FISCAL POLICY

Presented by: Ayesha Abdul Wahid Haseeb Nagaria shahroze Arshad Rahima Tanseer

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 Lipsey: – “Govt. revenue raising and Govt. revenue spending activities are called Fiscal policy”.

According to M.W.Lee: – “Fiscal policy considers (i) imposition of taxes, (ii) Govt. expenditures. (iii) Public debt and (iv) Management of public debt”.

FISCAL POLICY OBJECTIVES

• Controlling the level of employment

• Controlling inflation

• Achieving the desirable level of income distribution

• Controlling the level of consumption in the economy

Fiscal policy objectives

• Proper utilization of economic resources

• Increasing foreign exchange reserves

• Reducing burden of foreign debts

• Control on concentration of wealth

• Promoting trade and industrial development

Types of Fiscal Policy

Expansionary fiscal policy Expansionary fiscal policy is designed to stimulate the

economy during or anticipation of a business-cycle contraction.

This is accomplished by increasing aggregate expenditures and aggregate demand through an increase in government spending (both government purchases and transfer payments) or a decrease in taxes.

Expansionary fiscal policy leads to a larger government budget deficit or a smaller budget surplus.

Types of Fiscal PolicyContractionary fiscal policy Contractionary fiscal policy is designed to restrain

the economy during or anticipation of an inflation-inducing business-cycle expansion.

This is accomplished by decreasing aggregate expenditures and aggregate demand through a decrease in government spending (both government purchases and transfer payments) or an increase in taxes.

Contractionary fiscal policy leads to a smaller government budget deficit or a larger budget surplus.

Vision 2025 Integrated Energy Modernization of Infrastructure Indigenous Resource Mobilization Institutional Reforms and Governance Value-addition in Commodity Producing

Sectors Export promotion and Private Sector Led

Growth Social Capital

Vision 2025 Private sector as an engine of growth An efficient professional and accountable

public sector Corporate governance based on OECD

guidelines Macroeconomic stability with inclusive

growth Political stability and peaceful Pakistan.

Objectives of vision 2025 To have good quality of life and high

living standards compatible with emerging economies like Malaysia.

To achieve an annual growth rate of 7 to 8 percent by 2025.

To bring about structural transformation of economy from low productivity to high productivity in all real sectors.

Objectives of vision 2025 To build institutions and social capital

commensurate with requirements of high growth economy.

To have energy, food and water security.

To put private sector as driver of growth and ensuring enabling through better public management and good corporate governance.

TOOLS OF FISCAL POLICY

1- REVENUE

Example TAXES

2- EXPENSES

Example GOVERNMENT EXPENDITURE

SOURCES OF REVENUES

SOURCES OF EXPENDITURE

Tax Revenues Non-tax Revenues

Current Interest Pension Grants Defense Public order & safety

Development Federal Provincial Other development

& net lending

Taxes Fee levied by the government on product,

income or activity.

Purpose of Tax To finance government expenditure as

well as public goods and services.

Tax Evasion Difference between potential and actual

tax collection.Causes of Tax Evasion Weak systemConsequences of Tax

Evasion Dependency on IMF and other donors.

Tax System in Pakistan Unjust tax system. Indirect taxes have been increased. Regressive Taxation

• Performance on Tax collection

• Rs.2.7 trillion estimated

• Shortfall in last Quarter was 70 billion

• Tax collection comparison (34%)

Current Issues

Three measure are being pondered:- Equal to shortfall in revenue, or- Withdrawal of tax exemptions or- Cut in development expenditures.

Government woes to push budget deficit to 6.3%.

Tax System Setbacks Tax to GDP ratio 8.8%

Narrow Tax base

Massive Tax Evasion

Administrative Weaknesses

Some sectors under Taxed, Some not taxed at all.

Agriculture

Services

Regressive taxation rather than progressive

Tax buoyancy Tax buoyancy is an indicator to measure

efficiency and responsiveness of revenue mobilization in response to growth in the Gross domestic product or National income. 

A tax is said to be buoyant if the tax revenues increase more than proportionately in response to a rise in national income or output.

