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Budget Process
A Handbook for Parliament
2014
IP3 is Implemented By
TABLE OF CONTENTS
Purpose of this Guide .................................................................................................................................... 3
CHAPTER 1: THE BASICS ............................................................................................................................. 4
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The budget is the Governments most important economic policy tool. Government budgets
translate a Governments policies, political commitments, and goals into decisions. Decisions
such as; how much revenue to raise, how to raise it, and how to use these funds to meet the
countrys competing needs, from bolstering security to improving health care to alleviating
poverty.
International Budget Partnership
In a modern economy, the government budget plays a key role in the maintenance of economic
stability and growth, and the achievement of national objectives. A poorly managed budget can
lead to economic instability and national decline.
The budget is one of the most tangible expressions of how a government intends to govern the
state. In many countries, the government is the largest spender of resources. Hence the choice of
allocations through distribution of wealth and income can determine what type of development
outcomes a country intends to achieve.
The government budget also occupies a central position in any system of parliamentary
democracy. The budget is essentially an agreement or contract between the Executive and the
Legislature. It is an expression of no taxation without representation. Through the appropriation
of the budget the Legislature empowers the Executive to raise the revenues and other funds
required to finance the delivery of public services. The Executive, for its part, undertakes to
deliver the agreed services and discharge the agreed functions in an economic, effective and
efficient manner.
The budgetary process is inherently and necessarily political in nature as it is driven by the
policies of the Government and involves making choices between alternatives, within limited
resources.
In a modern democracy accountability and transparency are essential attributes of the budget as
they generate confidence in the political process and the rule of law.
Budget by Outputs
100
50
Operating expenditure
20
40
Physical assets
10
55
25
Total
155
Total
155
In the above example, the health budget is presented by both inputs and outputs. It is easy to
provide expenditure limits on a budget by inputs. Similarly, it is easy to link policy planning,
priorities and performance with budget by outputs.
The Output-based budget introduces results-orientation to budget. This means not only resource
requirements, but the government budget also, presents the expected results that will affect the
beneficiaries.
revision of roles of the Finance Division, and Planning, Development and Reforms Division.
Similarly, the line Ministries may undergo restructuring to focus on a policy-based budget as a
unified activity.
Therefore, countries have adopted stepwise progress. Initially both the recurrent and development
budgets are presented through a unified system of budget classification.
Presenting the budget by Functional classification (as developed by the IMF to provide a list of
standard government functions - e.g. defence, health, education, etc.) can unify the presentation
of the two sides of the budget.
In addition, presenting the budget by services (also known as outputs) can also act as a means to
unify the presentation of the two sides of the budget.
In this regard, output-based budgeting is also seen as an important step to enhance unified
budget preparation, review, reporting and approval.
Organisations objectives are addressed including performance and value for money
goals, and
Ministries / Divisions should have a dedicated finance function (e.g. office of the Finance
Director) with formalised responsibilities and an internal audit function.
Budget Laws
Organic budget laws are common in Parliamentary democracies. Through budget laws, roles and
responsibilities of different institutions are prescribed. In addition, budget laws contain provisions
of how the budget should be prepared, presented, executed, monitored and reported. Also
important are legal provisions related to changes in limits (also known as virement a process
through which the budget is shifted from one Demand to another, or an additional budget is
agreed) and purpose of the budget during the year.
The following diagram presents examples of countries with written and unwritten constitutions.
In most of the situations, the Executive rules and regulations are subservient to either one or
many budget laws.
4. BUDGET TRANSPARENCY
International Budget Partnership (an international research organisation that has developed an
assessment tool for determination of openness and transparency in a countrys budgeting system)
has developed criteria through the Open Budget Index initiative.
As per the criteria, their following documents should be available for public consumption:
A Pre-Budget Statement
This is the budget policy document of the government presenting the overall economic and fiscal
forecasts, key budget policies (e.g. tax policy, sectoral expenditure policies, etc.), and should be
available to the public at least 2 months before the budget is presented in the Legislature.
In Pakistan, while the government produces a Budget Strategy Paper (a pre-budget statement) it
is not shared with the public.
Enacted Budget
In case where the Governments budget proposals are changed, the Government should provide
information to the public on the changes incorporated during the budget debate and the
appropriation process.
A Citizens Budget
An easy to understand document for the public to understand outlining the Governments budget
that should also provide information on the Governments policies and plans and how the budget
numbers are shaped, should be produced. This document should be part of the budget documents
that the Government produces each year.
In Pakistan the Government does not produce a citizens budget.
In-year Reports
Monthly or quarterly reports on the use of the budget presented to the Parliament and shared with
the public.
In Pakistan quarterly fiscal operations (actual expenditure) reports are uploaded on the Finance
Divisions website. However, the information is not very user friendly.
Mid-year Report:
Comprehensive update on the implementation of the budget, including a review of the economic
assumptions underlying the budget and an updated forecast of the budget outcome for the current
budget year
Year-end Report:
The year-end report is the governments key accountability document. It should be audited by the
Supreme Audit Institution (Auditor General). It should include the original budget, any changes
made by the Government during the year and the actual expenditure together with performance
planned and delivered
Audit Report:
Audited financial statements of the Government by the Supreme Audit Institution (Auditor
General) should be made available to the public within 2 years after the end of the financial years.
Spending reviews
Strategy, policy,
and formulation
of plans
Budget
preparation and
presentation
Budget
execution
Accounting,
reporting and
audit
Monitoring and
evaluations
CHAPTER 2: LEGAL
REQUIREMENTS AND ROLES
1. ROLE OF THE EXECUTIVE AND LEGISLATURE IN
BUDGETING
Experiences from parliamentary systems of governments from around the world suggest that the
following stages are observed in the budgetary processes:
11
The Constitution of the Islamic Republic of Pakistan provides for a system of budgetary
management. Specific articles and their simplified explanation is provided below:
Article 73, 74
Only Federal Government can introduce or move Money Bill in the Parliament.
