Fiscal Policy of Pakistan 2000-2007

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Abstract Pakistan’s socio-political front has always been a cause of limelight, be it due to changing political scenarios or implementation, enactment or revival of new economic policies. This report is an overview of the fiscal policy of Pakistan from the years 2000 to 20007. It focuses fiscal policy trends in the past few years from policy changes such as introduction of new taxes, abolition of a few, change in the ratio of direct and indirect tax, the number of people falling under tax brackets, data documentation and the shift from a volatile budget deficit to an improvement in revenue collection, tax receipts, curtail expenditures and in short a movement towards a steady and more progressive economy. Introduction Fiscal policy primarily deals with the levels and composition of taxation, spending and borrowing by the Government. A sound fiscal policy is essential for preventing macroeconomic imbalances and realizing the full growth potential. In order to address the structural problems in the tax system and tax administration, the government has been introducing wide-ranging tax and tariff reforms, as well as reforms in tax administration. These reforms have already started yielding handsome dividends. During the last seven years, tax collection by the CBR has increased by 130. 0 percent – that is, more than doubled. Fiscal Policy For Year 2000 to 2001 FY01 witnessed the implementation of strong fiscal management along with structural reforms in almost all key sectors of the economy. The reforms were focused on documentation aimed at improving tax compliance. Other measures included a tax amnesty scheme, the extension of GST to services, fiscal transparency, measures to arrest the overrun of expenditures, and several other steps intended to promote fiscal discipline and correct macroeconomic imbalances. Despite weaker than expected economic growth on account of the drought, these measures helped the government realize a significant increase in tax revenue and contain expenditure growth. This jointly resulted in an impressive reduction of 1. 1 percent in the budget deficit to 5. 3 percent of GDP in FY01. Consolidated Fiscal Developments in FY01 The primary balance has remained in surplus for the last three years in a row, showing that the fiscal deficit is primarily driven by interest payments. Another measure of the fiscal position is the revenue deficit, which also shows signs of improvement in FY01; this was the outcome of exerted efforts to control government spending, which was sharply curtailed by 1. 7 percent of GDP over the last year. This was mainly on account of lower interest payments, reduction in other expenditures and a cut in the public sector development program of provincial governments. Moreover, higher tax collection also contributed to a reduction in the budget deficit. Despite lower than anticipated economic growth, consolidated tax revenues recorded healthy growth of 13. 8 percent over FY00, mainly on account of higher tax collection by CBR. However, this increase was eclipsed by lower non-tax revenues (consolidated), which slowed the overall growth in revenues to 4. percent in FY01, from 15. 6 percent last year.

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