IV.

Public Finance and Fiscal Policy

Introduction
In FY00, the combined fiscal efforts of the federal and provincial governments resulted in an
increase of 14.6 percent in revenue receipts, exceeding nominal G! gro"th rate of #.$
percent. %o"ever, this buo&ant appearance of fiscal efforts should be vie"ed "ith the
composition of revenue collection in mind' the rate of increase in tax collection "as less than
half of G! gro"th, "hile non(tax revenues increased substantiall& b& 6#.) percent, adding
more to total revenue collection than tax revenues. *his slo"er gro"th of tax receipts
lo"ered the tax+G! ratio to 1).# percent, from 1,.4 percent in FY$$.
-dding a dampener to increased revenue collection, gro"th in combined expenditures of the
federal and provincial governments also exceeded G! gro"th' increase in total expenditure
"as 40.. percent higher than the si/e of additional revenue receipts in FY00. *his resulted in
an expansion of the overall fiscal deficit, from 6.1 percent of G! in FY$$ to 6.. percent in
FY00.
The Consolidated FY00 Budget
*he consolidated federal and provincial budget for FY00 estimated total revenues and
expenditures at 0s .10.$ billion and 0s 6#,.1 billion. *he overall deficit of 0s 11).# billion
"as to be financed from net borro"ings of 0s .$., billion from external sources, 0s 61.1
billion from non(ban2 sources, along "ith a 0s 1,.1 billion retirement to the ban2ing s&stem.
*he provisional actual estimates for FY00 indicate a shortfall of 0s ,4.1 billion in revenue
receipts, along "ith excess expenditures of 0s .$.$ billion over budget targets. *he shortfall
in total revenue receipts "as primaril& the result of lo"er federal government revenues' on
the other hand, provincial governments revenue "as higher than envisaged in the FY00
budget. 3imilarl&, the increase in consolidated expenditure "as due to higher federal
spending, "hile there "as a marginal increase in provincial governments4 expenditure.
ue to this shortfall in revenues and excess expenditures, the overall deficit "idened to 0s
)06.# billion from the envisaged target of 0s 11).# billion. *o finance this "idened deficit,
financing exceeded budget targets resulting in net borro"ing of 0s 1,.6 billion from external
sources,
1
0s $,.) billion from non(ban2 sources and 0s 40.0 billion from the ban2ing sector.
*he additional revenue of 0s 6#.) billion in FY00 "as clearl& not enough to meet the 0s $..6
1
*hese include pro5ect aid, commodit& aid, food aid, other aid, 3audi oil facilit& and debt rescheduling.
4$
billion increase in current expenditure, resulting in an expansion of the revenue deficit to 0s
106.1 billion in FY00, from 0s 1#.1 billion the previous &ear.
In FY00, the rate of increase in current expenditures "as nearl& double that of G!,
indicating the inabilit& of federal and provincial governments to contain current expenditures
"ithin budget targets. 6ver the &ears, efforts to contain these expenditures have resulted in a
containment of development spending' the largest components of current expenditures 7debt
servicing, defence, and general administration8 tend to be stubborn. *he resulting increase in
budget deficits have led to a significant accumulation of total debt entailing a high and
increasing volume of debt servicing. -t the end of FY00, debt servicing alone "as larger
than the conventional budget deficit and has been gro"ing faster than G! since FY$6. *he
budget continued sho"ing a primar& surplus for the )
nd
consecutive &ear in FY00 indicating
that the deficit is largel& driven b& interest pa&ments
)
7see Figure IV.1 and IV.28. -
summar& of public finances is sho"n in Table IV.1.
In theor&, if a countr& borro"s onl& to finance development expenditures, a budget deficit is
not a severe problem. %o"ever, if it is borro"ing for current expenditures, this becomes a
burden on the econom&, as the additional debt does not increase repa&ment capacit&. In
!a2istan4s case, there has been a revenue deficit since FY#., indicating that borro"ings
finance both development and current expenditures.
)
9& definition, the primar& deficit excludes interest pa&ments from the conventional measure of the fiscal deficit.
6r more simpl&, this is expenditure ( revenue : interest pa&ments.
.0
Figure IV.1: Trends of eficits and Interest Pay!ents
-100
-50
0
50
100
150
200
250
F
Y
#
1
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#
)
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Y
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,
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4
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6
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$
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0
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1
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,
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4
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6
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$
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0
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0
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b
i
l
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i
o
n
8
;onventional eficit Interest !a&ments !rimar& eficit
Table IV.1: "u!!ary of Public Finance
;onsolidated Federal and !rovincial Governments
70s billion8
#eads FY$$
FY00 FY01
Target
B
Pro%. &ctual Target
B
&. 'e%enue 'ecei(ts )a*b+ ,-..- /00.$ /1-.. -0..-
a8 *ax 0evenue ,$0.1 44,.4 40..# 4$1.#
b8 <on(*ax 0eceipts 11.$ 1)1.6 1,1.0 110.#
B. Total 23(enditure )a*b*c+ -,0.. -.1.0 0,1.- 000.0
a8 ;urrent .41., .11.1 64).$ 6.#..
ebt 3ervicing ))0.1 )1,.. )6..1 )4$.1
efense 14,.. 14).0 1.0.4 1,,..
6thers 1#,.1 ))).1 ))6.# )1..$
b8 evelopment $#., 116., $..6 1)0.4
c8 <et =ending to !3>s etc. ).) (10., ..1 (#.)