The Speaker of the National Assembly will certify that the bill is a Money Bill and
send it to the President for assent. After assent of the President the bill will be
Levy of taxes
Taxes shall not be imposed without an Act of the Parliament.
th
[Authors note: This article was introduced as part of the 18 Amendment to the
Constitution]
Article 78,79:
Article 80,81,82,83,84:
Budgeting
Annual Budget Statement
The Federal Government will lay Annual Budget Statement in the National
Assembly containing statement of estimated receipts and expenditure.
The Annual Budget Statement will show charged, and other than charged
expenditure separately.
The statement will distinguish between revenue and other account.
The Annual Budget Statement will be presented in form of Demands for Grants.
The National Assembly has the power to accept or reject a Demand.
[Authors note: the budget books contain expenditure on revenue account, and
expenditure on capital account separately. The words capital account are
specified in the Audit Code issued by the Auditor General of Pakistan.]
Charged Expenditure
Expenditure of constitutional authorities, e.g. President, Judges, Chief Election
Commissioner, Speaker and the Deputy Speaker of the National Assembly,
Auditor General, will be charged. In addition, loan servicing (including principle
repayment of debt and interest), grants-in-aid to provinces will also be considered
charged.
13
[Authors note: While the Parliament can discuss charged expenditure, voting
does not take place on these items (Article 82). The rationale for this is to give
financial autonomy to these institutions, whereas debt servicing is included
because it has the states sovereign guarantee. ]
Schedule of Authorised Expenditure
Once the National Assembly approves Demands, the Prime Minister will sign the
Schedule of Authorised Expenditure which will specify expenditure limits against
each Demand / vote.
Supplementary and Excess Budgets
In case of any insufficiency of funds, or a new service is required to be funded for
which no funds were approved in the Schedule of Authorised Expenditure, the
Federal Government has the power to authorize supplementary budgets.
[Authors note: Pakistan is amongst only a handful of countries where the
Executive can change the budget and enhance budget limits without seeking prior
approval of the legislature. Each year together with the Annual Budget Statement,
the Federal Government also presents Supplementary Budget Statement, and
Excess Budget Statements]
Article 85, 86:
Authorising Demands
th
If the National Assembly is not able to approve Demands by 30 June each year,
it can authorize the Federal Government to spend funds for up to 4 months of the
financial year.
If National Assembly stands dissolved, then the Federal Government (Cabinet of
Ministers) can authorize spending of funds for up to 4 months.
Article 156:
Article 160:
Governments
Grants-in-aid to provinces
Borrowing powers of federal and provincial governments.
Government Borrowings
On security of the Federal Consolidated Fund (the main bank account of the
government), the government can borrow and provide guarantees, within limits
imposed by Act of the Parliament.
[Authors note: Fiscal Responsibility and Debt Limitations Act of 2005 provides
limits on borrowings and issuance of guarantees. The Act prescribes the limit of
th
60% of GDP on public debts to be observed by 30 June 2013 and guarantees to
the limit of 2% of GDP each year]
Article
168,169,170,171:
15
The government has prescribed rules and regulations for budgetary management mechanism.
These rules and regulations include:
17
6) Financial Reporting Manual provides detailed formats of financial reports that are
produced by accounting offices (for example the manual provides amongst other
specimens for consolidated monthly accounts)
7) Accounting Code for Self-Accounting Entities provides accounting framework for SelfAccounting Entities (such as Pakistan Railways).
Rules of Procedures and Conduct of Business in the National Assembly, 2007 provides rules
related to budgetary processes. These rules are mentioned in Rule 182 to Rule 197.
The following table provides the rule number and what it relates to:
Rule
Relate to
Rule 182
Rule 183
Rule 184
Rule 185
Rule 186
Rule 187
Rule 188
Rule 189
Cut Motions
Rule
Relate to
Rule 190
Rule 191
Rule 192
Rule 193
Rule 194
Rule 195
Rule 196
Vote on Account
Rule 197
19
CHAPTER 3: BUDGET
MANAGEMENT
1. BUDGETARY MANAGEMENT PROCESSES
Budgetary management processes of the Government comprises of the following different stages:
Spending reviews
Strategy, policy,
and formulation
of plans
Budget
preparation and
presentation
Budget
execution
Accounting,
reporting and
audit
Monitoring and
evaluations
2. SPENDING REVIEWS
Once a fiscal year (July-June) ends, the Accountant General of Pakistan Revenue (AGPR)
compiles a statement showing total expenditure against the allocated budget. This report is called
Appropriation Accounts, which is verified by the Auditor General of Pakistan and presented to
the President.
At the Executive level the Planning Commission undertake quarterly reviews of projects, while
the Financial Advisers in the Finance Division undertake regular reviews of budget and
expenditure related to the current expenditure.
The Ministry of Finance has recently started an annual monitoring exercise under which
expenditure and performance information is compiled.
The policymaking process of the government starts at the level of Ministries / Divisions. After
undertaking research of the current situation, a Ministry / Division formulates policy which is
shared with different stakeholders and endorsed by the Federal Cabinet. At policymaking level,
inputs from the Planning Commission and Ministry of Finance are taken in order to ensure that
the policy is in-line with the greater economic objectives of the country and required funding can
be made available.
For development projects generally referred as the Public Sector Development Programme
(PSDP), the Planning Commission has issued a Planning Manual that provides for processes
related to:
Vision currently the Planning Commission is in the process of formulating Vision 2025
Annual Plan.
