector to create future credit.

Fourth lever of growth could be investment in ‘critical infrastructure’ and not just any infrastructure. Half of
Pakistan still lacks access to basic individual and communal services, e.g., electricity, water, toilets and waste
disposal. This has overlapped with health, environment and food security. These are the critical infrastructure needs
of growing cities and peri-urban areas.

Pakistan will need to spend at least 9 per cent of GDP on closing infrastructure gap over the next decade. The State
Bank of Pakistan estimates that public and private sector should be spending USD 150 billion over the next decade
to bridge this gap.

Finally, CPEC long-term plan (2017-30) identifies agriculture value addition as a key area of cooperation. Our fifth
lever of growth could be those agro processing industries which could export to Chinese crop, food and livestock
markets and, in turn, help Pakistan’s supply chain integration with the region.
While a catch-up is more likely in the crop sector, there also exists vast potential in livestock, fisheries and forestry.
There is significant demand from China for Pakistani cotton, rice, fish and other aquatic invertebrates, hides and
skins. It is a matter of how fast Pakistan can expand its supply capacity. Halal meat for the Middle East and
European Union region remains another sector which can only contribute to our exports if producers understand the
product and safety standards in these regions.

The above-mentioned five growth levers will require public investment. Here again Budget 2018-19 can help
through addressing the structural weaknesses in public sector development programme (PSDP) and provincial
annual development plans (ADP).

These include: weak capacity of civil service to spend in regions with most needs; inability to prevent cost and time
overruns; multiplicity of similar projects in PSDP and ADP, improving feasibility, appraisal and approval process
(and avoid politically motivated projects); reduce throw forward (i.e. approved projects awaiting financing) through
funding modes, e.g., public private partnerships, build–operate–transfer or build–own–operate models.