C. 'e%enue "ur(lus4eficit )&5B.a+ 50..0 5-.. 510-.1 5,$.$
. 6%erall eficit )&5B+ 510$.2 5112.. 520-.. 51-2.1
2. Financing Through: 10$.2 112.. 20-.. 1-2.1
a8 >xternal 0esources 7<et8? 141.0 .$., 1,.6 $0.$
b8 Internal 0esources 7I:ii8 ,).) .,.4 1,,.) 11.)
i8 omestic <on(9an2 101.4 61.1 $,.) 1,.4
Ii8 9an2ing 3&stem (1..) (1,.1 40.0 ().,
&s (ercent of 7P )!(+
&. 'e%enue 'ecei(ts )a*b+ 1-.1 1-.. 1-.$ 10.1
a8 *ax 0evenue 1,.4 1,.1 1).# 14.)
b8 <on(*ax 0eceipts ).1 ,.# 4.1 ,.)
B. Total 23(enditure )a*b*c+ 22.2 20.2 21., 22.0
a8 ;urrent 1#.# 11.0 )0.) 1#.#
ebt 3ervicing 1.6 6., #., 1.1
efense 4.$ 4.) 4.1 ,.#
6thers 6., 6.6 1.1 1.$
b8 evelopment ,.4 ,.4 ,.0 ,.4
c8 <et =ending to !3>s etc. 0.1 (0., 0.) (0.)
C. 'e%enue "ur(lus4eficit )&5B.a+ 52.0 50.2 51.1 51.,
. 6%erall eficit )&5B+ 5-.1 51.1 5-./ 5,.-
2. Financing Through: -.1 1.1 -./ ,.-
a8 >xternal 0esources 7<et8 ..0 1.# )., ).6
b8 Internal 0esources 7i:ii8 1.1 1.6 4.) ).0
i8 omestic <on(9an2 ,.1 ).0 ).$ ).1
ii8 9an2ing 3&stem ().6 (0.4 1., (0.1
9@ 9udget
?Aost recent estimate from Finance ivision 7A6F8. *his "ill not tall& "ith the Economic Survey.
.1
>ven "ithin current expenditures, the persistent increase in debt servicing since the earl&
1$#0s is cause for concern. -s sho"n in Figure IV.28 since FY$. debt servicing eclipsed
development spending and the gap bet"een the t"o continues to rise.
,
Bith the IFI
sponsored focus on fiscal austerit& and the contractual nature of debt servicing, both
development and defence spending has been curtailed since FY$,.
The FY00 Federal Budget
'e%enues
-gainst a budget target of 0s .60.$ billion for gross revenue receipts, revised collection
stood at 0s .1$.4 billion indicating an actual shortfall of 0s 41.. billion. *"o(thirds of
this shortfall "as on account of surcharges, one(fourth due to non(tax revenues, and one(
tenth due to total taxes.
3urcharge collections not onl& fell short of target, but also sho"ed an absolute decline
over last &ear. %ad surcharges not declined b& 0s 41.1 billion, gross revenue collection
"ould have exceeded its target.
<evertheless, gross revenue collection increased b& 11.$ percent in FY00, exceeding the
nominal G! gro"th rate. *his improved performance over the previous &ear "as
largel& on account of a combined increase of 0s $6.1 billion in tax and non(tax revenues.
,
*he impetus for this rise in debt servicing can be traced to FY$1, "hen government borro"ing form the ban2ing
s&stem "as mandated at mar2et rates.
.)
Figure IV.2: Pattern of 9ey 23(enditure #eads
0.0
).0
4.0
6.0
#.0
10.0
F
Y
#
1
F
Y
#
)
F
Y
#
,
F
Y
#
4
F
Y
#
.
F
Y
#
6
F
Y
#
1
F
Y
#
#
F
Y
#
$
F
Y
$
0
F
Y
$
1
F
Y
$
)
F
Y
$
,
F
Y
$
4
F
Y
$
.
F
Y
$
6
F
Y
$
1
F
Y
$
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F
Y
$
$
F
Y
0
0
7
-
s

p
e
r
c
e
n
t

o
f

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!
8
ebt 3ervicing efence ev. >xp.
<on(tax receipts "ere higher on account of increased earnings from public propert& C
enterprises and civil administration, "hile tax receipts "ere higher due to an extension of
G3* to electricit&, gas and petroleum products.
*he *ax -mnest& 3cheme also contributed to higher collection of tax revenue b& more
than $.0 billion. *his has been included in item II.i 7a8 in Table IV.2.
-gainst a target of 0s 1,#.0 billion, transfers to provinces "ere 0s 4., billion higher,
resulting in net revenue receipts of 0s ,11.1 billion for the federal government 7see Table
IV.28.
Table IV.2: Federal 7o%ern!ent 'e%enue 'ecei(ts
70s billion8
#2&"
FY$$ FY00 FY01
'ecei(ts
&
Target
B
'ecei(ts
'
23cess4"hortfall
fro!
