FISCAL POLICY

Presented by:

Rohit Chawla

Nehan Muhajir

Zahra Khandwala

Fiscal Policy defined

• The means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy

• Governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending

Types of Fiscal Policy

• Expansionary: increase in government purchases, decrease in taxes, for the purpose of increasing aggregate demand and expanding output

• Contractionary: decrease in government purchases and increase in taxes for decreasing aggregate demand and thus controlling inflation

Objectives

• Pumping money into the economy

• Controlling strong inflation (increase taxes or decrease government spending)

• Containment of import of luxury and non-essential goods

• Promotion of investment

Issues

• Tax evasion: illegal practice where a person, organistion or corporation intentionally avoid paying its true tax liability

• Do not want to disclose their true income

• Unlawful business activities

• No fear of punishment

Issues

• Pakistan faces heavy tax evasion

• Currently FBR collects taxes from only 0.5% of registered tax payers of the total population

• Although tax evasion has the ability of expansion of cities it cause great problems with unplanned expansions like traffic, pollution, water shortages etc

• No free land to improve infrastructure

Issues

• Agricultural tax exemption: Minimal contribution to taxes although this sector accounts for 21.4% of Pakistan’s GDP and provides employment to approximately 45% of the population

Issues

• Underground economy on the rise may lead to an erosion of the tax base, a decrease in tax receipts and thus to a further rise of the budget deficit

Issues

• Poor monetary and fiscal coordination:

Policy measures taken by the two institutions (central back and ministry of finance) often conflict with each other

Issues

• Corruption: Recent studies have unveiled that corruption in the public sector impacts on both the level and the composition of public revenue and expenditure, thus influencing the conduct of fiscal policy-making

Objectives

• Current Issues

• Current Performance

Current Issues

• Performance on Tax collection

• Rs.2.7 trillion estimated

• Shortfall in last Quarter

was 70 billion

• Tax collection comparison

(34%)

http://www.dawn.com/news/1097355/rs70bn-shortfall-in-revenue-collection-likely

Tax conti

• 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%.

Privatization

• Developments regarding denationalization

- Historically, privatization has been only 22% successful.

- 65 SOEs are supposed to be denationalized

- phase 1 has took place for 25 organizations

- $2.2 billions expected inflows.

IMF Loan

• Regulations of IMF

- Cutting subsidies

- Electricity bill recovery

- Increasing tax collection

- Steps regarding Improving tax reforms

- keeping inflation rate in single digit.

http://www.dawn.com/news/1097355/rs70bn-shortfall-in-revenue-collection-likely

Eurobond Market

Category 5- year bonds

10 –year bonds

Interest rates7.25%

8.25% Premium5.58%

Reflections of investors confidence

http://tribune.com.pk/story/693308/pakistan-raises-2-billion-through-eurobonds/

http://tribune.com.pk/story/693308/pakistan-raises-2-billion-through-eurobonds/

3G auction• Estimated inflow of $1.6 billion

• bidding to be held from 14th April 2014.

• Base price has been quoted- Rs. 285 millions for a 3G license each. (four)

- Rs. 210 for each 4G license

- Results will be announced on 24th

April, 2014.

Performance Review

• Budget deficit (score= 0/10) then 8%, promised 4%, now 8.8%

• Government Borrowing (score = 0/10) then Rs. 345, now Rs. 550 (billions)

• Large scale Manufacturing (score= 8/10) promise 7-8% currently 6.7

• Exports ( score=5/10), imposed only 30% duty on SUVs, promising to keep 100% free of sales tax

• Privatization (score=5/10) Cumbersome process, only in 1st phase.

http://www.thenews.com.pk/Todays-News-3-229540-PML-N-performance-on-economic-revival-below-par

Current Performance

• Amidst of note of Appreciation by ADB.

• Challenge is to maintain long term sustainable fiscal discipline

• Emphasize is on the role of provinces in collecting revenues.

http://www.imf.org/external/pubs/ft/scr/2014/cr1490.pdf

http://www.samaa.tv/notes/01-Apr-2014/economy-not-out-of-woods-yet

Policy recommendation and Solutions

Increase tax to GDP ratio

• Taxing those who are not paying any tax

• Enhancing efficiency of the tax machinery

• Removing anomalies and distortions in the tax system

• Simplifying the tax procedures

Conti…

• Broadening of the tax base

• Rationalization of tax rates and exemptions

• Encouraging corporatization and documentation

• Eradicate maladministration and corruption in F.B.R

Reducing un-targeted subsidies

• Any scheme of subsidy, whether in electricity, gas, fertilizer, sugar and wheat must be targeted to reach to weaker segments of society.

Taxing the agriculture sector

• Since agriculture contributes 22% to GDP. Imposing taxes on the agriculture sector will help to reduce the fiscal deficit. Though small farmers should be exempted from taxes.

Austerity Measures

• Reducing the budget of Prime Minister House. (currently Rs.396 million)

• Reducing the size of the Cabinet Ministers.