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Fiscal Policy

Meaning: The word fisc is a French word which means state treasury and fiscal policy refers to policy concerning the use of state treasury or the govt. finances to achieve the macroeconomic goals. It is prime duty of Government to make fiscal policy. By making this policy, Govt. collects money from his different resources and utilizes it in different expenditure. Thus fiscal policy is related to development policy. All welfare projects are completed under this policy. Definition: According to Samuelson, Fiscal Policy is concerned with all those arrangements which are adopted by the Government to collect the revenue and make the expenditures so that economic stability could be attained/maintained without inflation and deflation Or We can define fiscal policy as the revenue and expenditure policy of Govt. Government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Types of Fiscal Policy 1. Expansionary: An increase in government purchases of goods and services, a decrease in net taxes, or some combination of two for the purpose of increasing aggregate demand and expanding real output 2. Contractionary: A decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two for the purpose of decreasing aggregate demand and thus controlling inflation.

Objectives of Fiscal Policy: There are following objectives of fiscal policy: 1. Development of Country: For development of Country, every country has to make fiscal policy. With this policy, all work is being done by govt planning and proper use of fund for development functions. If govt. does not make fiscal policy, then it may happen that revenue may be misused without targeted expenditure of govt. 2. Employment: Getting the full employment is also objective of fiscal policy. Govt. can take many actions for increase employment. Government can fix certain amount which can be utilized for creation of new employment for unemployed peoples. 3. Inequality: In developing country like Pakistan, we can see the difference one basis of earning. 10% of people are earning more than Rs.100000 per day and other are earning less than Rs.100 per day. By making a good fiscal policy, govt. can reduce this difference. If govt makes it as his target. 4. Fixation of Govt Responsibility: It is the duty of Govt to make effective use of resources and to make efficient and effective fiscal policy and minister's accountability should be checked.

Techniques of Fiscal Policy:


1. Taxation Policy: Taxation policy is relating to new amendments in direct tax and indirect tax. Govt. of Pakistan passes finance bill every year. In this policy govt. determines the rate of taxes. Govt. can increase or decrease these tax rates and amend previous rules of taxation .Govt.'s earning's main source is taxation. But more tax on public will adverse effect on the development of economy.

If Govt. will increase taxes, more burden will be on the public and it will reduce production and purchasing power of public. If Govt. will decrease taxes, then public's purchasing power will increase and it will increase the inflation. Govt. analyzes both the situation and will make his taxation policy more progressive. 2. Govt. Expenditure Policy: There are large number of public expenditure like opening of govt schools , colleges and universities , making of bridges , roads and new railway tracks . In all above projects govt has paid large amount for purchasing and paying wages and salaries all these expenditure are paid after making govt. expenditure policy. Govt. can increase or decrease the amount of public expenditure by changing govt. budget. So, govt. expenditure is technique of fiscal policy by using this, govt. use his fund first on very necessary sector and other will be done after this. 3. Deficit Financing Policy: If Govt.'s expenditures are more than his revenue, then govt. should have to collect this amount. This amount is deficit and it can be fulfilled by issuing new currency by central bank of country. But, it will reduce the purchasing power of currency. More new currency will increase inflation and after inflation value of currency will decrease. So, deficit financing is very serious issue in the front of govt. Govt. should use it, if there is no other source of govt. earning. 4. Public Debt Policy: If Govt. thinks that deficit financing is not sufficient for fulfilling the public expenditure or if govt. does not use deficit financing, then govt. can take loan from World Bank, or take loan from public by issuing govt. securities and bonds. But it will also increase the cost of debt in the form of interest which govt. has to pay on the amount of loan. So, govt. has to

make solid budget for this and after this amount is fixed which is taken as debt. This policy can also use as the technique of fiscal policy for increase the treasure of govt.

Fiscal Policy in Pakistan


Government Receipts:
The Government receipts consist of the following four sources: 1. Revenue Receipts (Net of Provincial Shares): In Pakistan, the heavy dependence is upon revenue receipts; about 65-70% of the revenue is estimated to be drawn from revenue receipts. It includes tax revenue, non-tax revenue, and surcharges. (a) Tax Revenue: In taxes we have direct taxes such as income tax, and wealth tax. Indirect taxes such as central excise, sales tax, and custom duty. Direct tax comprises about 70% of Pakistans total tax revenue. (b) Non-Tax Revenue: It includes income from government property and enterprises and receipts from Civil Administration and other functions. (c) Surcharges: Surcharges on natural gas and petroleum fall under this category. 2. Capital Receipts: Capital receipts include external borrowing and internal non-bank borrowings consisting of unfunded debt, public debt, treasury and deposit receipts besides the revenue account surplus and the surplus generated by public sector, etc. 3. External Resources: External resources are loans and grants which come from various sources. These sources include consortium, non-consortium and Islamic sources of aid: (a) Consortium: Consortium provides aid at both bilateral and multilateral levels: (i) Sources of consortium bilateral aid are Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Norway, Sweden, United Kingdom and United States. (ii) Consortium multilateral aid comes from Asian Development Bank (ADB), International Bank for Reconstruction and Development (IBRD), Int. Development

