PowerPoint Presentation
Fiscal policy and Its Framework
Members: Abdullah Khalil083 Zain Arif 116 Waqar Shahid080 Ahsin Ali071 Adeel Ashraf056What is Fiscal Policy?Fiscal Policy is themeans by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to Monetary policy through which a central bankinfluences a nation's money supply.Comparison Fiscal PolicyMonetary PolicyDefinitionFiscal policy is the use of government expenditure and revenue collection to influence the economy.Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.PrincipleManipulating the level of aggregate demand in the economy to achieve economic objectives of price stability, full employment, and economic growth.Manipulating the supply of money to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.Policy-makerGovernment (e.g. U.S. Congress, Treasury Secretary)Central Bank (e.g. U.S. Federal Reserve or European Central Bank)Policy ToolsTaxes; amount of government spendingInterest rates; reserve requirements; currency peg; discount window; quantitative easing; open market operationsHow Fiscal Policy WorksFiscal policy is based on the theories of British economist John Maynard Keynes.
Keynesian Economics
Governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending.Balancing ActThe Idea is to find a balance between changing tax rates and public spending.
Let's say that an economy has slowed down. Unemployment levels are up, consumer spending is down and businesses are not making substantial profits.
Govt. Decides to fuel economys engine by decreasing taxation, which gives consumers more spending moneyWhen Economy needs to be curbed?
When inflation is too strong, the economy may need a slowdown.
Governmentcan use Fiscal policyto increase taxes to suck money out of the economy in such situations.
Fiscal policy could also dictate a decrease in government spending and thereby decrease the money in circulation. Fiscal Policy effects Unfortunately, the effects of any fiscal policy are not the same for everyone.
Depending on the political orientations and goals of the policymakers,a tax cutcould affect only the middle class
In times of economic decline and rising taxation, it is this same group that may have to pay more taxes than the wealthier upper classObjectives of Fiscal PolicyEnsure sound public finances and that government debt does not grow faster than its ability to repay it.Ensure that debt service costs decline as a share of expenditure, so that these resources can be reallocated to the delivery of public services. Improve domestic savings to support a higher level of investment and reduce the need to borrow from abroad.Ensure that excess consumption does not push up inflation or lead to deterioration of the trade deficit.Frame Work of Fiscal Policy
Principles of Tax PolicyValueAdded Tax: Reducing exemptions and eliminating reduced rates is generally the best way to increase VAT revenue, unless low efficiency is caused by weak administration.Improving the mediumterm fiscal position requires reshaping revenue administration.There are three priorities:developing sound riskbased compliance strategies strengthening legal frameworkspowers of revenue agencies and exploiting new information technology. Principles Of Expenditure PolicyExpenditure reviews help to guide the design of specific strategiesExpenditure reforms should be guided by two objectives:Improving the efficiency of spending Ensuring equityHistorical Perspective on Fiscal DevelopmentsReview of longterm fiscal performancePakistans fiscal performance during 19912010 provides a good perspective on how different variables in the fiscal equation moved and yielded results in between the 20 years.Pakistans fiscal performance The 20year period could be divided into 5 intervals of unequal durations. These are: 19911995 (improvement), 19961998 (stability), 199904 (improvement), 20052008 (poor) and 20092010 (consolidation).
ContinueThrough these 5 periods (except Period 4) there has been a decline in total fiscal revenues as percentage of GDP.It decreased from 15.6 percent during 1991 1995 to 14.3 percent during 20092010.Steady slide in taxtoGDP ratio (from 11.8 percent to 10.1 percent) has been the prime reason behind this declining trend over the 20 year period. During 19992004(lowest average fiscal deficit of the 5 periods)the reduction in deficit came about on account of lower fiscal expenditure and not higher revenues.ContinueWhile taxtoGDP ratio showed a steady decline during 19912010, nontax revenuestoGDP registered a modest increase during this period. However, the trend have been quite different in recent periods, because of large SBP profit transfers and hefty external receipts for military services that boosted nontax revenues.Total expenditure as percentage of GDP showed a relatively favorable trend over the past 20 years.It decreased from a high of 21.6 percent during 19911995 to a low of 18.1 percent during 19992004.ContinueDefense expenditure declined steadily from 5.3 percent in 19911995 to 2.6 percent in 20092010.Debt servicing which peaked at 5.8 percent during 19961998 hit a low of 4.1 percent during 20052008 before increasing to 4.8 percent in 200910.Spending on general administration showed a hefty increase from only 1.4 percent during 19911995 to 2.8 percent during 20092010.Development expenditure showed a noteworthy decline from a peak of 4.8 percent in 19911995 to 4.0 percent in 20092010
Recent Fiscal Policy Developments
Pakistans public finances are mainly dominated because of the stationary taxtoGDP ratio, while the steady government spending patterns have promoted the fiscal misbehaviors.
Continue200708 registered a negative growth in real terms (doubledigit inflation also contributed to this downfall). The economy was slowing and this fall was very well communicated through the fiscal account in the form of dismal revenue collection.Tax revenue also suffered but maintained a real growth of 1.6 percent in that year.But in next fiscal year in went negative by a large margin but more than budgeted collection on account of nontax revenues assisted in attaining a positive 2.6 percent inflationadjusted growth in total revenue in 200809.
Fiscal Performance 2009-10In 2009-10 the economy showed a slight recovery and recorded a modest GDP growth of 4.1 percent with inflation subsiding to 11.7 percent (as against 20.8 percent in FY 200809).So, tax revenue, although short of the target, recorded a healthy increase of 11.1 percent (after adjusting for inflation).However, nontax revenues were not enough to compensate for the shortfall and observed lesser FY 200809. Hence, the real growth in total revenues dropped to 2.0 percent.
Revenue
The government in the Federal Budget 200910 focused primarily on improving the tax culture in the country and announced a firm commitment to increase revenues.Total revenue for FY200910 summed to PRs. 2,078.2 billion, up by 12.3 percent over the fiscal year 2008 09. A shortfall of PRs. 77.2 billion was seen against the budgeted estimates.Tax revenue registered a growth of 22.3 percent, adding PRs. 1,472.8 billion to the revenue side in 200910ContinueHowever, this head diverged from the original budget by 5.8 percent and FBR was not able to meet the target of PRs. 1,380 billion and fell short by PRs. 52.6 billion.Nontax revenue exhibited noticeable performance mainly owing to SBP profits by attaining above budget inflows during the fiscal year 200910. PRs. 605.4 was collected which is lower by 6.3 percent against the 200809 receipts.However, this healthy growth of 2.3 percent over original projections lessened the impact of tax revenue shortfall to some extent.FBR Tax Collection and Refunds 2009-10
FBR revenue target for the fiscal year 200910 was fixed at PRs. 1,380 billion at the time of announcement of Federal Budget. To reach the target, 18.9 percent growth was required over the actual collection of around PRs. 1,161 billion during 200809.
Continue200910 was a difficult and challenging year for the government and FBR.Despite of economic slowdown FBR managed to collect a sum of around PRs. 1,327.4 billion which was PRs. 166.2 billion or 14.3 percent higher than the collection of previous year; although 22.4 percent higher refunds were paid back during 200910.And now the overall target has been achieved to the extent of 96.2 percent.Reasons of shortfallGeneral economic slowdown.Negative growth in the manufacturing sector.Energy crises.Negative growth in imports.GST on sugar.Reduction of GST rate.Referenceswww.Finance.gov.pk
www.Investopedia.com.pk
