FORMAN CHRISTIAN COLLEGE

(A Chartered University)

Department of Economics

Essay
What are the policy options available for Pakistan to increase its revenue and decrease its expenditures, so that government can decrease its budget deficit?

Submitted by:Course: Section: A Submitted To:

Muahmmad Mohsin ECON 305 proff. Wajeeh Usman

Essay
Topic:
What are the policy options available for Pakistan to increase its revenue and decrease its expenditures, so that government can decrease its budget deficit?
Introduction of Pakistan economy:Pakistan came in to being in 1947, and after its creation it is facing the difficult situation in every field. It is a fact that every problem has some mother problem. In case of Pakistan the mother problem of all other problems is its weak economy. Pakistan has an agricultural base economy but in last ten years (1999-2009) different industries have established and the economy has changed its trend toward services base economy. The major exports are depending on primary products. Pakistan exports mainly rice, furniture, cotton fiber, textiles, leather and fruits. While its major imports are petroleum, industrial machinery, automobiles, computer and computer parts, live saving drugs, tea, eatable oils, chemicals, agricultural machinery and defense weapons. The current GDP of Pakistan is about $661 billions .The share of agriculture in GDP is 20% and the role of service sector is about 53% and whole sale and trade sector play role of about 30%. The trade deficit is about $5.04 billions. The average economic growth rate is 6 to 8 present/year. Pakistan current foreign reserves are about $13 billions and foreign debts are about $50.1 billions. Pakistan also has to pay the interest on this huge debt in billions of dollars. In current days Pakistan is participating in war on terror and in this war Pakistans economy suffers a lot and till now (Dec 2009) Pakistan has lost $38 billions from its GDP. Ref( economic survey of Pakistan)

State bank of Pakistan:We can say that it is the back bone of Pakistans economy. State Bank of Pakistan is a central bank in Pakistan; it controls all economic and financial affairs in the country. State bank issue the currency and control the supply of money in the economy. It gives the economic policies and handles the national budget through its suggestions and recommendations to ministry of finance. In the end of the financial year it presents the economic report in the form of Economic Survey of Pakistan. Other then this it also controls the interest rate and other banks. All other banks working in Pakistan are licensed by it. It also deals with the foreign reserves in the country. It set the price of foreign currencies exchange rate. It was the little introduction about the economy of Pakistan, now comes to the real topic which is about the policy options available to Pakistan to increase revenue and decrease expenditures. For this we have to first see that what are the reasons behind the less revenue generation and high expenditures?

Reasons for Less Revenue Generation:

There are many social and economic and moral reasons due which Pakistan Government is unable to increase its revenue rapidly. Some of them are as following: 1. Tax sector revenue loss: The major source of government revenue is tax collection in mix economies like Pakistan. The most of the budget depends upon the revenue collected from the taxes. If there is drain in tax then this will affect the revenue and in result the national budget will effect. In Pakistan same thing is happening and Pakistan government is suffering huge loss in revenue amount. Lets take a bird eye view of the reasons of tax loss in Pakistan. The tax collection system is not clear. it has many complexities which create hurdles in its collection. There is lot of corruption in government Offices and officers. These officers take some reward money for the illegal favor and they help tax defaulters to pay all taxes. The tax rates are higher for the poor or low income people and lower for the rich or high income people. So when government collects taxes from them the poor people become unable to pay these taxes completely. While the high income group often use illegal ways to prevent from paying the full tax. This result in decrease in tax generation and ultimately it affects the annual revenue gathered by Pakistan government. Another reason behind the loss of tax is large sale smuggling. Pakistan has neighbors like Afghanistan, China, Iran and India. From these countries many things get smuggled into Pakistan. E.g. Electronic items, fruits, petroleum etc. And many things from Pakistan smuggled there. These smugglers do not pay any kind of custom duty or other entry taxes. This thing is causing the huge damage to Pakistans economy in form of direct tax loss and indirect tax loss. Indirect tax loss is in that sense that when these things come in Pakistan, they sell in very low prices and destroy the local industry and when local industry is in loss it will be unable to pay the government taxes. Taxes are also loss due to incorrect information about the tax payers properties and income. The people also misguide government to prevent them from the huge taxes. This creates problem for the government to collect the tax. There is one another reason of tax loss. The people of Pakistan have different trends and mental approaches. Some of them feel prideful thing to not to pay the tax and violate the laws. Such kind of people feel insult if they obey the law. They dont know that how badly their mentality is affecting the economy and development of Pakistan. They just dont pay the tax and give a enormous loss to government revenue. There is another reason of loss in tax. Some people do not give tax just because they believe that government is misusing the amount of money gathered through taxes. There is a lack of trust between government and public. 2- Revenue loss due to nationalized industries and institutes:In 1973, Government nationalized all private business. This was a patriotic step but it is a fact that in Pakistan there is no lacking of corrupt minds. These minds started using these

