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

Eurobond Market
Reflections of investors confidence

Category
5- year bonds

10 –year bonds

Interest rates
7.25%

8.25%
http://tribune.com.pk/story/693308/pakistan-raises-2-billion-through-
Premium eurobonds/
5.58%
 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.