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Decisions of a government in setting the level of public expenditure and how that
expenditure is funded.
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It contrasts with monetary policy, Fiscal policy is the deliberate change in government spending and
government borrowing or taxes to stimulate or slow down the economy.
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Fiscal policy is described as being neutral, expansionary, or contractionary.
According to Lee, fiscal policy considers:
Imposition of taxes Government expenditures
Public Debt Management of Public Debt
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Di r e c t T a x : The term direct tax generally means a tax paid directly to the government by the
persons on whom it is imposed.
I n d i r e c t T a x : Indirect is a tax collected by an from the person who bears the ultimate economic
burden of the tax (such as the customer)
De v e l o p m e n t E x p e n d i t u r e : Money Spent on Research and Development.
N o n De v e l o p m e n t a l E x p e n d i t u r e : An amount of money that is spent on goods and
services.
P u b l i c De b t : The total of the nation's debts: debts of local and state and national governments;
an indicator of how much public spending is financed by borrowing instead of taxation.
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Self Reliance
Expansion of exports
Promotion of investment
Reduction in income
disparity
Taxation Policy
Govt. Expenditure Policy
Deficit Financing Policy
Public Debt Policy
Direct Taxes Indirect Taxes
Federal Government Income Tax
Corporation Tax
Wealth Tax
Property Tax
Sales Tax
Excuse Duty
Import Duty
Exports Duty
Gas, Petroleum Surcharge
Foreign Travel Tax
Provincial Government Land Revenue
Urban Immovable property tax
Tax on transfer of property
Agriculture income tax
Capital Gains Tax
Tax on professions and trades
Stamp Duty
Motor Vehicle Tax
Entertainment Tax
Excise duty
Cotton Fee
Electricity Duty
Tax Distribution
Responsibility District Tehsil Union Council
Education Primary and
Secondary education
X X
Health Local Hospitals X X
Roads District Roads X X
Water X Water Supply
Systems
Wells and ponds
Sewers and
Sanitation
X Yes X
Fire Services X Yes X
Parks and
Playgrounds
X Yes Yes
Street Services X Street Lighting and
signals
Street Lightning
Expenditure Responsibilities
Pakistan Devolution, ADB 2002, p.19
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oDebt flow
oNon debt flow
oDebt
Bank borrowing
Non-bank borrowing
oEquity
oPrivatization proceeds
The removal of funds from the economy will reduce levels of aggregate demand
in the economy and contract it, bringing about price stability.
In the case of a government running a budget deficit, funds will need to come from public borrowing,
overseas borrowing or the printing of new money.
BUT THERE EXISTS A PARADOX
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Fiscal Policy (As % of GDP)
Indicator
60s 70s 80s 90s 2000s 01-02 02-03 03-04 04-05
Total Revenue 13.1 16.8 17.3 17.1 14.2 14.2 14.9 14.3 13.8
- Tax Revenue - - 13.8 13.4 10.6 10.9 11.5 11.0 10.1
- Non Tax
Revenue
- - 3.5 3.7 3.7 3.3 3.4 3.3 3.7
Total Expenditure 11.6 21.5 24.9 24.1 18.7 18.3 18.5 16.7 17.2
-Current
Expenditure
- - 17.6 19.4 15.4 15.9 16.3 13.5 13.3
-Development
Expenditure
- - 7.3 4.7 3.5 2.8 2.2 3.1 3.9
Overall Deficit 2.1 5.3 7.1 6.9 4.5 4.3 3.7 2.4 3.3
Source: PES, Various Issues, Islamabad
Fiscal Policy (As % of GDP)
Indicator
05-06 06-07 07-08 08-09 09-10
Total Revenue 14.2 14.9 14.6 14.5 14.7
- Tax Revenue 10.6 10.2 10.6 9.5 10.9
- Non Tax Revenue 3.6 4.7 4.4 5.1 4.0
Total Expenditure 18.5 19.1 22.2 19.9 19.8
-Current Expenditure 13.6 14.9 18.1 16.0 15.4
-Development Expenditure 4.8 4.9 4.4 3.8 4.1
Overall Deficit 4.3 4.3 7.6 5.2 4.9
Source: PES, Various Issues, Islamabad
% of
Expenditure
1971 1976 1980 1987 1990 1996 1997 1998 1999 2000 2001 2002
Current
Expenditure
68.1 45.6 62.7 74.1 75.0 84.2 83.6 84.5 88.3 89.9 84.7 81.7
Defense 44.5 26.1 24.5 26.1 24.8 23.6 21.5 22.1 21.2 18.3 18.0 17.7
Interest 11.9 6.0 9.3 18.4 19.2 29.8 31.9 34.0 37.0 34.7 31.6 27.1
Development
Expenditure
31.9 54.5 37.7 25.9 25.0 15.8 16.4 15.5 11.7 10.1 15.3 18.3
Consolidated Federal and Provincial government expenditures 1971-2003
Source: PES, Various Issues, Islamabad
R e a s o n s f o r F i s c a l De f i c i t i n P a k i s t a n :
Total expenditure exceeds total revenue, and the growth in expenditure
is greater than that in revenue.
