ECONOMIC SURVEY OF PAKISTAN

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PRESENTED BY: SAHAR KHAN

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COURSE:MONEY AND BANKING TOPIC: ECONOMIC SERVEY OF PAKISTAN ON PUBLIC FINANCE (2009-10)

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PUBLIC FINANCE

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WHAT IS PUBLIC FINANCE “Public finance is a field of economics , concerned with Paying for collection and governmental activities and with administration and design of those activities.”

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CONSISTS IN FOLLOWING Government expenditure Government revenue Public debt Financial management

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PROBLEM TO BE EXAMINED LOW TAX REVENUE FISCAL DEFICIT PUBLIC DEBT GROWTH IN ECONOMY

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PUBIC DEBT

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MACROECONOMICS CRISIS 2008 STIMULUS PACKAGES After the global financial crisis of 2008, government were forced to capitalize banks. Take over a large part of the debts of failing financial institutions . Introduce large stimulus programs to revive the economy. STIMULUS PACKAGES(EST.) COUNTRY USD (Billions) China 585.3 Germany 80.5 India 38.4 Japan 297.5 United Kingdom 29.2 United States 787

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GOVERNMENT REVENUE Pakistan’s tax collection amounting to around 9‐10% of GDP at best. India 12.9% tax to GDP Srilanka 14.2% tax to GDP As compare, Pakistan’s tax to GDP is lower. TAX TO GDP:

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GOVERNMENT EXPENDITURES Out of 100% budgetary expenditure: 27% for.. debt servicing (including repayment of foreign loans). 73% to.. Security spending. Development spending, Spending vulnerable segment of the population and etc.

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The additional expenditure absorbed in the budget on account of any fiscal stimulus measure, would necessarily imply an increase in the stock of public debt. Each 1% increase in the size of the fiscal deficit increases the public debt stock by at least 1.08%, at the current effective interest rate on public debt. On the end‐March 2010 outstanding stock of public debt was at least Rs. 88.2 billion, for every one percentage point increase in the fiscal deficit – with the impact on growth less than clear. This incremental debt stock would generate an annual debt servicing liability of over Rs. 7 billion. EXPENDITURE AND DEFICIT EFFECT DEBT

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In any case, the notion that growth in the economy leads to autonomous, and at the very least, proportionate growth in government revenue, is misplaced. This argument is neither borne out by the sources of growth and revenue in the economy, nor by Pakistan’s historical experience in this regard. MISMATCH BETWEEN GROWTH AND REVENUE

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SOURCES OF GROWTH AND TAXES

Recent Developments (2009-2010):

Recent Developments (2009-2010) FBR TAX REVENUES

Direct Tax Collections:

Direct Tax Collections

Indirect Taxes:

Indirect Taxes

1- Sales Tax:

1- Sales Tax Sales tax grew by 16 % during July-April 2010. Its generates from domestic production, Sales and while the rest originates from Imports. Net domestic sales taxes contribution has come from telecom services, natural gas, sugar and cigarettes. Edible oil, plastic resins, vehicles, iron and steel machinery and mechanical appliances have a major contribution in the import stage collection of sales tax.

Sales Tax Collections:

Sales Tax Collections

2-Custom duty:

2-Custom duty Custom duty taxes grew by 7.2% during July-April 2010. Major revenue sources have been automobiles, edible oil, machinery, iron and steel products.

Custom Duty Collections :

Custom Duty Collections

3- Federal Excise Tax:

3- Federal Excise Tax Federal excise tax has been grew by 3% during July-April 2010. The major revenue comes from cigarettes, cement, beverages, natural gas etc.

Federal Excise Tax Collections:

Federal Excise Tax Collections

Review of Public Expenditure::

Review of Public Expenditure: In the Federal budget for 2009‐10, a total expenditure of Rs. 2,877.4 billion was estimated for the full year, comprising of Rs. 2,260.9 billion of current expenditure (79% of total), and Rs. 616.5 billion of development expenditure, including net lending. Debt servicing accounted for 27% of total expenditure in the federal budget 2009‐10, a substantial decline of nearly 5 percentage points over 2008‐09. Share of defense services stood at 17.2%, while subsidies and grants totaled an estimated 11.8% .