Target
B
23cess
o%er
:ast
Year
Target :ast Year
&. 'e%enue 'ecei(ts )II*III*IV+ ,-,., /-0.$ /1$., 5,1./ //.0 /$,.- 0/.2
I. *otal *axes and 3urcharges ,#6.# 41$., ,##., (,1.0 1.4 41,.1 #..4
II. *otal *axes ,0#.. ,.6.0 ,.1.6 (4.4 4,.1 4,..1 #4.1
i8 irect *axes 110.) 1)1.0 10$.# (11.) (0.4 1,1.. )1.1
a8 *axes on Income 10,.) 11$.0 10).4 (16.6 (0.# 1)4., )1.$
b8 Bealth *ax ,.. 4.6 4., (0., 0.# $.# ...
c8 Bor2ers Belfare *ax ).) 1.) ).6 1.4 0.4 ).$ 0.,
d8 ;apital Dalue *ax 1., )., 0.. (1.# (0.# 0.6 0.1
ii8 Indirect *axes 1$#., ))$.0 )41.# 1).# 4,.. )$#.) .6.4
a8 ;ustoms 6.., 6... 64.# (0.1 (0.. 1,.0 #.)
b8 ;entral >xcise 60.$ 61.0 .1.0 (10.0 (,.$ .).6 (4.4
c8 3ales *ax 1).1 $6.. 1)0.0 ),.. 41.$ 11).6 .).6
III. 3urcharges 1#., 6,., ,6.1 ()6.6 (41.1 ,#.0 1.,)
a8 !etroleum 66.4 .#.1 )6.. (,1.6 (,$.$ ),.0 (,..
b8 <atural Gas 11.$ ..) 10.) ..0 (1.# 1..0 4.#
ID. <on(*ax 0evenue 11.. 141.1 1,1.1 (10.6 .,.6 1)0.$ (10.)
a8 !ropert& and >nterprises .0.1 1..1 14., (0.$ )4.) 11.1 (,.)
b8 ;ivil -dministration 11.1 ,#.# ,,.# (..0 )).6 )1.6 (6.)
c8 Aiscellaneous 16., )1.# ),.1 (4.1 6.# )).) (0.$
B. Less Transfers to Pro%inces 121.$ 11..0 1,2.1 ,.1 20., 1.2./ ,0.2
'e%enue 'ecei(ts );et+
1,2./ ,22.$ 100.1 5,/.. 1,.- ,12.1 1/.0
- E -ctual, 9 E 9udget, 0 E 0evised 3ource@ -nnual 9udget 3tatement of the Federal Government
.,
Taxes and Surcharges
- tax target of 0s ,.6.0 billion "as set in the FY00 9udget, "hile revised collection stood at
0s ,.1.6 billion, indicating a minor shortfall of 0s 4.4 billion, "hich "as much smaller
compared to the shortfall in the previous &ear. - compositional brea2(up into direct and
indirect taxes sho"s that the 0s 1).# billion excess under indirect taxes 7against a budget
target of 0s ))$.0 billion8, "as not enough to meet the 0s 11.) billion shortfall in direct
taxes.
Income taxes have lost buo&anc& since FY$#, largel& on account of slo"er gro"th in
"ithholding taxes' lo"er interest rates on treasur& bills and a shift of government borro"ing
to"ards 39! financing 7returns on *(bills held b& the central ban2 is not taxed8 has led to a
sharp reduction in tax revenues from government securities. <evertheless, this fall in tax
revenues "as compensated b& larger non(tax receipts to the federal government on account of
higher transfers of 39! profits in FY00. 0eliance on commercial ban2 borro"ing "ould
have resulted in higher interest accruing to these institutions and thus a higher "ithholding
tax collection.
iscretionar& measures adopted in FY00 to boost economic activit&, included the exemption
of "ithholding tax on industrial and commercial gas consumers, ban2 drafts, and other
transfer instruments under the %ome 0emittances 3cheme, and "ithdra"al of capital value
tax on locall& manufactured 5eeps. *hese measures also led to a suppression of revenue
collection of direct taxes.
0evised revenue receipts from indirect taxes "ere estimated at 0s )41.# billion compared
"ith a budget target of 0s ))$.0 billion. -mongst the components of indirect taxes, there "as
a sharp upsurge of 0s ),.. billion in sales tax revenues over the budget target. *his increase
"as driven b& the extension of G3* to electricit&, gas, petroleum products, a five percent rate
increase on manufactured plastic goods etc, and the partial replacement of ;> and
surcharges "ith G3*. -lthough, total collection benefited from higher sales revenues, this
reflects a change in the incidence of the tax than an overall increase in revenues.
6n the other hand, against a budget target of 0s 6..6 billion, the revised custom revenues
stood at 0s 64.# billion in FY00. *he reasons for this are given belo"@
Falling non(oil imports in FY00, together "ith the relative stabilit& of the 0upee seemed
to have contributed to this shortfall, and
*he steps ta2en to boost the industrial sector in FY00 included a reduction in the custom
dut& rate from 10 to . percent on vin&l chloride monomer, "aiver of 1(percent custom
dut& on edible oil, permission of dut&(free release of ra" material from bonded
"arehouses, etc.
0eceipts from ;> also lagged behind the budget target and sho"ed a negative gro"th over
the previous &ear. *his is the outcome of the partial replacement of ;> "ith sales tax and
the reduction in rates on various items' in the previous fiscal &ear, the government replaced
;> "ith sales tax on gas, sugar, plastic goods, hotels, etc. Aoreover, the reduction in the
.4
;> rate from 1. to . percent on pol&ester chips, from 10 to . percent on pol&ester filament
&arn, and the removal of ;> on the import of sac2 craft paper and locall& manufactured
paper sac2, also depressed revenues.