Current expenditure alone exceeds total revenue.
Interest payments along with defense expenditure constitute more than half of annual
expenditure.
Although total expenditure has fallen, current expenditure has risen in the 1990s and has not as
yet, fallen significantly since 1999.
Total revenue has remained, with some variations over time, more or less the same in 22years,
despite reforms of different sorts.
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Over the past three years public debt has grown sharply in countries because many governments not
only had to bail out ailing banks, but also pay for rising unemployment benefits in addition to providing
stimulus to the economy.
General Government Debt (Gross, % of GDP)
County 2007 (Pre Crisis) 2009
Australia 8.5 13.5
Canada 64.2 75.5
China 20.2 20.9
France 63.3 77.4
Germany 63.6 79.8
India 80.5 83.7
Pakistan 55.5 58.1
Japan 187.7 217.4
UK 44.4 68.6
USA 63.1 88.8
Source: IMF World Economic Outlook 2010
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Tax to GDP Ratio:
Pakistan 9-10% India 12.9% Sri Lanka 14.2%
With the lowest Tax to GDP ration is the region the additional expenditure absorbed in the budget
on account of any fiscal stimulus measure, would necessarily imply an increase in the stock of
public debt.
Each 1% increase in the size of the fiscal deficit increases the public debt stock by at least
1.08%, at the current effective interest rate on public debt.
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In the case of Pakistan, a low, and declining, TaxtoGDP ratio, and an elevated and rising
public debt stock has imposed a hard constraint on the size of fiscal stimulus that can be provided
to the economy.
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With the slowdown in Pakistans economy coming in the wake of a macroeconomic crisis in 2008 the
prudent course for policymakers has been to adopt a path of stabilization.
The gap between low tax revenue collection, the fiscal deficit and the stock of public debt needs
to be decreased.
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Historically, Pakistans highgrowth periods have lasted a maximum of around 4 to 5 years with or
without a stimulus. Hence, the absence of policy stimulus does not appear to explain the short
and increasingly infrequent spells of high growth in Pakistans economy.

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t h
NF C Aw a r d s
The distribution of resources has been made on multiple criteria instead of population.
The agreed sharing of the divisible pool will now take place on the basis of the following:
Population 82.0%
Poverty and backwardness 10.3%
Revenue collection / generation 5.0%
Inverse population density 2.7%
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Federal Transfers to the provincial governments on the basis of the percentage specified:
Existing (%) 7
th
NFC Award (%)
Balochistan 7.17 9.09
Khyber
Pakhtunkhwa
14.88 14.62
Punjab 53.01 51.74
Sindh 24.94 24.55
Total 100.00 100.00
Source: Provincial Finance Wing, Finance Division
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t h
NF C Aw a r d s
It has also been recommended in NFC award that the Federal government and Provincial governments
should streamline their tax collection system to increase their revenues in order to achieve 15 percent tax
to GDP ratio by the terminal year i.e. 201415.
Federal Government and Provincial governments would develop and enforce mechanism for
maintaining fiscal discipline at the Federal and Provincial levels through legislative and administrative
measures.
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REFORM AGENDA
A low and declining taxtoGDP ratio, is amongst Pakistans biggest structural weaknesses and
the possible reasons for this low ratio are:
A narrow tax base
Agriculture, large number of services, capital gains is not included in tax net
Low tax compliance
Wide spread exemptions
Large undocumented informal sector
Weak audit and enforcement
TAX EVASION
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Pakistans Elite Pay Few Taxes, Widening Gap
By SABRINA TAVERNISE
Published: July 18, 2010
Entire swaths of the economy, like agriculture, a major moneymaker for the elite, remain untaxed.
Pakistans income from taxes last year was the lowest in the countrys history, according to Zafar ul-
Majeed, a senior official in the Federal Board of Revenue
Taxes are the Achilles heel of Pakistani politicians, said Jahangir Tareen, a businessman and member
of Parliament
Akbar Zaidi, a Karachi-based economist, estimates that as many as 10 million Pakistanis should be
paying income tax, far more than the 2.5 million who are registered.
Out of more than 170 million Pakistanis, fewer than 2 percent pay income tax, making Pakistans
revenue from taxes among the lowest in the world, a notch below Sierra Leones as a ratio of tax to
gross domestic product.
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Dr Aqdas Ali Kazmi in his paper Tax Policy and Resource
Mobilisation in Pakistan estimates that 70 percent part of economy
consists of 36 percent pure black economy, 18 percent exempted
economy, 9 percent illegal economy, 4.5 percent unrecorded economy
and 2.5 percent informal economy (unreported economy). His study
says that the problem in the low resource mobilisation is the rigid
system of taxation, and the emphasis of the government to increase
revenue, ignoring the details of the long-term policy measures.