platforms for their personal benefits. They do the lot of corruption in different sectors. For this purpose they make relations and networks in different administrative departments. Now a days, when government realize this condition it start de nationalizing these institutions. But now the situation of these departments and institutes is such that most of them are in great loss. Most of them have huge debts on them and they are near to bank corrupt. This thing even endangered their existence. Instead they generate revenue for the government they, they are becoming burden for it and if the condition dont change then government may have to shut down them or sell them in foreign hands in loss price. Such institutions include many schools, colleges, universities, banks and industrial units. 3-Government controlled authorities, departments and corporations: In Pakistan, government has established many developmental and services providing authorities and departments e.g. WAPDA, Railway, Soi Northern Gas, WASA, TEPA ,PIA ,LDA ,CDA ,etc. WAPDA is the main authority to provide power supply in the country. It generates electricity from different sources and provides it to different areas of the country. It takes huge amount from the revenue for the maintenance purposes. Although it is not in loss but even then it waste much funds. Government also provides subsidies to the people and this has to be bear by the government own pocket and this subsidy are usually provided to the residential areas instead of any industrial purpose. So it is extra burden on the national budget. In northern areas of Pakistan, people often do not give the bills of electricity and this cause loss of revenue. After tax it is one of the big sources for the government to make revenue. So if it Has a revenue loss, then this will cause loss in national revenue and in result they National budget will be affected. Pakistan railway was one of the profits making field for the Government. But with increase in corruption and changing transportation trends it also become a los making and a burden on a government. Now days, it is in a great loss. Ministry of railway waste a lot of government funds in purchasing substandard trains and the interest payments of huge debts. Due to this the annual income of railway isles then its annual expenditures. If we see towards PIA. We will find that it is also in a loss. In other countries most of the national air lines are in profit. But in Pakistan it is a burden for the economy. You can see that most of the major revenue generating ministries are showing the loss conditions. This is only due to mismanagement and changing policies. 4-Aggricultural Sector:Our backward agricultural sector is also one of the reasons for revenue loss. This is because most of the MNA and MPA belong to feudal class. They dont allow government to make policies against there interests and they always create hurdles in the improvement of direct taxes in agricultural sector. Our economy is agricultural based economy due to this reason government treat leniently with this sector in the matter of taxation. The farmers just pay some indirect taxes. There are very few direct taxes and even in them they have some relaxations. Other than tax there are also some other ways to generate taxes from agricultural sector but government do not give any proper attention towards them.