Usually, tax elasticity is considered a better indicator to measure tax responsiveness

DEFICIT FINANCING

Deficit financing refers to the borrowing undertaken by the government to make up for the revenue shortfall.

REASONS FOR DEFICIT FINANCING IN PAKISTAN?

Rise in government expenditures No rule based fiscal policy Low savings Rapid population growth

SOURCES OF FINANCING DEFICIT

1) Bank borrowing

- The SBP issues new currency notes in the amount being lend to the Government .

-The Government draws upon the cash balances of the past for fulfilling the budget deficit.

The effect of deficit financing through

bank borrowing is that it increases money supply in the economy and creates inflationary pressure

2) Non-bank borrowing - Domestic Borrowing. funds to bridge the deficits in the budget

are mobilized through the T-Bills, Short Term Federal Bonds, etc

This increases domestic interest rates, and discourages private investment in the nation

3) External borrowing The consistent large fiscal deficits have

forced the government of Pakistan to borrow from foreign lenders

This has a negative effect on exchange rate

Public debt

around 40 percent of the addition in public debt originated from PKR depreciation, which inflated the external debt during Q1-FY14. More specifically, Rupee depreciation against US Dollar resulted in Rs 348.3 billion increase in the Rupee value of external debt

As regards the domestic debt, the increase came primarily from budgetary borrowings from SBP to finance the fiscal gap. However, it should be noted that the increase in domestic debt far exceeded actual budgetary requirements during the quarter; financing of the government from domestic sources was Rs 314.1 billion,25 but domestic debt shows an increase of Rs 634.0 billion during the quarter. This difference arose mainly because the government borrowed more funds than it actually required, and placed the additional funds in its deposits held by SBP

Deficit financing is useful as … (1) It mobilizes additional resources for

economic development. (2) It helps in utilization of unutilized and

under-utilized resources of the country. (3) It helps in building up social and

economic overheads. (4) It helps in ensuring higher level of

employment in the country by productive use of resources.

Negative impact of deficit financing

1) interest rate increases which hinders private investment

When the government borrows funds, it competes with the private business for attaining funds. The additional demand for funds raises interest rate in the money market.

2) In case the deficit financing is financed by printing of money by SBP, It creates inflationary impact on the economy, which

(a) discourages foreign investment (b) Reduces exports (c) Increases imports (d) Increases inequality in the

distribution of income (e) Lowers saving rate in the economy

and (f) Encourages wasteful expenditures.

FISCAL POLICY OF PAKISTANIntroduction• Numerous Challenges both external and internal

• Importance of Prudent Fiscal Policy

Fiscal Performance of the Country improved between 2003-2007

Deterioration of Fiscal Performance after 2007

Historical Perspective

Cause of Rise in Fiscal Deficit in 2007-2008

Slowdown in Growth Fiscal Deficit widened to 8% on account of

over estimation of Budgeted Tax Revenue, underestimation of subsidies and Interest Payments and settlement of Circular Debt.

Revenue increased by 16.2%.Tax Revenue showed a significant slowdown due to

1. Reducing FED rate on Sugar from 8% to 0.5%2. Reduction in sales tax rate on electricity for

steel melters etc3. Duty Reduction on Imports4. Lowering of Withholding tax

Overview Of Fiscal Policy 2012-13

Expenditures increased by 22.4% compared to 14.2 % increase in FY12

Debt Servicing accounts for quarter of total expenditures.

Subsidies are the second largest expenditure.

PSDP was cut down below its budgeted target to limit the fiscal deficit

Expenditures

Goal1. Price Stability2. Switching over to targeted subsidies3. Generating more Revnues

Fiscal Policy 2013-14

Taxing all the sectors of the economy and limiting or eliminating exemptions

Restoring wealth tax Overcoming the problem of under

invoicing of imports Tax Administrative reforms

Plans for Tax Reforms

Fiscal Deficit remained at 3.2% as compared to 4.7% last year during the same period

Ensuring Fiscal Sustainability by phasing out of electricity subsidies,restructuring/privatization of PSE and raising revenue

Reforms in PSE Restructuring Plan for Pakistan Steel Mill Bail out Package for PIA Grant for Pakistan Railway Privatization of 31 PSEs