Purpose of 2009-10 Fiscal Policy:
A balanced tax structure based on rational and affordable rates with minimal
exemptions covering a broad range of taxpayers,
An expenditure policy that aims to moderate growth in nondevelopmental expenditure and
adequately accommodate the pressing social and infrastructure needs of a developing economy,
and,
A prudent debt management policy.
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Measures to broaden tax base 2009-10
The basic limit of exemption from income tax in respect of salaried persons is proposed to be
increased from Rs.1,80,000 to Rs.2,00,000.
Presently senior citizens are allowed 50% relief in tax liability provided the taxable income, in a
tax year, does not exceed Rs.5,00,000/-. In view of inflationary trend, it is proposed to enhance
limit of taxable income to Rs.7,50,000.
In order to promote the voluntary pension schemes and allow relief to pensioner class the said limit
of exempted limit is proposed to be enhanced from 25% to 50%
The rate of withholding tax is proposed to be enhanced to 4% from 2% across the board.
The indenting commission is being taxed @ 1% of the gross receipts whereas the general rate for
commission and brokerage is 10%. In view of the gross disparity in the rate it is proposed to be
enhanced to 5%.
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The scope of advance tax collection on purchase of new locally manufactured motorcar/jeep is
proposed to be extended to all types of motor vehicles.
At present, additional tax is chargeable @ 12% per annum on late payment of tax.It is therefore,
proposed to increase the rate of additional tax to 15% per annum
In order to broaden the tax base and promote documentation of economy, importers, exporters and
service providers are being required to file normal return of income instead of simple statement.
To accelerate the pace of documentation of the economy and broadening of tax base the
manufacturer are being incentivized by allowing tax credit at 2.5% of the tax payable if they are
able to make at least 90% of their sales to sales tax registered persons.
Enhancing the tax incidence on cigarette i.e, an injurious to health item
Reduction of Federal Excise Duty on cement is aimed at providing cement at cheaper rate which will
encourage construction activities in the country.
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Reduction of Federal Excise Duty on telecommunication services from 21% to 19 % is aimed at
reducing the cost of the service.
Reduction of activation charges of cellular phones from Rs. 500 to Rs. 250 is aimed at reducing the
cost of new connection of mobile phones
To generate additional revenue for meeting dire national needs the scope of FED on advertisement
has been increased
The FED @ 16% at VAT mode has been levied on services provided by the port and terminal
operators including wharfage in respect of imports to widen tax net
The FED @ 16% in VAT mode has been levied on services provided by stock brokers is aimed at
widening the tax net.
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Projection of Fiscal year 2009-10
Projection For FY 2009-10:
Source: SBP Annual Report FY10
Source: SBP Annual Report FY10
How the Fiscal policy 09-10 was not able to achieve its projected aims:
Pakistans economy witnessed a moderate but fragile recovery during FY10
Fundamental structural weaknesses in the economy remained unaddressed. For example, some key
reforms failed to gather
traction:
(A) persistent disagreements led to the deferment of a proposed expansion of the tax net through
the introduction of a broad based GST,
(B) the proposed restructuring of public sector enterprises, to improve efficiency and lower the
fiscal burden, did not take place; and,
(C) after some initial work, there was little or no progress in either resolving the energy sector
debt chain (the so called circular debt problem) or substantially improving electricity supply
The principal structural problem, however, was the weak fiscal performance. The eventual Rs 77
billion shortfall in total revenues was therefore not very
surprising, given the absence of any significant measures to expand the tax base or to exploit the
existing tax base more effectively.
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Admittedly, there are significant rigidities in government spending, including debt servicing,
defense, the government salary bill, etc.
In short, the FY10 fiscal performance, characterized by continuing expansion in fiscal and
quasifiscal operations, crowded out and otherwise undermined private sector activities, supported the
persistence of double-digit inflation
While the expansionary fiscal policy and subsequent partial monetization of this deficit were
important contributors to (demand pull) inflation in the economy, ironically, even the efforts to
reduce the burden of subsidies also generated (cost push) inflation.
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Being a developing economy, Pakistan needs to augment its development efforts. Development
efforts crucially hinge upon additional resource mobilization that can be generated by extending the
tax net to untapped areas of the economy.
For a developing country like Pakistan, resource mobilization is vital for economic and social
development over a sustained period of time. Going forward, the government needs to boost its
revenue generation capacity, streamline and prioritize its expenditures while overcoming structural
weaknesses and internal inefficiencies.
Public expenditure is one of the critical components of a countrys development goals that include
economic and social objectives. To make expenditure policy effective, it is necessary that resource
allocation decisions are based on the availability of timely and precise financial data, a set
framework of financial and accounting principles that are recognized internationally, and a system
of public accountability that is backed by audit legislation.
Fiscal consolidation crucially hinges upon improvement in the power sector. Pakistan has to
rationalize the generation mix for provision of cost effective energy supplies.
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The enforcement of Reformed General Sales Tax (RGST) would cause a flood of dearness with
inflation going up by at least 13 to 15 percent having impact on the prices of 48 food items in
Consumer Price Index (CPI) basket. Therefore the impact of this tax should be considered before it
is implemented.
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