Fiscal Policy of Pakistan Presented by: Zaheer-Ud-Din Ali Akber Lone15638 Bilal Tahir15379 Talha Bukhari15038

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 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 were Rs 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 were Rs 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 billion ) Receipts from civil Administration ( Rs billion ) Miscellaneous Receipts ( Rs billion ) The total revenue collected during the FY was Rs billion.

Who collects tax revenues? Government of Pakistan Ministry of Finance Ministry of Foreign Affairs Ministry of Agriculture Revenue Division Federal Board Of Revenue Inland Revenue Service 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 The fiscal deficit is projected 4.6% of GDP in The FBR is targeted to collect Rs.1,952 billion in

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

(continued)

Fiscal Deficit till

Fiscal Indicators till

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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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