0evised receipts from surcharges
4
stood at 0s ,6.1 billion, representing a shortfall of 0s )6.6
billion over the budget target of 0s 6,., billion and 0s 41.1 billion over last &ear4s collection.
*his "as primaril& on account of the decrease in oil development surcharge 7638 due to
rising international prices that "ere not passed on to consumers. 6n the other hand, natural
gas surcharges increased b& 0s ..0 billion after consumer prices "ere increased on 16
th

-ugust 1$$$. In effect, the massive decline in surcharges during FY00 "as not onl& the
result of an increase in international oil prices but also on account of s"itching receipts from
63 to G3*.
Non-Tax Revenue
*he federal budget for FY00 envisaged a target of 0s 141.1 billion for non(tax revenues,
"hile revised receipts stood at 0s 1,1.1 billion representing a shortfall of 0s 10.6 billion.
.

<on(tax receipts, ho"ever, sho"ed an impressive increase of 6$.1 percent over FY$$. *he
additional revenue generated in FY00 stood at 0s .,.6 billion, in "hich receipts from
propert& and enterprises contributed 0s )4.) billion, follo"ed b& civil administration 7at 0s
)).6 billion8 and miscellaneous receipts 7at 0s 6.# billion8.
0eceipts from propert& and enterprises, "ith a share of .6.1 percent in non(tax receipts,
comprise interest and dividend income earned b& the federal government on loans extended
to provinces and various institutions, and shares held in various public sector enterprises.
0eceipts from civil administration comprise fees, fines, rents, service charges earned b&
various organs of state, and transfer of 39! profit to the federal government. Finall&,
miscellaneous receipts are made up of oil and gas ro&alties, sale proceeds, "or2ers
participation fund, passport fee, airport tax, foreign travel tax, etc 7see Table IV.18.
23(enditure
*otal expenditure on the revenue and capital accounts amounted to 0s 1,6.$ billion in the
revised estimates for FY00, "hich "ere 0s ,1.4 billion and 0s .0.$ billion higher than the
budget estimates and actual expenditures in FY$$, respectivel&. %igher debt servicing, and
expenditures on grants to provinces and subsidies, drove this increase in government
expenditures. ;ompared to budget targets, current expenditure increased b& 1.. percent on
the revenue
4
3urcharges on petroleum products and natural gas represent the difference bet"een cost of production and the
retail price, or the differential bet"een the average import price and the prescribed sale price of petroleum
products.
.
*he shortfall in non(tax revenue "as the outcome of lo"er profit transfers from 39! 7than budgeted8 and
reclassification of F(16 refund receipts, "hich "ere earlier classified under FAiscellaneous 0eceiptsG, but are no"
reflected as external financing in the revised budget FY00.
..
account and )1.$ percent on the capital account. 6n the other hand, development expenditure
decreased b& )$.1 percent on the revenue account and 1,.) percent on the capital account.
*hus, the combined current expenditures on revenue and capital accounts at 0s 6)#., billion
"as 0s .,.) billion higher than FY00 budget estimates, and 0s .,.6 billion higher than the
actual in FY$$. 3imilarl&, combined development expenditures on the revenue and capital
accounts "ere 0s 10#.6 billion lo"er than the budget estimates, and 0s ).# billion lower than
development expenditure in FY$$ 7see Table IV.,8.
Table IV.,: Federal 7o%ern!ent 23(enditure
Table IV.1: Federal 7o%ern!ent ;on5Ta3 'ecei(ts
70s million8
#eads
FY$$ FY00 FY00 FY01
'ecei(ts
'
Target
B
'ecei(ts
'
Target
B
&. Pro(erty and 2nter(rises )I*II*III+
/18$,0.0 0/81,1.0 0,820-.- 018110.2
I. Interest Inco!e )i*ii+
,282/1.0 -08/,,.0 -18-01.. /-8$1/.0
i+ Pro%inces
2/8,-/.$ 208/1-., 2.82-$.$ 2.8$.-..
!un5ab
1),),..# 1),61#.6 1),60$.1 1,,,14.0
3indh
6,)$1.4 1,.,0.1 1,$61.1 1,461.4
<BF!
4,.64.# 4,#16.# .,)0$.# .,.1..,
9alochistan
),,6#.0 ),4,1.0 ),4#).# ),6,6.)
ii+ Institutions
1-80./.. 11802..1 118,02.0 208$,..2
II. i%idend Inco!e
1180--.. 1,8/$..1 1280.1.0 1,8,/0.,
!*;=
#,104., $,400.0 #,$$4.) 10,000.0
6G;
),000.0 ),000.0 ),000.0 ),.00.0
!-0=
440.6 6.0.0 466.6 .00.0
!36
,$$.) 4.0.0 400.0 400.0
<I;
,00.0 ,00.0 ,)0.0 ,.0.0
6thers 0eceipts
.)).1 1,1$#., 601.0 100.4
III. 'ail<ays = Post 6ffices
)01./+ )0.1+ )100.0+ )20/.2+
B. Ci%il &d!inistration
108.,..$ 1.80/1.0 1180/$./ 208/.$.1
*ransfer from 39!
#,000.0 ,.,000.0 ,0,000.0 ),,000.0
6ther 0eceipts
),#4#.$ ,,1.1.0 ,,1.$.. 4,.#$.1
C. >iscellaneous
//8../.0 2080.2.$ 2180.,., 2281./..
