An Analysis of Federal Budgetary Policy

By Ali, Muhammad Imtiaz | Economic Review, June 1995 | Go to article overview

An Analysis of Federal Budgetary Policy


Ali, Muhammad Imtiaz, Economic Review


Controversy is going on for decades on ideal budgetary policy in Pakistan. Various Taxation Commissions appointment by the then governments in Pakistan have been addressing themselves with this issue but failed to produce the desired results of ensuring economic growth by reducing the deficit financing, no new taxes, encouragement for industrial investment and personal savings, substantial lowering of tariff to boost up imports, and big increase in development outlay.

We have two types of budget in Pakistan viz (i) Revenue Budget and (ii) Annual Development Plan (ADP).

i) Revenue Budget: In revenue budget, an effort is made to match the current revenue against current expenditure and curtail the deficit. A good revenue budget leaves a surplus for Financing Development Plan but unfortunately we have very poor record of deficits which is almost constantly increasing since 1987-88 from 21 billion to 57 billion in 1994-95 which shows a negative contribution of the annual revenue budget to the financing aspects of ADP and failure on the part of the governments to mobilise enough resources through current revenue to meet current expenditure.

Revenue Budget Deficits

                                Billion
Year                            Rupees

1987-88                           21
1988-89                           22
1989-90                           27
1990-91                           26
1991-92                           32
1992-93                           40
1993-94                           63
1994-95                           57

An analysis of the Revenue budget 1994-95 reveals that financial needs of the federal government was significantly met by indirect taxes as in the past several years.

Direct Taxes in 1994-95:

                            Billion
Rupees

a) Income tax                 54
b) Wealth Tax                  2

                              56

Indirect Taxes 1994-95:

                            Billion
                            Rupees

a) Custom Duties              78
b) Federal Excise             40
c) Sales Tax 4                 0

                             158

The financing need of the Government may be classified as under:

1) Current Expenditures 1994-95:

                            Billion
                            Rupees

a) Debt Services             136
b) Defense                   102
c) Other Expenditure          57

                             295

ii) Development Expenditures:

a) Federal Government Development Projects.

b) Autonomous bodies under the Federal Government.

c) Allocation to provinces for their development projects.

d) Social action plan (SAP)

e) Special Development project.

Growth and Composition of Indirect Taxes

A study the indirect taxes over the last decade i.e. 1985-86 to 1994-95 reveals that there has been a growth from Rs. 50 billion to Rs. 158 billion. On a simple average, there has been an annual growth of 3.16% in the indirect taxes over the last ten years.

Indirect Taxes
(1985-86 to 1994-95):

                     Rupees
Year                 Billion

1985-86                   50
1986-87                   54
1987-88                   65
1988-89                   77
1989-90                   90
1990-91                   93
1991-92                  114
1992-93                  123
1993-94                  147
1994-95                  158

Federal Revenue
Budget 1994-95:

Particular       Rs. billion    (%)

Indirect Tax             158     48
Nontax Revenue            92     27
Direct Taxes              56     17
Surcharges                26      8

                         332    100

Indirect Taxes as Component
of the Federal Budget - 1994-95:

Custom Duties             78     50
Federal Excise            40     25
Sales Tax                 40     25

                         158    100

Composition of Indirect taxes from 199091 shows the following trends:

Custom Duties: Custom duties also called tax on international trade show declining trend in 1990-91 this constituted 55% of total indirect taxes as result of successive governments' policy to reduce tariff in the current scenario of free trade environment. …

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