Fiscal Policy of Pakistan

Presented by:
Zaheer-Ud-Din 15175
Ali Akber Lone 15638
Bilal Tahir 15379
Talha Bukhari 15038
 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.
• Government spending policies that
influence macroeconomic conditions.
These policies affect tax rates, interest
rates and government spending, in an
effort to control the economy.
 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
 Types of Fiscal Policy
1. 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.

1. 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.
Instruments of Fiscal Policy
• Expenditures

• Revenues
 Expenditures
Non-development Expenditures:
• Defence (Rs.442.2 billion)
• Environment Protection (Rs. 0.4 billion )
• Health Affairs and Services (Rs.7.3 billion )
• Housing and Community Amenities
(Rs. 1.8 billion )
Total Non-development Expenditures for
the FY 2010-11 were Rs. 1997.9 billions.
Expenditures (Continued)
Development Expenditures:
• Internal Resources:
These sources are permanent debt, Floating
debt, recoveries of loans and advances, non-
investment of shares of public Corporation,
saving schemes of the Federal Government.
• External Resources:
External sources for development
expenditures of the federal government are
project Aid, Community Aid, Food Aid, Other
Aid, Rupee Grant etc.
 (Continued)
• Total Development expenditures
for the FY 2010-11 were Rs.
766.5 billion.
 Revenues
Tax Revenue:
• Direct Taxes
• Personal Tax (10-15 %)
• Tax on Companies (39%)
• Customs (37%)
• Central Excise
• Sales Tax (15%)
 Non-Tax Revenue
• Income from Property and
Enterprise (Rs. 169.8 billion )
• Receipts from civil Administration
(Rs. 332.2 billion )
• Miscellaneous Receipts
(Rs. 130.2 billion)
The total revenue collected
during the FY 2010-11 was Rs
2764.4 billion.
 Who collects tax revenues?
Government of Pakistan

Ministry of Finance Ministry of

Agriculture
Ministry of
Foreign Affairs
Inland
Revenue
Revenue Division Service
Federal Board
Of
Revenue
Customs
and
Excise Department
Common issue regarding
collection of Taxes

Tax Evasion:
It is an illegal practice
whereas, person, organization
or corporation intentionally
avoids paying his/her/its true
tax liability.
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
Fiscal Projections for 2010-11
• The fiscal deficit is projected
4.6% of GDP in 2010-11.

• The FBR is targeted to collect

Rs.1,952 billion in 2010-11.
Why Pakistan faces large revenue –
expenditure gap?
The principal reason lies in the
structural weaknesses of
Pakistan’s tax system which is:
• Complex
• Inefficient
• Unfair
Why Pakistan is Facing budget
shortfall (Cont.)
– Too many factories are closed or in
partial production for want of power and
gas.
– Tax Evasion by well performing industries
.
– Stock Exchange and Real Estate pay
minimal tax.
– Law and Order causing burden on the
Expenditure side by way of compensation
to the affected and mobilization to send
forces to such areas.
Objectives of fiscal policy in
Pakistan
• To achieve desirable price level
• To Achieve desirable consumption
level
• To Achieve desirable employment
level
• To achieve desirable income
distribution
• To Development of infrastructure
• Foreign Exchange Earnings
 Tools of Fiscal Policy
1. Discretionary Fiscal policy:
a) Changes in government expenditure
i) The Multiplier Effect
ii) Formula for Spending Multiplier
Multiplier = 1/ (1-MPC)
MPC = Marginal Propensity to Consume
iii) The Crowding-Out-Effect
b) Changes in Taxes
 Tools (Continued)
2. Automatic Stabilizers:
i) Progressive Taxes
ii) Unemployment Allowances
iii) Stable Government Expenditures
iv) Support Policy for Farm Prices
Fiscal Performance of Pakistan
till 2010-11
(continued)
Fiscal Deficit till 2010-11
Fiscal Indicators till 2010-11
(Continued)
 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.
THANK YOU