0o&alt& on 6il and Gas
,,114.# 4,6#).) 1,$6..1 1,.,..)
3ale !roceeds of 6il and Gas
,,100., 4,010., 6,011.6 .,),0.1
Bor2ers !rofit !articipation Fund
1,400.0 1,#00.0 1,#00.0 1,$00.0
Foreign *ravel *ax
),000.0 ),)00.0 1,100.0 1,#00.0
!assport C ;op&right Fee
,,..#.1 ,,1,6.6 ),$,0.0 ),$#0.0
6ther 0eceipts? 41,.11.) 11,)$,.# ),611.1 ),1,$.$
Total 1208-.0.$ 1,18-0-.$ 1118120./ 1208../.1
0 E 0evised, 9 E 9udget. 3ource@ >xplanator& Aemorandum on Federal 0eceipts
? *he revised estimate of FY$$ includes the refund for F(16, the 3audi 6il facilit& and arrears
.6
70s billion8
#eads
FY$$ FY00 FY01
23(end5
iture
&
Target
B
23(end5
iture
'
23cess4"hortfall
fro!
Target
B
23cess
o%er
:ast
Year
Target
:ast
Year
&. 'e%enue 23(enditure )1*2+ /2$.0 //1.$ /./.1 11.2 /-.1 -0,.0 1..$
1. ;urrent >xpenditure .1..4 .)..$ .6..4 ,$.. .0.1 .11.6 1).1
a. ebt 3ervicing )$0.1 )#1.4 ,1,.1 )6.) ),.0 ,0..6 (#.0
i. Interest on omestic ebt 11.., 160.6 1#,.$ ),., #.6 11..4 (#..
ii. Interest on Foreign ebt ,#.0 4).4 .0.. #.1 1).6 ...0 4..
Iii. 0epa&ment of Foreign ebt 11.4 #4.4 1$.) (..) 1.# 1..) (4.0
b. efense 14,.. 14).0 14,.4 1.4 (0.1 1,,.. ($.$
c. General -dministration 1#.. )1.) 1$.. (1.1 1.0 4#.1 )#.6
d. Grants and 3ubventions 16., ,#.0 41.0 ,.0 )4.1 44.) ,.)
e. 3ocial 3ervices $.6 $.# 10., 0.6 0.1 11.# 1.4
f. =a" and 6rder #.1 #.6 $.1 0.. 1.0 10.1 1.0
g. ;ommunit& 3ervices ..1 6.1 6., 0.) 0.6 1.0 0.6
h. 3ubsidies $.. ).4 14.4 1).0 4.$ 11.# ().6
I. >conomic 3ervices ..0 ).6 ).6 0.0 ().4 ,.) 0.6
5. Hnallocable #.4 1.1 ..1 ().6 (,., )., ().#
). evelopment >xpenditure 1,.1 )#.0 1$.1 (#., 6.0 )6.4 6.#
B. Ca(ital isburse!ents )a*b+ 1/0.0 1/1./ 1/1.0 0.2 5/.2 $0.1 5-1.,
a. ;urrent >xpenditure .$., 4$.) 6).$ 1,.1 ,.. )0.4 (4)..
b. evelopment >xpenditure $1.1 10)., ##.$ (1,.. (#.# 10.0 (1#.$
Total 23(enditure
-.-.0 00/., 01-.$ 11., /0.$ -$,.1 5,2./
- E -ctual, 9 E 9udget, 0 E 0evised 3ource@ -nnual 9udget 3tatement of the Federal Government
- detailed appraisal of current expenditures reveals that expenditures on general
administration, economic services and unallocable items remained "ithin target, "hile all
other heads exceeded budget targets.
3ubsidies on different heads totaled 0s 14.4 billion in the revised budget of FY00, a 0s 1).0
billion increase over budget estimates. *his abrupt increase "as due to the follo"ing reasons@
- massive increase in pa&ments to B-!- to sustain a tariff reduction to accommodate
G3* pa&ments and do"n"ard ad5ustments in additional surcharges. *his "as due to the
partial pass through of international prices to domestic consumers.
3imilar pa&ments "ere also increased to I>3; for repa&ments of federal government
dues and the G3*, and
3ubsidies also increased on account of "heat imports in FY00.
In the revised budget estimates, debt servicing stood at 0s ,1,.1 billion "hich "as 0s )6.,
billion higher than budget estimates and 0s ),.0 billion over FY$$. Bithin debt servicing,
.1
interest pa&ments on domestic debt "ere 14.. percent higher than the budget target. *he
increase "as attributed to higher interest pa&ments on permanent and floating debt. In the
case of permanent debt, returns on 3pecial H3 ollar 9onds had a large impact, "hile interest
pa&ments on G6! borro"ing from 39!, factored into the increase in floating debt. *o ease
the burden of interest pa&ments, the government reduced rates on <33 instruments during
FY00, but the effect of these cuts "ill be reali/ed in subseJuent &ears 7except !ri/e 9onds8.
Interest on foreign debt "as revised to 0s .0.. billion, "hich "as an increase of 0s #.1
billion over budget estimates. !rincipal repa&ments on foreign debt stood at 0s 1$.) billion,
"hich is 0s ..) billion lo"er than budget estimates. -s can be seen, higher debt servicing is
a ma5or constraint on the government4s efforts to reduce the fiscal deficit. *his unsustainabl&
high level of debt servicing is a conseJuence of borro"ing at high rates of return.