Step 1:
The Finance Division and Planning, Development and Reforms Division prepare a Medium-Term
Macroeconomic Framework in consultation with various Government Ministries / Divisions and
the State Bank of Pakistan.
21
Step 2:
Based on the macroeconomic environment, the Finance Division articulates its policy priorities
and prepares a Medium-Term Fiscal Framework (budget for the 3-years forecasting revenues,
expenditure, borrowings, and debts).
Within the governments policy priorities the Finance Division and Planning, Development and
Reforms Division work out medium-term Indicative Budget Ceilings for each Principal
Accounting Officer (PAO). These are expenditure limits that each Principal Accounting Officer
(Secretary of a Division) receives. The ceilings are indicative in nature and discussed in detail in
a wider forum called Priorities Committee (as mentioned in step 6).
Step 3:
Fiscal framework, policy priorities, and forecasted ceilings are presented in the Cabinet through a
paper called Budget Strategy Paper. The Cabinet debates on policies, priorities, and allocation
for different Ministries / Divisions.
Step 4:
In the next step, the Finance Division issues a Budget Call Circular and forwards 3-years
Indicative Budget Ceilings for recurrent and development budgets separately to line Ministries.
A Budget Call Circular includes forms that are filled by Ministries / Divisions. Based on these
forms, the budget books are compiled.
Step 5:
Based on the Indicative Budget Ceilings, Ministries / Divisions prepare their detailed budgets that
are quality assured by the Finance Division, and Planning, Development and Reforms Division.
From the Finance Division, the Financial Adviser Organisation quality assures budgets. From the
Planning, Development and Reforms Division the Sector Chiefs discuss and agree allocations for
projects.
Step 6:
The Secretaries of Finance, Planning & Development, and Economic Affairs Divisions jointly
chair the Priorities Committee meetings. These are weeklong meetings held in the Finance
Division. The meetings discuss policy, budget allocations and priorities, and any additional
budget demands with each Principal Accounting Officer.
Step 7:
The Annual Plan Coordination Committee (APCC) discusses the public sector development
projects with the Federal Government and Provincial Governments. This a daylong meeting
chaired by the Minister / Deputy Chairman of the Planning Commission. The meetings discuss
projects, allocations, and Ministerial developmental priorities.
In the APCC, the Planning Commission provides total size of the PSDP (Public Sector
Development Programme), and macroeconomic context including projected growth rate,
investments, and savings.
Step 8:
The Finance Division shares the broad contours of Budget Strategy Paper with the
Parliamentary Standing Committees on Finance & Revenue.
Step 9:
The National Economic Council (NEC) approves the Public Sector Development Programme
(PSDP) of the Federal and Provincial Governments.
Step 10:
The detailed budgets for recurrent and development sides are consolidated in a computer system
available with the Finance Division. Through the computer system, information for the budget
books is prepared.
The finalized budget is presented in the Cabinet for endorsement and Parliament for
appropriation.
Key document:
The Planning Commission has prescribed the following 5 documents during different stages of
project management:
PC2: Feasibility study for Rs.1 billion and above projects giving long-term perspective, rationale,
brief description
PC1: Details about a proposed project detailed objectives, rationale, finances, phasing,
measurement criteria, project plan etc.
PC3: Quarterly review report of projects being implemented undertaken by project directors
consolidated by Planning Commission
23
Approval Forums:
CDWP: Central Development Working Party up to PKR.1 billion Chaired by Deputy Chairman /
Minister for Planning
Planning Commission issues PSDP proforma based on which PSDP budget proposals are
invited
2.
Based on this information Planning Commission undertakes Mid-year review for on-going
projects (in January each year)
3.
Finance Division forwards Indicative Budget Ceilings (single-line) to Principal Accounting Officers
(PAOs) to provide guidance to Ministries on their resource availability
4.
Ministries compile their proposals for the upcoming year including on-going and new projects Sector Chiefs in Planning Commission undertake technical review
5.
6.
Federal and provincial projects are then discussed in Annual Plan Coordination Committee
(APCC) chaired by Deputy Chairman Planning Commission / Minister
7.
Project Directors prepare New Item Statement (NIS) which specifies budget required and
submit to Computer Section in Finance Division based on which Demands for Grants as
required in the Constitution is prepared
8.
The Planning Commission prepares PSDP (list of projects), and Annual Plan (macroeconomic
situation, sectoral policies, etc.) approved by the National Economic Council chaired by the
Prime Minister
9.
Cabinet approves Demands for Grants, PSDP and Annual Plan, etc. and forwards the budget to
the Parliament.
Planning Commission reviews these plans and forwards these to Finance Division
Finance Division undertakes ways and means clearance based on which Planning Commission
gives authorisation to project directors to spend funds
Project Director opens up an Assignment Account (bank account) with approval of Finance Division
Monitoring and Evaluation units exists in Ministries that have PSDP projects
Together with the Budget Speech, the Federal Government presents the following budget books.
Each book and brief explanation of what it contains is provided below:
FEDERAL'BUDGET'
DEMANDS FOR
GRANTS AND
APPROPRIATIONS
BUDGET YEAR
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
Demand number
Demand name
FEDERAL'BUDGET'
DETAILS OF DEMANDS
FOR GRANTS AND
APPROPRIATIONS
BUDGET YEAR
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
25
Budget in Brief
FEDERAL'BUDGET'
BUDGET IN BRIEF
BUDGET YEAR
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
ANNUAL BUDGET
STATEMENT
BUDGET YEAR
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
BUDGET YEAR
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
27
BUDGET YEAR
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
FEDERAL'MEDIUM+
TERM'BUDGET'
ESTIMATES'FOR'
SERVICE'DELIVERY'
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
Tax receipts
Miscellaneous receipts
Capital receipts
Public debt
Public accounts
Privatisation proceeds
External flows
Goal
Personnel plan
for current year and next year, and forward estimates for 2
years
Annual Plan
ANNUAL%PLAN%
BUDGET YEAR
GOVERNMENT OF PAKISTAN
PLANNING COMMISSION
MINISTRY OF PLANNING,
DEVELOPMENT AND REFORMS
GOVERNMENT OF PAKISTAN
PLANNING COMMISSION
MINISTRY OF PLANNING,
DEVELOPMENT AND REFORMS
For each of the sector, this book presents details of projects. The
project details include approval status (usually containing date of
approval and approving authority), total cost of the project,
expenditure to date, budget estimates for the budget year divided
into local currency, and foreign currency components.