 Most of the land that are in government custody still lay barren. Government does not take any proper step to start cultivation in these areas. This is waste of natural resources and finally the loss of revenue. In Pakistan, there are no proper markets which are link with the international markets. Due to this our farmers have a very small market area available for the business. This affects our GDP and NI. It also affects our national annual revenue loss. In Pakistan, even after lot of efforts by the government side, it is still a dream to organize the farmers in the country for maintaining the balance in cultivation of different crops. Due to this they dont have any proper guidance to cultivate how much quantity of specific crop in a year. Some time most of them grow wheat at a time and it causes its access and on the same time the shortage of other substitute crop occurs. In other words our farmers dont have market sense and they dont know how to maintain balance in the market. This thing also causes revenue loss because at one side one access product loss its price rates and on other side government have to import the lacking crop to fulfill the requirements. Now in the form of foreign exchange drain to other country, our government suffers from the decrease in revenue. 5-Terrorism factor: After the 9/11 incident, Pakistan is continuously in a condition of war with terrorists. Although it is a proxy war but even then Pakistan has to play a front line country role in this war. Due to this Pakistan is suffering from the destruction of the infrastructure, social Administrative setup, economy and public goods. Till now thousands of people have died or injured in the terrorists attacks. Government distributes billions of rupees among the families of the victors. This is for their temporary help. But on the part of government budget and revenue it is an extra burden. This is because when the government gives this money for the charity purposes many other projects suffer from it and revenue also decreases. Government is also doing operations in some areas of a country. These military operations are necessary for the survival of Pakistan but they have bad effects on Pakistan economy. Government has to purchase the heavy weapons for these operations that have a gigantic cost. Other than this the petrol consumption in tanks, jets, helicopters and other army vehicles has also increase. For this government have to provide more funds. Now for this purpose government either take the external debts or cut down some amount from developmental funds. Now in both cases government will be at loss and the revenue of government will also be loss in the war. On the other side it is also a big task for the government to settle the people migrated from the operational areas. On their settlement government again get loss of revenue. Due to unstable conditions in the country most of the inverters are not investing in Pakistan and even the people who have already invested in it, are taking out their investments. This decrease the industrialization in the country and now in result the production and employments are decreasing. When production decrease then the revenue generated through taxes decrease and ultimately it affects the national budget.

6-Banking and multinational companies: In Pakistan most of the investment came in banking sector or through multinational companies. Banks came here, opened their branches and give loans to the people. People take these loans, but some of them invest them their business expansion and some waste them in their personal desires. Then they pay its interest other than original amount borrowed. Here problem creates; these banks are the part of international groups. They take away the interest money as a profit in form of foreign currency. Now, it is the kind of foreign exchange drain from our national reserves. This cause devaluation of rupee and also negatively affects the government revenue. In case of multinational countries the situation is same because they also take away their profit from the Pakistan. On one side these companies and banks take away the foreign reserves currency from Pakistan and on other side we get force to take external loans with high interest rates to pay the bills of these banks and companies in foreign currency. This thing is continuously increasing our foreign debts and expenditures on the interest payments. This is doing devaluation of our currency. Due to this we have to pay more money. It is just like a web track in which we are trapped now.

The Extra Government expenditures:

1-Tax Expenditures: Tax collection system is a vast system. There is much kind of taxes in Pakistan and there are different sources to collect them. The worth of taxes according to Economic survey of Pakistan is Rs.1.2 trillions. The most famous taxes are Income tax, sale tax, custom tax, airport tax, excise tax, tool tax, property tax and zakat etc. For the collection of these different taxes government has made different departments. These departments gather revenue for the government in the form of taxes from different parts of the country. To collect the tax and to run the departments, these departments spend government funds and these funds came from the government budget and budget came from the revenue and revenue came from the taxes that these departments collect. So we can say that these funds used by these tax collecting departments are actually the cost on tax collection or the expenditure of tax collection. These are the necessary expenditures, but the officers of such departments increase these expenditures due to their unnecessary use of government funds. This put burden on national budget. According to Economic survey of Pakistan of 2008-2009 the total tax expenditures of sales, income tax and custom duties is 119.64 billions. 2-Ministaries expenditures: In Pakistan it has become a political trend that when new government comes in power, it introduces some new ministries to compensate its allies. This put a great stress on the budget. These ministries recruit large no of party workers. They just take their salaries for doing nothing. This razes the government expenditures but the output is just nothing. This increases the unnecessary expenditures of the government. Government ministries give the facility of transportation to their employees. These employees avail this facility even for their personal matters. That is unfair with the public of Pakistan. It is also a burden on a national budget. There is a corruption in most of the ministries and they often show more expenditure then the real expenditures. They steal the extra amount use it in personal affairs.