Association (IDA), Int. Finance Corporation (IFC), and Int. Fund for Agricultural Development (IFAD). (b) Non-Consortium: Non-consortium sources of loans and grants mostly provide bilateral aid. These include Australia, China, Czech Republic, Denmark, Finland, Rumania, Switzerland, Russia and Yugoslavia. (c) Islamic Aid: Bilateral aid from Islamic countries come from Saudi Arabia, Kuwait, Qatar, United Arab Emirates, Turkey, Lebanon, Libya and Iran. While multilateral Islamic sources of aid are OPEC Fund, and IDB. Loans and grants received by Pakistan can be classified into project and non-project aid. Non-project aid can be further decomposed into food, non-food, BOP and Relief aid. 4. Self-Financing by Autonomous Bodies: This is actually the surplus left after meeting all the expenses of these bodies. This surplus is available to government for revenue and development expenditures.

Government Expenditure:
Government expenditure is classified into current expenditure and development expenditure: 1. Current Expenditure: It comprises mainly debt servicing, defence, general administration, social services, law and order, subsidies, community services, economic services, grants to Azad Jammu and Kashmir, Railway and others. 2. Development Expenditure: Public Sector Development Program (PSDP) is another name given to Governments development expenditure. The priority areas are transport and communication, power and water. These three sectors combined cover about 50% of total allocation of PSDP. The share of current expenditure is always remain substantial, it constituted around 70-80%

of total Government expenditure. Non-development expenditure is generally regarded as being excessive and therefore subjected to persistent public criticism. With sharp increase in population, constant threat from the enemies and increasing cost of corruption, nondevelopment expenditure is subjected to a rising trend which could only be controlled by rapid economic development. On the other hand, negligence of non-development expenditure may result into ill-equipped and under-staffed hospitals, dispensaries and educational institutes, and arrears in maintenance of roads, dams, bridges, electricity and forests. Non-development expenditure should be economically managed in order to ensure the economic development of Pakistan.

There are six major heads of current expenditure of Federal Government of Pakistan: 1. Defence, 2. Debt servicing, 3. Subsidies and grants, 4. General administrative, 5. Social services, and 6. Others.

Tax Structure of Pakistan:


1. The narrow base enigma has been a base in Pakistans tax structure from the beginning. 2. In 1987 when population of the country was more than a hundred million, the total number of taxpayer was just over a million. 3. The main base taxes imposed are direct and indirect taxes. 1. Direct tax of the Federal Government comprises of income tax, wealth tax and corporate tax 2. Indirect tax, on the other hand, consists of custom duty, excise duty, sales tax, import duty and all others.

4. Indirect tax contributes the predominant share to the total tax collection. Direct taxes have persistently dropped their share in total tax revenue. 5. Indirect tax, on the other hand, contributes more than 70% of the total tax revenue. Indirect tax is regressive. It may cause the inflation to rise and its incidence is fall on poor class of the economy.

Deficit Financing in Pakistan:


Following are the sources of deficit financing in Pakistan: 1. Printing new currency notes 2. Public borrowings 3. Foreign loans, aid and grants 4. Using previous balances, and 5. Borrowings from banks including from the central bank. Dr. Mahboobul Haq defines deficit financing in the following words: (i) Net borrowings by the government from the banking system which includes the State Bank of Pakistan (SBP) and commercial banks but excludes non-banking institutions and individuals, and (ii) Net borrowings by the Government from the SBP only. But the public debt does not only constitute the above sources, it also includes money lent to Government out of the balances of the banks which would have been held if the Government had not borrowed them. Deficit financing is a sound and necessary instrument of the Government finance and its role, its desirability and limitations of its use in mobilising revenue, must be properly analysed in the context of its broad implications on the economy and compared to the adequacy of other techniques of resource mobilisation. It was planned in Third Five-Year Plan that there will be no deficit financing during the said plan but the government had to revise the plan. In the Fourth Five-Year Plan there were annual plans and major upsets in the economy. In the Fifth and Sixth Five-Year Plans,

though there were very large amounts of foreign remittances but there was not remarkable reduction in deficit financing. A well-managed deficit financing could be a key to greater economic achievements especially for a less developed country. A wise finance minister has to keep an eye on all the factors of the economic development and spent the public fund in the manner that is most beneficial to the nation.