BUDGET YEAR
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
29
The Government presents the budget as per a system of classification. The system of
classification classifies budget as per the following main categories:
Object Classification
This represents line items of revenue, expenditure, asset, liabilities and equity. Each line item
is represented with a code. An example is provided below:
Element
Major Object
Minor Object
Detailed Object
A Expenditure
A01 Employee
related expenditure
A011 Pay
On the revenue side, the budget books provide information up to the Detailed Object level.
For expenditure side, in order to reduce size of budget documents, the budget books provide
information up to the Minor Object level.
Another example of codes of Non-Tax Revenues is reproduced below. For detailed objects
Chart of Accounts can be downloaded from PIFRA (Project to Improve Financial Reporting
and Auditing) website: (www.pifra.gov.pk/chart-of-accounts.html).
Major
Object
Code
C01
Description
Income from Property and
Enterprise
Minor
Object
Code
C010
C012
C025
C026
C027
C028
Social Services
C029
C019
Receipts from Civil
Administration and Other
Functions
Profits
Interest on Loans and Advances to Provinces
Interest on Loans to Local/ Autonomous
Bodies
Dividends
General Administration Receipts - Fiscal
Administration
General Administration Receipts - Economic
Regulation
Defence Services Receipts
C013
C02
Description
C022
C023
Functional Classification
Represents functions of the Government. An example is provided below:
Major Function
Minor Function
Detailed Function
03101 - Justice
List of the major functions is provided below. For minor and detailed functions Chart of
Accounts can be downloaded from PIFRA (Project to Improve Financial Reporting and
Auditing) website: (www.pifra.gov.pk/chart-of-accounts.html).
Function Code
Description
01
02
03
04
Economic Affairs
05
Environment Protection
06
07
Health
08
09
10
Social Protection
Entity Classification
This represents organizational hierarchy of the Government. An example is provided below:
Government
Attached Department
Spending Unit
F - Federal Government
F012 Cabinet
Secretariat
Establishment Division
Fund Classification
This represents structure for Demands for Grants. An example is provided below:
Fund
Sub Fund
FC - Federal
31
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
Example
Demand No. 030 (FC21P03) PAKISTAN MINT
(Pakistan Mint is an attached department of Finance Division, responsible
for minting coins. Currently coins of Re.1, Rs.2 and Rs.5 are minted there)
As per Entity Classification: Pakistan Mint is part of the Ministry of Finance /
Finance Division.
As per Fund Classification Pakistan Mint will be paid out of Federal
Consolidated Fund.
Voted Amount: Rs.401.7 million. This demand will undergo voting.
Functional Classification: 011 Executive and Legislative Organs,
Financial and Fiscal Affairs, External Affairs
Object Classification:
Budget 2013-14
Code
Object Classification
A01
252.3
A02
20.0
A03
Operating Expenditure
A04
1.0
A05
3.6
A06
Transfers
0.1
A09
Physical Assets
A13
Rs. Millions
105.4
10.2
8.9
401.7
GOVERNMENT OF PAKISTAN
FINANCE DIVISION
ISLAMABAD
Example
Demand No. - (FC24E08) ELECTION
(This demand is a charged demand and relates to Election Commission of
Pakistan. Since it is a charged expenditure, it does not have a Demand
Number and hence is not open for voting)
As per Entity Classification: Budget of Election Commission of Pakistan is
shown in the hierarchy of Ministry of Law and Justice.
As per Fund Classification Election Commission of Pakistan will be paid out
of Federal Consolidated Fund.
Charged Amount: Rs.1,843.4 million. This demand will not undergo voting.
Functional Classification: 018 Administration of General Public Service
Object Classification:
Budget 2013-14
Code
Object Classification
A01
881.4
A02
A03
Operating Expenditure
A04
1.6
A05
5.0
A06
Transfers
1.6
A09
Physical Assets
3.8
A13
Rs. Millions
1,004.4
15.5
1,843.4
33
Commercial banks
The main instruments through which the government borrows from the domestic sources include
treasury bills, investment bonds, and national savings instruments such as prize bonds, Bahbood
savings certificates, etc.
Releases of funds
Based on cash forecasting and treasury management the Finance Division issues releases orders
for current and development budgets as per its funds release procedures that it issues from time to
time.
For the current budget, funds are released on quarterly basis. For the development budgets the
release mechanism is as follows:
1) Projects prepare quarterly Cash Plans and forward to Planning Commission
2) Planning Commission reviews these plans and forwards these to Finance Division
3) Finance Division undertakes ways and means clearance based on which Planning
Commission gives authorisation to project directors to spend funds
4) A quarterly release strategy 20:20:30:30 guides releases
35
2) Financial Statements - includes receipts, payments and public accounts balances. Moreover,
balances of assets and liabilities are also included in it along with current year flows, and
3) Combined Finance and Revenue Account - is consolidated Finance Account including all
Accountant Generals and Accountant General Pakistan Revenue and its sub-offices.