Source (personal knowledge, news papers reading) 3-VIP Expenditures: In Pakistan VIP culture is very common. But in this bad thing is that these people get facilities on behalf of government money. This money is actually public money. In a poor country like Pakistan it is injustice with the people, to waste their money for facilitating few people. Some examples of such useless expenditures are following: When our president or prime minister visit any place, there protocol and security expenditures come in millions. These expenditures doubled when these personalities have to visit some other country and have to do stay over there. The delegations with them also increase these expenditures of government. The story dont end on VIP movements, the expenditures on the government protocol department is very high. This is one of the unnecessary expenditure. 4-Defense expenditures: Pakistan has many enemies in this earth. That is why it has big army to protect its boundaries. A big part of its revenue spend on its defense budget and now a days this expenditure has risen a lot due to a war on terror. Due to this unwanted war government and public both are suffering. 5-Interest payments: Pakistan government has taken the debt of $50.i billions (economic survey of Pakistan 2008-2009) and this amount of debt is increasing day by day. On this debt government pay billions of $ as an interest. This interest boosts the government expenditures. Such expenditures are also the waste of foreign exchange earn by the exports 6-Government subsidies: Like other countries, Pakistan government also facilitates its public and industry through providing the subsidies on different commodities. The purpose of subsidies is to improve the stander of living and improve some specific industry. It also use for giving the shelter to the local industries. But in it national budget face little burden. Because some times it do not give the expected results and create problems even itself. 7-local government expenditure In Pakistan local government system has been introduced in recent past. This system works very effectively. It helps people to solve their problems at their negative aspects is that it has increased the govt. expenditure much more than the past. In this the untrained and uneducated elected administration have played a main role who starts different works without proper planning and waste lots of funds. They also actively participate in corruption and increase government expenditures. Source (personal knowledge, news papers reading)

The main reasons of decreasing revenue and increasing expenditures:

After looking toward reasons of revenue loss and unnecessary govt. expenditures we can see that in Pakistan the key problems are corruption, foreign debts, mismanagement, lack of proper planning, injustice, lack of laws implementation, poverty and un respectful attitude. These are the root causes which collectively create many problems which Pakistan is suffering now day. Now we have to make policies keeping in view these root causes. So that we may successfully tackle from the economic problems and budget deficit problems.

Policies to increase revenue and decrease expenditures:

1-Tax policy: As the main source of revenue generation is tax collection. So government shall adopt the public friendly tax policy. Govt. has external pressures of IMF and World Bank for policy making but govt. have to reject that pressure. They just protect the investors or capitalists class. But Pakistan government shall have to take care of both rich and poor classes. For this govt. has to impose equal tax rates on both classes. The taxes rates shall be low. It is economic rule that when there is low tax rate, more people pay tax and more revenue generates. The direct tax for the low income class and high income class shall be equal The indirect taxes rate shall be low because these taxes disturb the balance in taxes. E.g. the rate of sales tax shall be low. The property tax and the income tax of high income people shall be high. The rate of these taxes for both classes of income shall not be more then 5% of there income. There are chances of corruption and a possibility that people may not pay the complete tax. To avoid such things government shall introduce the computer technology for the collection of data in a safest and fastest ways. Government also has to impose strict laws for the tax defaulters and have to make sure that these laws are implemented properly. But there shall be conations for the people who pay their tax properly. So through this govt. can promote the proper tax payment trend in the society. The rate of custom duty on export goods is high. Government has to decrease its level. This will promote exports and when exports will rise, and then the production will rise. This will boost the economic activities. To give the shelter to the local industries govt. shall increase the custom duty on luxury goods but the duty on raw materials necessary for the local industries shall be minimize. This will help to balance the trade deficit. The duty on the industrial machineries import shall be ended in case of local companies but the level of duty on such machines shall be high in case of multinational companies required machineries. There shall be high tax on the products of multinational companies. This will decrease there sales and they will take away less profit. This will help to balance the trade deficit.

2-policy for industrial sector: Although there are power problems and security threats in a country and infesters are leaving the country rapidly. But still there are some policies through which govt. can promote industrialization. Govt. has to promote such industries in which power consumption is less. Such industries include small scale industries and home industries.

