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Introduction
In FY00, the combined fiscal efforts of the federal and provincial governments resulted in an increase of 14.6 percent in revenue receipts, exceeding nominal GDP growth rate of 8.9 percent. However, this buoyant appearance of fiscal efforts should be viewed with the composition of revenue collection in mind; the rate of increase in tax collection was less than half of GDP growth, while non-tax revenues increased substantially by 68.2 percent, adding more to total revenue collection than tax revenues. This slower growth of tax receipts lowered the tax/GDP ratio to 12.8 percent, from 13.4 percent in FY99.

Adding a dampener to increased revenue collection, growth in combined expenditures of the federal and provincial governments also exceeded GDP growth; increase in total expenditure was 40.5 percent higher than the size of additional revenue receipts in FY00. This resulted in an expansion of the overall fiscal deficit, from 6.1 percent of GDP in FY99 to 6.5 percent in FY00.

The Consolidated FY00 Budget
The consolidated federal and provincial budget for FY00 estimated total revenues and expenditures at Rs 570.9 billion and Rs 683.7 billion. The overall deficit of Rs 112.8 billion was to be financed from net borrowings of Rs 59.3 billion from external sources, Rs 67.1 billion from non-bank sources, along with a Rs 13.7 billion retirement to the banking system.

The provisional actual estimates for FY00 indicate a shortfall of Rs 34.1 billion in revenue receipts, along with excess expenditures of Rs 59.9 billion over budget targets. The shortfall in total revenue receipts was primarily the result of lower federal government revenues; on the other hand, provincial governments revenue was higher than envisaged in the FY00 budget. Similarly, the increase in consolidated expenditure was due to higher federal spending, while there was a marginal increase in provincial governments’ expenditure.

Due to this shortfall in revenues and excess expenditures, the overall deficit widened to Rs 206.8 billion from the envisaged target of Rs 112.8 billion. To finance this widened deficit, financing exceeded budget targets resulting in net borrowing of Rs 73.6 billion from external sources, Rs 93.2 billion from non-bank sources and Rs 40.0 billion from the banking sector. The additional revenue of Rs 68.2 billion in FY00 was clearly not enough to meet the Rs 95.6 billion increase in current expenditure, resulting in an expansion of the revenue deficit to Rs 106.1 billion in FY00, from Rs 78.7 billion the previous year.

In FY00, the rate of increase in current expenditures was nearly double that of GDP, indicating the inability of federal and provincial governments to contain current expenditures within budget targets. Over the years, efforts to contain these expenditures have resulted in a containment of development spending; the largest components of current expenditures (debt servicing, defence, and general administration) tend to be stubborn. The resulting increase in budget deficits have led to a significant accumulation of total debt entailing a high and increasing volume of debt servicing. At the end of FY00, debt servicing alone was larger than the conventional budget deficit and has been growing faster than GDP since FY96. The budget continued showing a primary surplus for the 2nd consecutive year in FY00 indicating that the deficit is largely driven by interest payments (see Figure IV.1 and IV.2). A summary of public finances is shown in Table IV.1

In theory, if a country borrows only to finance development expenditures, a budget deficit is not a severe problem. However, if it is borrowing for current expenditures, this becomes a burden on the economy, as the additional debt does not increase repayment capacity. In Pakistan’s case, there has been a revenue deficit since FY85, indicating that borrowings finance both development and current expenditures.

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B: Budget
*Most recent estimate from Finance Division (MOF). This will not tally with the Economic Survey.

Even within current expenditures, the persistent increase in debt servicing since the early 1980s is cause for concern. As shown in Figure IV.2, since FY95 debt servicing eclipsed development spending and the gap between the two continues to rise. With the IFI sponsored focus on fiscal austerity and the contractual nature of debt servicing, both development and defence spending has been curtailed since FY93.

The FY00 Federal Budget
Revenues
Against a budget target of Rs 560.9 billion for gross revenue receipts, revised collection stood at Rs 519.4 billion indicating an actual shortfall of Rs 41.5 billion. Two-thirds of this shortfall was on account of surcharges, one-fourth due to non-tax revenues, and one-tenth due to total taxes.