These three reports are prepared by the Controller General of Accounts and presented to the
Auditor General of Pakistan for endorsement. The Appropriations Account report is presented to
the President and the Public Accounts Committee.
In the late 1990s, the Government embarked upon an important project to improve financial reporting
and auditing called Project to Improve Financial Reporting and Auditing (PIFRA). In this project the
New Accounting Model was developed as a first step. In the second step a large-scale
computerization exercise was undertaken. More than 120 accounting offices throughout the country
have been computerized and linked to central servers via wide-area-network.
Today, after more than a decade, the financial reporting is being done through the computerized
system. Average cycle time of month-end closing and finalization of annual accounts has drastically
been reduced.
reports. This requirement also does not preclude preparation of accounts on accruals-basis of
accounting.
The Governments budget has wider economic implications. If a government spends more than its
revenues, then it has to borrow to finance expenditure leading to budgetary deficits. A
government having limited revenue resources can easily fall in debt trap if borrowings continue
unabated. A country enters into a debt trap if interest on borrowings occupies most of its
expenditure. At this stage more loans are taken to repay existing loans. In such a condition,
private sector investment suffers through crowding out. Private investment is important for
increasing productivity and job creation. High government borrowings also result in printing of
money, which causes inflation (i.e. rise in prices of commodities).
It is therefore, important to view the budget in the wider macroeconomic context. A
macroeconomic framework helps in understanding the context.
In a macroeconomic framework four sectors of an economy are considered. These include:
1) Growth a study of economic growth, investments, consumptions, etc.
2) Governments budget a study of revenues, expenditure, borrowings and public debts
3) Balance of payments - a study of foreign exchange movements through imports, exports,
remittances, foreign loans, etc.
4) Monetary a study of the banking sector and inflation.
In order to understand the macroeconomic context the following important ratios can be studied:
37
Sector
Important ratios
Growth
Investment as
percentage of GDP
Governments
budget
Savings as percentage
of GDP
Tax as percentage of
GDP (to understand the
level of
Interest as proportion of
net revenues
Balance of
Payments
Monetary
Reserves months of
import cover
Inflation annual
percentage change
The resource allocation and budgetary system in Pakistan is critical in nature. Since the country is
a federation of four Provinces, revenues are collected centrally (mainly by/through the Federal
Board of Revenue) and then distributed between the Federal Government and the Federating
units. This distribution takes place in accordance with a resource distribution mechanism called
National Finance Commission (NFC) Award, which is applicable to resource transfers to the
Federal Government and the four Provinces.
[Note: Transfers to AJK, Gilgit-Baltistan, FATA or FANA are made through the Federal
Governments Budget]
Transfers under the NFC Award constitute the largest resource item in provincial receipts.
Provinces have the authority and power to raise taxes (other than those collected by the Federal
Government and which are covered under the NFC Award).
The Constitution allows the Parliament an authority to raise certain types of taxes. These are
broadly categorised into:
Income tax and corporation tax (excluding taxes on income consisting of remuneration
paid out of the Federal Consolidated Fund)
These taxes are deposited in Federal Consolidated Fund, which is the main bank account operated
by the Federal Government. Therefore, in each financial year a share of the taxes and duties
levied and collected by the Federal Government are shared between Federation and Provinces
based on a predetermined proportion.
The following are the main types of funds transfers from the Federal Government to the
Provinces:
Revenue sharing from the Revenue divisible pool Tax collected by the Federal
Government is shared with the lower levels of the Government. The divisible pool
includes the pool of taxes that is shared
39
Straight Transfers These include transfers from the Royalties, Excise Duties,
Surcharges etc.,
Grants-in-Aid These may include special grants extended from the Federal Government
on areas such financing the deficits, arrears, emergency aid etc. ,
Loans Soft loans may be extended to Provinces by the Federal Government. The
reverse flow from the Provincial to Federal Government may include principal and
interest repayment on the soft loans,
th
th
The 7 NFC Award was given effect through Presidents Order No. 5 of 2010. Salient features of the Award
include:
The divisible pool consists of all of the taxes levied and collected by the Federal Government.
These include taxes on income, wealth, capital value, sales & purchase of goods, and duties such
as on export on cotton, custom, federal excise and other taxes which may be levied by the Federal
Government
The 7 NFC Award recognises the economic problems of the Government of Khyber
Pakhtunkhwa due to war on terror and provides 1% of net proceeds of divisible pool as special
grant
The share of provinces in the divisible pool has been increased to 56% for 2010-11 and 57.5% for
the remaining years of the Award which ends in 2014-15
Multiple criteria for distribution of revenues amongst the Provincial Governments are used
including; population, poverty or backwardness, revenue collection or generation and invest
population density with the ratio of 82%, 10.3%, 5.0% and 2.7% respectively
The resources will be transferred amongst Provinces on the basis of percentage specified.