0evised defense expenditure at 0s 14,.4 billion "as 0s 1.4 billion higher than budgeted.
ebt servicing 7including repa&ment of foreign debt8 and defense together accounted for 6).0
percent of total expenditure during FY00, compared "ith 6,., percent in FY$$. >xpenditure
on general administration totaled 0s 1$.. billion, a 0s 1.1 billion fall over budget estimates.
*he revised estimates for total federal expenditures stood at 0s 1,6.$ billion in FY00, and
"ere financed b&@
<et revenue receipts of 0s ,11.1 billion,
Internal capital and public account receipts of 0s 1).., billion,
>xternal capital receipts of 0s 1$1., billion,
9an2ing borro"ing of 0s )#., billion, and
0s 14.# billion from provincial surpluses 7see Table IV./8.

The Consolidated FY01 Budget
*he prime ob5ective of the governments is the reduction in budget deficit, "hich is expected
to decline b& 1.$ percent of G! in FY01. *o achieve this target, 0.4 is through higher
revenue and the remaining b& reducing total expenditures. *he follo"ing points indicate the
salient features of the consolidated budget for FY01@
*otal revenues of 0s 60#.6 billion, total expenditures of 0s 110.1 billion, and a resulting
budget deficit of 0s 16).1 billion 7or 4.6 percent of estimated G!8.
*ax revenue is targeted at 0s 4$1.# billion and non(tax receipts at 0s 110.# billion. *he
tax revenue target is 0s $).0 billion higher, "hile non(tax receipts are 0s )0.) billion
lo"er than provisional actuals for FY00. Gro"th in nominal G! is pro5ected at 10.,
percent and tax revenue b& )).1 percent in FY01, "hich implies that buo&anc& estimate
is ).) against 0.44 in last &ear. *his reflects the intent to capture more pa&ers in the tax
net and imposition of G3* on additional sectors of the econom&.
Table IV./: Financing of the Federal 7o%ern!ent 23(enditures
70s billion8
.#
#eads
FY$$ FY00 FY01
Finan5
cing
&
Target
B
Finan5
cing
'
23cess4"hortfall
fro!
Target
B
23cess
o%er :ast
Year
Target :ast Year
1. 0evenue 0eceipts 7<et8 ,4).. 4)).$ ,11.1 (4..# ,4.6 41).1 ,..0
2. Internal 0esources 11).. $,.# 1).., ,1.6 (41.) $#.$ ()6..
a. ;apital 0eceipts 41.) )$.6 ,0.$ 1., (10., 4).. 11.1
b. !ublic -ccount@ 1,1.4 64.) $4.. ,0., (,6.$ .6., (,#.)
3. >xternal 0esources ),6.# )0).4 1$1., (11.1 (4... 1#..6 (..1
a. !lan 0esources 1)1.0 11#.0 104.1 (1,.$ (),.0 146.6 4)..
b. ebt 0escheduling $,.4 61.0 1,.0 6.0 ()0.4 ,1.$ (41.0
c. <on(!lan 0esources 16.4 11.4 14., (,.1 ().1 1.1 (1.)
4. *otal 0eceipts 1.1.$ 11$.1 6$,.# ().., (.#.1 6$6.6 ).#
.. ;redit From 9an2ing 3&stem (1,.# (1,.1 )#., 4).0 10).1 ().) (,0.6
6. !rovincial 3urplus 7:8+eficit 7(8 1.$ 0.0 14.# 14.# 6.# 0.0 (14.#
0. Total 'esources -.-.0 00/., 01-.$ 11., /0.$ -$,.1 5,2./
- E -ctual, 9 E 9udget, 0 E 0evised 3ource@ -nnual 9udget 3tatement of the Federal Government
;urrent expenditures are pro5ected at 0s 6.#.. billion, compared to 0s 64).$ billion
reali/ed in FY00.
-s sho"n in Table IV.-, defense expenditures are sho"ing a do"n"ard trend since the
earl& 1$$0s. >ven ad5usting for the change in treatment of militar& pensions, defense
spending is pro5ected at 4.. percent of G! in FY01. -s a fraction of current
expenditures, the 1.(percentage point fall during the 1$$0s is a reflection of both the
gro"ing pressure to contain public expenditures and also the continuous increase in debt
servicing.
*he federal and provincial governments sho"ed their commitments to maintain their
plans that envisage a reasonable increase in development expenditures. evelopment
expenditure at 0s 1)0.4 billion, is )6.0 percent higher than the provisional actual for
FY00.
espite larger fiscal deficits in FY$# and FY$$ than had been reported, the role of
interest pa&ments is clearl& sho"n in Table IV.0. *his refers to the fact that interest
pa&ments had alread& reached 1.6 percent of G! in FY$#, "hich forced the primar&
balance to near /ero. *he follo"ing t"o &ears, the fiscal deficit "as brought do"n b&
running primar& surpluses. *his austerit& "ill continue into FY01.
.$
Table IV.-: Trends in efense 23(enditure
70s billion8
#eads FY$0 FY$/ FY$$
FY00
A
FY01
B
FY01?
efense .#.1 104.. 14,.. 1.0.4 1,,.. 1.$.6
&s @ of 7P 6.$ ..6 4.$ 4.1 ,.# 4..
&s @ of Current 23(enditure ,... ,0.) )6.) ),.4 )0., )4.)