 Government shall make new industrial zones near international borders of Iran and Afghanistan and near the sea shores of sindh and Bullochistan. This will decrease there transportation cost and help to increase the manufacturing production. Govt. shall select any five small scale industries and then promote them in country at large scale. Govt. shall also help to become independent in these five industries. E.g. If govt. has selected flower industry, then govt. shall help people to not only produce flowers but also their final products like scents, perfumes and other sub products and also the products use in there production like seeders, pesticides etc. In short all components of production shall be creating in the country. This will expand the economic activities and increase the govt. revenue. It shall also a part of govt. policy to start training programs for these selected industries. So that people may start them individually. Other than this, govt. shall make the production guide department for these industries and shall also divide different production works in different areas of a county. So that every area may do specialization in any one field. This will help these industries to work in an organize manner. This will increase the production also. In simple words Pakistan has to specialize in few simple industries. But in them Pakistan shall be the best in the world. This will increase its products demand and also increase its exports and revenue. To save the current industries govt. has to decrease taxes on the raw materials and there shall be proper arrangements for power supply. It is beneficial to buy electricity from Iran and china temporarily. This will save the dieing industrial sector. When the industrial situation will stable then exports will automatically increase. To promote the home base or small scale industries government shall provide the Islamic loans or interest free loans to the small investors. These loans will help these small investors to start their own work and get self employment. This will improve there purchasing power and this will increase industrial production in the country and GDP will also increase. For the organize production, govt. have to train them according to their work. In Pakistan there is a problem of lack of awareness due to high illiteracy rate. Now if government will train borrowers about there an industrial skill, then it is also necessary to train them how to sell their item and how to search for new markets in the world. Because due to unawareness and lack of training in Pakistan often industrialist of small scale remain backward from other world. So to increase our revenue it is necessary to train them from all aspects. This will increase production, sales, exports and foreign reserves. For establishment of industries, govt. has to give shelter to the local industries. But to stop the smuggling govt. shall decrease the tax rate and custom duty of such products that smuggled most in the country. This will decrease the profit of smugglers and they will either stop smuggling or will start paying tax for legal trade. These both conditions are favorable for the government of Pakistan and industrial growth.

3-Policies for agricultural sector: There are vast chances of generating the revenue through the agricultural sector. For this govt. have to organize it and have to introduce the manufactured agricultural products production at local level. Pakistan major exports are raw products of agricultural sector and these products generate very less amount of foreign exchange as compare to their quantity. In developed countries agricultural products earn much more then Pakistans earning with same quantity. This is just because they export manufactured products: e.g. Cane products, packed products etc. For implementation of this policy govt. have to first train the local farmers and for this govt. have to start training companies on large scale. Then it has to divide the areas of production according to their production specifications, just like industrial programs. The govt. also has to provide the required machinery to the farmers so that they may do their own manufacturing. If this machinery has to be import then govt. shall charge minimum tax and duties on their imports. To facilitate the poor farmers govt. shall have to make the groups of farmers and also share financially in that manufacturing setup. This will increase production and govt. will be able to earn more revenue. 4-Policies for decreasing extra expenditures: Govt. has to control its extra expenditures. For this govt. shall introduce strong audit of govt. departments. The protocol expenditures shall be decrease, The govt. has to take back the transportation facility for personal matters. The govt. has to cut down the VIP expenditures. This will save much revenue for the developmental programs. 5-petrioticism promotion: It may not looks directly related with the revenue generation and expenditure decrease. But it plays a big role in the progress of country. If people will be patriotic they will prefer to use the national products. This will be useful to promote the local production. So govt. shall make a policy to promote patriotisms in the country. 6- Freedom from debts: In last I will say that govt. have to decrease the dependence on the foreign loans. They are not helpful for progress. They are just a temporary solution. So to keep save from them govt. of Pakistan have to discourage multinational companies in the countries and encourage the local companies. We also have to decrease borrowing the loans and for fulfilling the exchange currency needs we have to promote organize setup of overseas Pakistanis. They can earn much more for Pakistan; if govt. helps them to start some business in the countries they are living and make a proper setup to take back the profit amount in Pakistan. This will raise the foreign reserves of Pakistan and we will be able to put off those external debts which are the main hurdle in our progress. There are still many policy options remaining through which govt. can increase its revenue and decrease its expenditures. But the steps have to be taken by the government. We people can just wait for these steps.

References and sources:1. Economic surveys of Pakistan. 2. Issues of Pakistan economy (by Akbar zaidi). 3. News papers reading (Jung news, the daily dawn). 4. Personal knowledge. 5. net surfing.

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