Balochistan 9.09%, Khyber Pakhtunkhwa 14.62%, Punjab 51.74% and Sindh 24.55%
th
Multiple Indicators
Weight
Population
Share of provinces
Punjab
Sindh
KP
Balochistan
82.0%
57.36%
23.71%
13.82%
5.11%
Poverty / backwardness
10.3%
23.16%
23.41%
27.82%
25.61%
5.0%
44.00%
50.00%
5.00%
1.00%
Inverse population
density
2.7%
4.34%
7.21%
6.54%
81.92%
100.0%
57.74%
24.55%
14.62%
9.09%
th
The 7 NFC Award recognises the economic problems of Balochistan and guarantees Rs.83
Billion as the total revenue transfer (from net proceeds of divisible pool) in 2010-11
Each of the Provinces will be paid a share in the net proceeds of the total royalties on crude oil in
the proportion as the production of crude oil in the Province to the total production
Development surcharge on gas will be paid to each of the Province based on average rate per
MMBTU of the respective province. The royalty on natural gas will be distributed in accordance
with clause (1) of Article 161 of the Constitution
The development surcharge on natural gas for Balochistan with effect from 1 July 2002 will be
reworked out hypothetically on the basis of the formula given in clause (1) and the amount, subject
to maximum of Rs.10 billion will be paid in five years in five equal instalments as grants
Sindh will receive 0.66% of the province share in net proceeds as Grants-in-Aid as compensation
for losses on account of abolition of octroi and zilla tax
The 7 NFC Award recommends streamlining of the tax collection systems of both the Federal
and Provincial Government so as to increase the tax to GDP Ratio to 15% by 2014-15. Provinces
would initiate steps to effectively tax the agriculture and real estate sectors. Federal and Provincial
Governments may take necessary administrative and legislative steps
Federal and Provincial Governments would develop and enforce mechanisms for maintaining
fiscal discipline at the Federal and Provincial levels through legislative and administrative
measures
The meeting of the NFC will be convened regularly on a quarterly basis to monitor the
implementation of the award.
th
There are two recognized methods of assessing the state of Public Financial Management
(budgetary management system) in the country:
41
PEFA assessment system is based on 28 indicators for the Government. Scores on these
indicators can be either A, or B/B+, or C/C+, or D/D+.
Federal Governments PEFA Assessment
The Federal Governments PEFA assessment was carried out in 2008 and in 2012. The results of
the two assessments are as follows:
Number of Indicators
Number of Indicators
2008
2012
B/B+, C/C+
15
16
D/D+
Scores
43
Pakistan is amongst many other countries around the World that has promulgated a law to
introduce limits on public debts. Fiscal Responsibility and Debt Limitations Act (FRDLA), 2005
prescribed two fiscal rules:
1. Reduction of revenue deficit to nil by 30th June 2008
2. Reduction of public debt to GDP ratio to 60% by 30th June 2013.
Revenue deficit is total revenues less current expenditure. The reason for reducing revenue deficit
to nil was that the Country should be able to meet all its current expenditure from the revenues
(tax and non-tax revenues) that it generates. It should therefore, only borrow for the purposes of
development expenditure.
Public debt is the loan acquired for the purposes of financing budget deficit (budget deficit arises
when government spends more than what it receives through tax and non-tax revenues). The
loans are acquired from domestic and foreign sources. In the domestic sources, the Government
normally borrows from commercial banks, the State Bank of Pakistan, and National Savings
Organisation. The reason for imposing 60% limit was that public debt normally remains
sustainable at that level for a country like Pakistan.
However, the Government did not achieve both of the targets by June 2013. The public debts
were 62.7% (as reported in the Fiscal Policy Statement) by 30th June 2013.
In addition, the FRDLA, 2005 required:
1. Public debt will be reduced by 2.5% of GDP each year from 2003 till 2013
2. Social and poverty alleviation related expenditure would not reduce below 4.5% of GDP
3. The Government will not issue guarantees on loans greater than 2% of GDP each year
4. The Government will lay three reports in the Parliament:
a. The Medium-Term Budgetary Statement includes 3 years targets, specifies fiscal
measures, and risks, and includes ratios related to growth, inflation, revenues,
expenditure, borrowings, and public debt.
b. The Fiscal Policy Statement rationale for deviation from fiscal measures i.e.
taxation, expenditure, subsidies, etc., and provides updates on macroeconomic
indicators,
Public Procurement Regulatory Authority (PPRA), has been constituted thorough an Act of
Parliament of Pakistan in 2004. The major objective of PPRA 2004 rules is to ensure transparent
and cost effective procurement of quality goods and services in the public departments covering
all the stages involved in the procurement process.
As per the PPRA rules the following process of procurement will be used:
1. Procuring agencies undertake procurement planning
2. After planning, the procuring agency will advertise the procurement (15 days for national
competitive bidding, and 30 days for international competitive bidding)
3. The procurement agency will invite bids on a prescribed date as mentioned in the
advertisement
4. The procuring agency will conduct pre-bid meetings that will be attended by the bidding
agency
5. The bidding agency will submit the bids
6. The procuring agency will open bids undertake evaluation of bids
7. After evaluation, the final bidder will be selected with whom contract negotiations will take
place. Upon successful negotiations, the procuring agency will issue contract
8. If there is any grievance on behalf of bidder then the procuring agency will resolve it within
15 days of submission of grievance
9. Following the above processes, the implementation of the contract will begin.
45
Once the House is resumed, the Demands for Grants are presented along with the repots of the
Standing Committees. The House proceeds to discuss and vote on the grants. At this stage cut
motions can be moved to reduce the amounts of the grants.
A Money Bill can be introduced only in Lok Sabha. After it has been passed by Lok Sabha, it is
transmitted to Rajya Sabha for its recommendations and that House is, within a period of fourteen
days from the date of the receipt of the Bill, required to return the Bill to Lok Sabha with its
recommendations, if any.
Lok Sabha may either accept or reject all or any of the recommendations made by Rajya Sabha. If
Lok Sabha accepts any of the recommendations made by Rajya Sabha, the Bill is deemed to have
been passed by both the Houses with the amendments recommended by Rajya Sabha and
accepted by Lok Sabha. If however, Lok Sabha does not accept any of the recommendations of
Rajya Sabha, the Money Bill is deemed to have been passed by both the Houses of Parliament in
the form in which it was passed by Lok Sabha without any of the amendments recommended by
Rajya Sabha.
If Rajya Sabha does not return the Bill within the prescribed period of fourteen days, the Bill is
deemed to have been passed by both the Houses of Parliament at the expiry of the period in the
form in which it was passed by Lok Sabha.