Fiscal Policy Results (July-March)

Fiscal Deficit expected to reduce to 6%Tax Reforms Enhancing resource mobilization and

increasing tax to gdp ratio Broadening the tax Base Administrative Improvement

Initiatives Tax Payers Facilitation Strengthening Tax Audit

Total Expenditure expected to reduce to 20.4% of GDP

Expenditure Review

Table 4.3: Trends in Components of Expenditure

Year T o ta l C u rre n t Interest Defenc

e Developme

nt N o n

In te re st

Expenditure E x p en d itu r

e P a y m en t

s (D) Expenditur

e N o n -

D efe n c e (A ) (B ) (C ) (E) Exp (A -C -D ) 2005-06 17.1 12.6 2.9 2.9 4.4 11.2 2006-07 19.5 14.9 4.0 2.7 4.7 12.8 2007-08 21.4 17.4 4.6 2.6 4.2 14.2 2008-09 19.2 15.5 4.8 2.5 3.6 11.8 2009-10 20.2 16.0 4.3 2.5 4.1 13.4 2010-11 18.9 15.9 3.8 2.5 2.8 12.6 2011-12 19.6 15.6 4.4 2.5 3.7 12.7 2012-13 21.4 16.3 4.4 2.4 3.5 14.6 2013-14B 20.4 15.2 4.4 2.4 5.1 13.5

2013-14 July-March Growth B.E 2013-14 2012-13 A. Total Revenue 3,646.7 2,477.4 2,124.9 16.6 a) Tax Revenue 2,768.1 1,786.2 1,527.8 16.9 Federal 2,598.1 1,650.0 1,418.3 16.3 of which FBR Revenues 2,475.0 1,574.8 1,335.2 17.9 Provincial Tax Revenue 170.0 136.2 109.6 24.3 b) Non-Tax Revenue 878.6 691.2 597.0 15.8 B. Total Expenditure 5,297.2 3,289.0 3,171.1 3.7 a) Current Expenditure 3,963.0 2,904.6 2,642.0 9.9 Federal 2,778.0 2,083.2 1,887.1 10.4 - Interest 1,153.5 909.1 772.2 17.7 - Defense 627.2 451.7 405.8 11.3 Provincial 1,185.0 821.4 754.9 8.8 b) Development Expenditure & net lending 1,334.3 555.8 445.8 24.7 PSDP 1,155.0 393.0 407.4 -3.5 Other Development 171.8 77.0 37.3 106.6 c) Net Lending 7.5 85.9 1.1 - e) Statistical discrepancy - -171.3* 83.3 - C. Overall Fiscal Deficit 1,650.6 811.7 1,046.2 -22.4 As % of GDP 6.3 3.2 4.7 - Financing of Fiscal Deficit 1,650.6 811.7 1,046.2 -22.4 i) External Sources 168.7 -50.1 -4.1 - ii) Domestic 1,481.8 861.7 1,050.3 -18.0 - Bank 975.0 436.9 856.7 -49.0 - Non-Bank 506.8 424.8 193.7 119.4 GDP at Market Prices 26,001 25,402 22,489 13.0 Source: Budget Wing, Finance Division

Non tax revenue also includes Universal Support Fund and the Coalition Support Fund

Total Expenditures registered a decline in the second and the third quarters

Subsidies remained lower than the previous period

Prudent Expenditure Management

Ceasing Secret service expenditures of all Ministries /Divisions/ Attached Departments /Autonomous Bodies except Intelligence Agencies.

Discontinuation of Discretionary funds for Prime Minister and Ministers.

Allocation of PM’s House/ PM Office reduced voluntarily by 40 percent. Moreover,

30 percent cut in current budget of Ministries/Divisions, except pay and allowances, resulted in saving of billion rupees.

Working of foreign missions reviewed and being right‐sized leading to expected

savings of Rs 2 billion annually.

Cabinet Committee on Restructuring has directed all Ministries / Divisions to review for rationalizing their strengths for the purpose of rightsizing.

Fee/remuneration for government nominated directors in PSEs capped at Rs 600,000/‐ per annum. Amount over and above will be deposited into government treasury

Comparison among Countries