&s @ of Total 'e%enue ,1.0 ,).$ ,0.6 )#.0 )1.$ )6.)
3ource@ 3ummar& of !ublic Finance 7Finance ivision, A6F8.
-E !rov. -ctual, 9E 9udget
? *he extra column includes militar& pensions of 0s )6.1 billion, "hich have been reclassified and transferred to General
-dministration.
*hese points clearl& sho" that fiscal
austerit& is 2e& in FY01, paving the
"a& to"ards a povert& reduction
and gro"th facilit& 7!0GF8 on the
basis of higher development
spending in FY01. In terms of
specifics, interest pa&ments have
been estimated at 0s )4$.1 billion, a
6., percent decrease over the
provisional actual estimates of 0s
)6..1 billion in FY00. *he estimated budget deficit of 0s 16).1 billion is expected to be
financed from external 7net8 borro"ing of 0s $0.$ billion and domestic financing of 0s 11.)
billion. Bithin domestic sources, non(ban2 borro"ing is estimated at 0s 1,.4 billion, and a
0s )., billion retirement is planned to the ban2ing sector.
The Federal Budget FY01
Revenue
Gross revenue receipts are pro5ected at 0s .$4.6 billion@ an increase of 14.. percent over the
revised FY00 budget. *otal expenditures, on the other hand, are pro5ected at 0s 6$4.,
billions, "hich is ..# percent lo"er than the revised budget estimate of FY00. *his signals
the government4s resolve to reduce the revenue(expenditure gap through a simultaneous
increase in revenue, and reduction in total expenditure.
<et revenue receipts have been estimated at 0s 41).1 billion, a $., percent increase over the
revised estimates of FY00.
*ax revenues are pro5ected at 0s 4,..1 billion indicating a ),.$ percent increase over the
revised estimates of FY00. -n improvement in both direct and indirect taxes is envisaged,
"ith the former expected to rise b& )..) percent and the latter b& ),., percent. Bithin direct
Table IV. 0: 2%olution of Fiscal eficit
7as K of G!8
#eads FY$. FY$$ FY00 FY01
6%erall eficit (1.1 (6.1 (6.. (4.6
Pri!ary Balance (0.1 1.4 1.$ )..
Current eficit (,.# ().1 (,., (1.4
3ource@ 3ummar& of !ublic Finance 7Finance ivision, A6F8 and
>conomic 3urve& 1$$$()000.
60
taxes, a )1.4 percent increase is expected under income taxes and 1)6.$ percent in "ealth
tax.
6
-lthough the targets appear to be optimistic, these ta2e into account the on(going *ax
3urve& and the ne" *ax -mnest& 3cheme. Hnder indirect taxes, customs revenue is
estimated to increase b& 1).1 percent and sales tax b& 4,.# percent, "hile revenue from ;>
is expected to decline b& 1.1 percent over the revised budget estimates of FY00.
- brea2(up of the budget estimates for indirect taxes, indicates sales tax as the prime source
of revenue. *his is based on three factors@
1. *he government is expecting the impact of the G3* extension 7in the energ& sector8 to
continue into FY01,
). G3* has been levied at the retail level from 1
st
Lul& )000, and
,. *he government is not onl& substituting ;> "ith sales tax, but also extending the scope
of sales tax.
-lthough the government is tr&ing to raise direct taxes, indirect taxes "ill remain the
mainsta& of fiscal efforts, as the share of direct taxes in total tax revenue is expected to
decline in FY01.
<on(tax revenues are pro5ected to decline b& 1.# percent in FY01, from 0s 1,1.1 billion in
FY00. In terms of a brea2do"n, civil administration receipts are pro5ected to decrease b&
1#., percent from the FY00 revised estimates, "hich is primaril& attributable to lo"er 39!
profits in FY01. *ransfers to provinces are estimated at 0s 1#).. billion against 0s 14).,
billion in the revised budget for FY00. 6ne possible explanation for this increase might be
the imposition of agriculture income tax b& provinces "ith effect from 1
st
Lul& )000, and the
lev& of sales tax on select services.
In conclusion, it should be stated that the thrust of the tax polic& is on "idening the tax base,
increasing eJuit& in the incidence of taxes and simplif&ing the tax procedures. *o"ards this
end, the government is reducing the number of federal taxes, and providing specific
concessions "ithin its tight fiscal position. *he concessions to industr& on fresh investments
specificall& to the Information *echnolog& 7I*8 sector are Juite generous, "hile the
abolishment of "ealth tax has also been "elcomed.
23(enditures
*he ratio of federal government expenditure to G! is pro5ected to decline from ),.) to 1$.#
percent in FY01. %o"ever, defense and debt servicing continue to dominate. *he reduction
of 0s $.$ billion in defense expenditures is due to the shift of militar& pensions 7of 0s )6.1
billion8 to general administration. If this is shifted bac2 to the defense budget to 2eep the
figure comparable "ith the previous &ear, defense spending actuall& rises b& 0s 16.) billion,
accounting for more than one third of net revenue receipts during FY00. *his explains the
146.6 percent increase in expenditures under general administration 7see Table IV.,8.
6
It is important to reali/e that "ealth tax is being collected during FY01. 3ubseJuentl&, this tax "ill not be levied.