47
The UK does feature a rather extensive committee stage lasting several weeks of a 3 month
parliamentary budget process. Germany allows 4 months for the Budget deliberations including
several weeks allocated to the Budget Committee stage in the Bundestag. In Romania the
Parliament Budget season lasts for 3 months with no less than 3-week committee deliberation
period. The Finnish Parliament has 4 months out of which 2 are spent in the Finance Committee.
In Sweden 2 out of total 3 months available to the Parliament are dedicated to the committee
discussions. In India and Australia also the House Committees get sufficient time for Budget
Scrutiny and in Canada as already discussed, the total time spent on Budget consultation and
scrutiny comes to 8 months.
Analysis of modern parliamentary democracies reveals that Parliaments generally review the
following at the time of budget submissions:
1. Debt Strategy in case where debts occupy most of the budget, the Parliament should review
the medium-term debt strategy
2. Macroeconomic framework macroeconomic assumptions underlying the budget projections
especially medium-term debts are important to understand the budget strategy of the
Government
3. Revenue projections the Ministry of Finance normally overestimates revenue projections.
Therefore, its methodology and underlying assumptions such as new revenue measures and
their impact on revenue generation are important
4. Performance budgets the Parliament should consider reviewing performance targets
together with budget numbers.
Standing Committees have an important role to play in a parliamentary democracy. In the UK,
much of the work of the House of Commons (lower house) and the House of Lords (upper house)
takes place in Committees. These Committees examine issues in detail, from government policy
and proposed new laws, to wider topics like the economy.
Standing Committees in Pakistan can suggest legislation or make recommendations to the
Assembly.
A system of checks and balances is created in the Constitution where the Executive branch has
certain responsibilities and performs under the direction of the Cabinet of Ministers.
The Rules of Procedure and Conduct of Business in the National Assembly provide guidance on
the role of Standing Committees. Rule 198 to 201 include:
Rule 198
Rule 199
Rule 200
Composition
Rule 201
Functions
49
Lately, the following rule has been added in the Rules of Procedure and Conduct of Business in
the National Assembly.
www.pac.na.gov.pk
The PAC is one of the statutory organs of the National Assembly of Pakistan. According to
Article 171 of the Constitution of Islamic Republic of Pakistan, the Report of the Auditor General
(AG) relating to the accounts of the Federation shall be submitted to the President, who shall
cause them to be laid before the Majlis-e-Shoora (Parliament). The AG Report so laid in the
National Assembly (N.A) shall be referred to the Public Accounts Committee [N.A Rule 177 (2)].
It is only through the Public Accounts Committee that the objective of Transparency and
Accountability is ensured.
5. PROCESS OF CUT-MOTIONS
The members of the National Assembly can propose reduction in the budget presented by the
Federal Government through the process called cut motions.
Ventilation of Grievance
If a Member wants to ventilate a specific grievance, which falls under the sphere of the
Government, then a notice of Token Cut can be raised.
On the notice the Member will present that the amount of the demand be reduced by Rs.100.
Speeches will be confined to a particular grievance.
51
Name of the Demand this can be found in a budget book called Demands for Grants and
Appropriations the name of the Demand is mentioned on the top of the page.
2.
Demand Number this can be found in the same book as mentioned in point 1 above.
3.
Page Number the page number is mentioned on the bottom of the book mentioned in point 1 above.
4.
The matter
a.
for Disapproval of Policy Cut precise indication of particulars of the policy is required
b.
for Economy Cut specific matter that will affect the economy is required
c.
It will not relate to expenditure charged (as per Article 81 of the Constitution) upon Federal
Government
It will be clearly expressed. It will not contain arguments, inferences, ironical expressions,
imputations, epithets or defamatory statements
It will not make suggestions for amendment or repeal of any existing law
It will not refer to matters that are not primarily the concern of the Government
It will not relate to a matter which is under adjudication by a court of law having jurisdiction
in any part of Pakistan
It will not revive discussion on a matter which has been discussed in the same session and on
which a decision has been taken
It will not anticipate a matter which has been previously appointed for consideration in the
same session; nor shall it relate to a trifling matter
It shall not relate to any matter which is pending before any court or other authority
performing judicial or quasi-judicial functions.
Review goals, outputs (service delivery), and outcomes (affects of services on target population) of
each Ministry as mentioned in the budget book called Federal Medium Term Budget Estimates for
Service Delivery
Review performance indicators and targets together with budgets as mentioned in the budget book
called Federal Medium Term Budget Estimates for Service Delivery
Review changes in the budget by comparing current years budget with the proposed years budget
as mentioned in the budget book called Demands for Grants and Appropriations for each Demand
separately
Review taxation proposals as mentioned in the Finance Bill their underlying assumptions
Review macroeconomic framework, policies and targets as mentioned in the budget book called
Annual Plan
Review projects and their allocations as mentioned in the budget book called Public Sector
Development Programme
Review supplementary Demands as mentioned in the budget book called Supplementary Budget
Statement
53
GLOSSARY OF TERMS
Accountant General
The officer responsible for the Governments overall accounting operations and performing preaudit of financial transactions within their jurisdiction. Accountant Generals office is established
in each Province and the Federal Government. Accountant General at Federal Government level
it is called Accountant General Pakistan Revenues (AGPR). (See also Auditor General of
Pakistan)
Actual Expenditure
Amount expended by a spending division/department/ unit out of the funds allocated against a
particular account head.
Account Number
Account Number is five numeric character sub-elements. This sub-element defines the detailed
natural accounts to which transaction will be classified (e.g. salaries, utilities etc). The account
number contains a further internal structure (i.e. Major object, Minor object and Detailed object).