Graph Between Current and Development Expenditure::

Graph Between Current and Development Expenditure :

GRAPH OF DEFENSE ,SUBSIDIES AND DEBT:

GRAPH OF DEFENSE ,SUBSIDIES AND DEBT

GRAPH OF TOTAL REVENUE:

GRAPH OF TOTAL REVENUE

GRAPH BETWEEN TAX AND NON-TAX REVENUE:

GRAPH BETWEEN TAX AND NON-TAX REVENUE

GRAPH BETWEEN DEVELOPMENT AND CURRENT EXPENDITURE:

GRAPH BETWEEN DEVELOPMENT AND CURRENT EXPENDITURE

GRAPH OF OVERALL FISCAL DEFICIT:

GRAPH OF OVERALL FISCAL DEFICIT

GRAPH OF FINANCING OF FISCAL DEFICIT:

GRAPH OF FINANCING OF FISCAL DEFICIT

REFORM AGENDA:

REFORM AGENDA

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A narrow tax base Agriculture, large number of services, capital gains is not included in tax net Low tax compliance Wide spread exemptions Large undocumented informal sectors Weak audit and enforcement REASONS OF LOW-TAX-GDP RATIO IN PAKISTAN

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A number of measures have been planned to redress this shortcoming: FBR is undergoing a major step in tax administration reform, with the establishment of the Inland Revenue Service (IRS). This will serve as a single entity within the FBR by merging the tasks of all domestic taxes, namely the sales tax, income tax and excise tax . MEASURES TAKEN TO INCREASE THE TAX-TO-GDP RATIO:

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To broaden the tax base and to correct the structural shortcomings in Pakistan’s tax system and particularly to ensure horizontal equity in the taxation system, a broad based Value Added Tax (VAT) is sought to be implemented in the country. Considerable work has been completed for the planned introduction of the VAT by July 1, 2010, subject to approval of national and provincial assemblies. MEASURES TAKEN TO INCREASE THE TAX-TO-GDP RATIO:

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Value added tax (VAT) is a special type of indirect tax, also known as goods and services tax (GST) in India, in which a sum of money is levied at a particular stage in the sale of a product or service. VALUE ADDED TAX

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Due to its revenue generating capacity, efficiency and ready comprehensibility in many developed countries, the developing nations also motivated to adopt VAT during eighties and nineties. The VAT deals with many problems quite efficiently, that are often associated with a conventional sales tax system. BENEFITS

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In sales tax, there is no provision for input tax credit; consequently the end consumer has to pay tax on an input that has already been taxed previously. This is known as “cascading” which leads to an increase in consumer tax and price level, thus increasing the incentive for evasion which can be harmful for economic growth. In VAT system there is no incidence of cascading due to the fact that is imposed on value addition at every single stage. BENEFITS

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The main objective to introduce vat is to increase the tax to GDP ratio to above 14 percent of GDP by 2013/14. OBJECTIVE OF INTRODUCTION OF VAT:

MEDIUM TERM BUDGETARY FRAMEWORK:

MEDIUM TERM BUDGETARY FRAMEWORK

What is MTBF ?:

What is MTBF ? The MTBF is an approach of budgeting which links the spending plans of government to its policy objectives. The main feature of MTBF is that annual budget preparation is carried out in a frame work which takes into account the resources expected to be available to the government over the medium term.

MAIN OBJECTIVES OF MTBF:

MAIN OBJECTIVES OF MTBF Strengthen fiscal discipline, by creating a an orderly framework for the management of the annual budget over the medium term. Strengthen the allocation of federal resources to the government strategic priorities. Improve the operational efficiency by strengthening the capacity of federal line ministries to prepare and manage their budget effectively.

Benefits OF MTBF:

Benefits OF MTBF It support the predictability in the budgeting process by ensuring the budget is based on a medium term or macroeconomic and fiscal forecast. It ensures the fiscal policy objectives. It relates budgetary allocations to strategic priorities by focusing the budget more clearly on services. It creates a more efficient budget management system based on delegated authority to ministries.

MAJOR MODIFICATION TO THE MTBF BUDGET PREPARATION:

MAJOR MODIFICATION TO THE MTBF BUDGET PREPARATION Strengthening the strategic process of budget preparation in each federal ministry. First step towards result based budgeting. Clear Identification of the cost of services(output) to be delivered. Preparation of “Medium term budget estimates for service delivery”

CONCLUSION:

CONCLUSION In Pakistan, a low, and declining, Tax‐to‐GDP ratio, and rising public debt stock has imposed a hard constraint on the size of fiscal stimulus. Because of the low tax revenue collection and more repayment of foreign loans expenditure , country can't control its fiscal deficit. The FBR revenue target for fiscal year 2010 was set at Rs 1380billion. Among the four federal taxes the highest growth of 16% in the case of sales tax receipts. The purpose to over come the shortening is to increase the tax to GDP ratio to above 14% of GDP by 2013/14 The MTBF will help ensure macroeconomic and fiscal stability and will enable the government to align its use of available resources more effectively.

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