61
*he ).6 percent decline in debt servicing "as driven b& domestic debt "hile external debt
servicing has risen b& #.$ percent over the previous &ear. *his decline in domestic debt
servicing is on account of the rate cuts on <33 instruments and a fall in *(bill rates during
FY00. *he higher interest pa&ment on external debt is mainl& the result of increased interest
pa&ment on rescheduled debt.
*he federal government has allocated 0s $6.4 billion for development expenditures compared
to 0s 10#.6 billion in revised budget estimates for FY00.
1
*he budget also indicates a
reduction in subsidies b& 1#.0 percent in FY01, from 0s 14.4 billion to 0s 11.# billion. It
should be noted that a portion of these subsidies is related to I>3; and B-!-.
-dditionall&, a ma5or amount of subsidies "as spent on imported "heat. *his &ear, "ith the
bumper crop at home, a negligible subsid& is envisaged in the FY01 budget.
7eneral "ales Ta3 )7"T+
Hsed in a number of countries, it is 2no"n as the Dalue -dded *ax 7D-*8. *his captures the
simple concept of value addition to assess the amount of tax at each stage of production. *ax
paid at the bu&ing stage 7Input *ax8 is deducted from the total tax 76utput *ax8 collected at
the selling stage. *he difference bet"een the t"o is the D-*, "hich is referred to as the
General 3ales *ax 7G3*8 in !a2istan. If the difference is positive, it is paid to the
government, and if negative, the refund is to be claimed from the government. %o"ever,
claims for refund reJuire proper accounting procedures and detailing of invoices' the s&stem
is based on documented record 2eeping. It is, therefore, also 2no"n as the invoice(based
consumption tax.
-s far as the sales tax procedures in !a2istan are concerned, traders are categorised into t"o
t&pes b& ;90. 0egistered *raders, "ho pa& G3* at the rate of 1. percent and claim input
tax, and >nrolled *raders "ho pa& ) percent turnover tax and cannot claim input tax relief.
>nrolled traders are being considered as un(registered up till ,0
th
Lune )000, after "hich the&
"ill be categori/ed as registered. *ransactions bet"een registered traders are sub5ect to 1.
percent sales tax, "hile transactions bet"een registered and non(registered 7or enrolled8
traders are sub5ect to an 1# percent G3* liabilit&. *he additional , percent is applied as a
penalt& for non(registration. *he government holds the vie" that all enrolled and registered
traders should pa& according to the different categories of business.
;onsumption taxes are paid b& consumers in the form of higher prices, it follo"s that the
agitating group should be consumers, not traders or producers. %o"ever, the real resistance
to G3* is spearheaded b& retail+"holesale traders because of the documentation it entails.
6nce G3* is comprehensivel& levied, the incomes of each business are cr&stallised, ma2ing
tax evasion difficult. -s mentioned above, G3* allo"s ad5ustment to taxpa&ers "ho pa&
taxes diligentl& at each stage of production and maintain proper records of their invoices.
1
*he apparent decline in federal development expenditure is deceptive, "hen seen in the context of the
consolidated budget that sho"ed an increase of )6.0 percent over FY00. *his point also suggests that the federal
government is substituting its development responsibilities "ith provincial governments.
6)
*hose "ho fail to clearl& document their income are unable to ad5ust their G3* liabilit&,
possibl& rendering their products uncompetitive and overpriced.
Ta3 &!nesty "che!e )T&"+ 2000
In FY00, the government announced a *ax -mnest& 3cheme 7*-38 for regulari/ing
undeclared income and assets b& pa&ing a 10 percent tax on it. -ccording to this scheme, an&
undisclosed+untaxed income and an& assets created out of such income, could be declared
"ith no penalt& greater than the fixed tax. Furthermore, the assets declared under the scheme
are not liable to "ealth tax both for preceding &ears and also for the next five &ears. *he
success of the scheme can be gauged b& the fact that on its expir& on ,0
th
Lune )000, assets
"orth 0s $0 billion had been declared, and 0s $ billion collected in taxes. *he scheme "as
also successful in easing the general public4s apprehensions of the on(going tax surve&.
In general, successive tax amnest& schemes have not been "elcomed, on the argument that it
gives businessmen and individuals the incentive to hold their assets "ithout documentation
and "ait for the next scheme. FreJuent extensions in deadlines ho"ever, do reduce the
government4s credibilit&. %o"ever, the idea behind this initiative is to reduce the public4s
anxiet& concerning the on(going *ax 3urve& and to provide an avenue for individuals to enter
the tax net. It is hoped that this drive gains enough momentum to dispel the vie" that another
amnest& scheme "ill follo".
The Ta3 "ur%ey
Bith a vie" to"ards la&ing the foundations of a full& documented econom& "ith a broad tax
base, the federal government launched a *ax 3urve& and 0egistration 3cheme on )1
th
Aa&
)000. *he surve& "or2 started simultaneousl& in 1, ma5or cities of the countr&. - simple
and comprehensive form has been designed to collect information from prospective
taxpa&ers. *he government has also offered special concessions to those "ho ta2e advantage
of the surve& through the *-3. -s stated traders "ent on stri2e against the surve&, and after a
period of general stri2es, the government and traders reached an agreement, along the
follo"ing lines@
>xisting assessees "ho have <*< numbers need not fill column 1, of the surve& form,
relating to declaration of stoc2s.
*here "ill be not be an& on(the(spot assessment of existing taxpa&ers for FY$$.
In case of non(<*< holders, on(the(spot assessments "ill be made.
6,