Appropriation Accounts
Appropriation Accounts refer to a comparative statement of actual expenditure against respective
budget allocations separately for each grant. These Accounts are published annually by Auditor
Generals office (through the office of the Controller General Accounts and its subordinate
offices i.e. Accountants General) and are prepared according to Function and Object
classification.
Appropriation
Appropriation refers to an allocation of funds to a spending department. It is an Act of the
Parliament that enables the department to spend money for specific purposes.
Auditor-General
The Auditor-General is responsible for keeping the accounts of the Federation and of the
Province in specific forms and according to principles and methods as prescribed by the AuditorGeneral with approval of the President. Auditor-Generals office performs functions in
collaboration with office of the Controller General of Accounts and its sub-ordinate offices i.e.
Accountants General. (See also Accountants General)
Budget Deficit
The amount by which a government's spending exceeds its income over a particular period of
time is called deficit or deficit spending.
Budget Resolution
This refers to the annual framework within which the Parliament makes its decisions about
spending and taxes. This framework includes targets for total spending, total revenues and the
deficit as well as allocations, within the spending target, for discretionary and mandatory
spending.
Budget Surplus
The amount by which a government's, income exceeds its spending over a particular period of
time.
55
Capital Receipts
Capital Receipts in the context of government budget refer to receipts obtained from sources of
finance other than Revenue. Examples include loans, advances, grants, etc. (See also Revenue
Receipts)
Capital Expenditure
This refers to expenditure met from capital receipt. For example, research and development
activity met from loan obtained from domestic sources. This can be both Development and NonDevelopment (or Current) Expenditure. (See also Revenue Expenditure)
Charged Expenditure
This refers to certain expenditures met from the Consolidated Fund, which, under the
Constitution, must be discussed, but are not submitted to the vote of the National or Provincial
Assemblies. (See also Voted Expenditure)
Consolidated Fund
Consolidated Fund is the bank account of the Government.
Demand Number
This is a unique number assigned to each demand under a specific Ministry / Department.
Development Project
A development project is an activity undertaken to acquire, build or improve physical assets or
develop human resources and is provided within the development expenditure grant.
Development project usually has a finite life and a specific source of funding.
Direct Tax
A tax imposed directly on the income or capital of a person or organization, rather than as part of
the price of goods or services. Tax on an individuals income, referred to as Income Tax, is an
example of Direct Tax.
Expenditure
This includes current and development expenditure on Revenue Account and current and
development expenditure on Capital Account. The term Expenditure as used in Annual Budget
Statement and related documents usually covers Budget Estimates, Revised Estimates and Actual
Expenditure.
Fiscal Year
Refers to the accounting period of the Government. It is a 12-month period starting from 1st July
of the current year and ends on 30th June of the succeeding year.
Function Code
Function Code is one of the five components of the Chart of Accounts used to identify purpose
for which a budget allocation is utilized. Some of the common functions (and their relevant
codes) are: Health (07), Education affairs and services (09), Economic Affairs (04), etc.
Fiscal Transfer
Fiscal Transfers means the share of the Province out of Divisible Pool Taxes, transferred in
accordance with the National Finance Commission (NFC) Award to the relevant account of the
Provincial Governments by the Federal Government on the last working day of each month.
Grant
This refers to funding approved to a ministry or department against their Demands through the
Schedule of Authorized Expenditure.
57
Non-tax Revenue
Non-tax Revenue means the income, other than tax levied through a statue, accrued against the
service provided by the government, as user charges.
Object Code
One of the five components of Chart of Accounts used to identify economic classification of a
budget allocation. Examples include Pay & Allowances (Code A01), Repairs & Maintenance
(Code A13), Operating Expenses (A03). (See also Chart of Accounts)
PC-1
A pro-forma prescribed by Planning Commission for creation of development projects. Prior to
initiating any project a PC-1 document is prepared.
Planning Commission
National authority responsible for economic planning and monitoring of development activity in
Pakistan.
Public Account
Public Account consists of those specific purpose moneys for which Federal and Provincial
Governments have a statutory or other obligation to account for, but which are not available for
appropriation against the general operations of the Governments. For example, inflows into and
disbursements from savings schemes launched by the Government from time to time.
Re-appropriation
Transfer of allocated amount from one unit of appropriation to another such unit is called Reappropriation. This is done to utilize saving of budget allocation in a unit / head of
appropriation, for example, if it is anticipated that budget allocation for utilities could not be fully
utilized during the fiscal year, the spending department can request for transfer of un-utilized
amount to another account head, e.g. repairs & maintenance. Certain restrictions apply on Reappropriations.
Revenue Expenditure
Expenditure met from revenue receipts.
Revenue Receipts
These represent receipts that are collected during the normal operations of the Government and
make up the largest proportion of the Governments total receipts in a fiscal year. For example,
income tax, sales tax, capital value tax, etc. collected by or on behalf of Federal Board of
Revenue (FBR) are part of Revenue Receipts.
59
Revenue Account
Revenue Account is the account of the income derived from taxes and duties, fees for services
rendered, land revenue from government estates, fines, penalties, other miscellaneous items,
and the expenditure met there from.
Supplementary Budget
Additional funds not provided in the original budget. Supplementary budget is prepared and
approved during the year of execution.
Tax-Revenue
Tax-Revenue is compulsory financial contribution imposed by the government to raise revenues,
levied on income or property, on the prices of goods and services.
Voted Expenditure
Voted Expenditure means such expenditure as is submitted to the vote of the Assembly, with
reference to Article 82 (2) of the Constitution. Under the requirements of the Constitution,
expenditure in Annual Budget Statement (ABS) is separately shown for charged expenditure
and voted expenditure).
NOTES
This publication has been produced with the assistance of the European Union. The contents of this publication are the sole responsibility of
IP3 and can in no way be taken to reect the views of the European Union.