Surcharge collections not only fell short of target, but also showed an absolute decline over last year. Had surcharges not declined by Rs 41.7 billion, gross revenue collection would have exceeded its target.

Nevertheless, gross revenue collection increased by 11.9 percent in FY00, exceeding the nominal GDP growth rate. This improved performance over the previous year was largely on account of a combined increase of Rs 96.7 billion in tax and non-tax revenues.

Non-tax receipts were higher on account of increased earnings from public property & enterprises and civil administration, while tax receipts were higher due to an extension of GST to electricity, gas and petroleum products.

The Tax Amnesty Scheme also contributed to higher collection of tax revenue by more than 9.0 billion. This has been included in item II.i (a) in Table IV.2.

Against a target of Rs 138.0 billion, transfers to provinces were Rs 4.3 billion higher, resulting in net revenue receipts of Rs 377.1 billion for the federal government (see Table IV.2).

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A = Actual, B = Budget, R= Revised
Source: Annual Budget Statement of the Federal Government

Taxes and Surcharges
A tax target of Rs 356.0 billion was set in the FY00 Budget, while revised collection stood at Rs 351.6 billion, indicating a minor shortfall of Rs 4.4 billion, which was much smaller compared to the shortfall in the previous year. A compositional break-up into direct and indirect taxes shows that the Rs 12.8 billion excess under indirect taxes (against a budget target of Rs 229.0 billion), was not enough to meet the Rs 17.2 billion shortfall in direct taxes.

Income taxes have lost buoyancy since FY98, largely on account of slower growth in withholding taxes; lower interest rates on treasury bills and a shift of government borrowing towards SBP financing (returns on T-bills held by the central bank is not taxed) has led to a sharp reduction in tax revenues from government securities. Nevertheless, this fall in tax revenues was compensated by larger non-tax receipts to the federal government on account of higher transfers of SBP profits in FY00. Reliance on commercial bank borrowing would have resulted in higher interest accruing to these institutions and thus a higher withholding tax collection.

Discretionary measures adopted in FY00 to boost economic activity, included the exemption of withholding tax on industrial and commercial gas consumers, bank drafts, and other transfer instruments under the Home Remittances Scheme, and withdrawal of capital value tax on locally manufactured jeeps. These measures also led to a suppression of revenue collection of direct taxes.

Revised revenue receipts from indirect taxes were estimated at Rs 241.8 billion compared with a budget target of Rs 229.0 billion. Amongst the components of indirect taxes, there was a sharp upsurge of Rs 23.5 billion in sales tax revenues over the budget target. This increase was driven by the extension of GST to electricity, gas, petroleum products, a five percent rate increase on manufactured plastic goods etc, and the partial replacement of CED and surcharges with GST. Although, total collection benefited from higher sales revenues, this reflects a change in the incidence of the tax than an overall increase in revenues.

On the other hand, against a budget target of Rs 65.6 billion, the revised custom revenues stood at Rs 64.8 billion in FY00. The reasons for this are given below.

Falling non-oil imports in FY00, together with the relative stability of the Rupee seemed to have contributed to this shortfall, and

The steps taken to boost the industrial sector in FY00 included a reduction in the custom duty rate from 10 to 5 percent on vinyl chloride monomer, waiver of 1-percent custom duty on edible oil, permission of duty-free release of raw material from bonded warehouses, etc.

Receipts from CED also lagged behind the budget target and showed a negative growth over the previous year. This is the outcome of the partial replacement of CED with sales tax and the reduction in rates on various items; in the previous fiscal year, the government replaced CED with sales tax on gas, sugar, plastic goods, hotels, etc. Moreover, the reduction in the CED rate from 15 to 5 percent on polyester chips, from 10 to 5 percent on polyester filament yarn, and the removal of CED on the import of sack craft paper and locally manufactured paper sack, also depressed revenues.

Revised receipts from surcharges stood at Rs 36.7 billion, representing a shortfall of Rs 26.6 billion over the budget target of Rs 63.3 billion and Rs 41.7 billion over last year’s collection. This was primarily on account of the decrease in oil development surcharge (ODS) due to rising international prices that were not passed on to consumers. On the other hand, natural gas surcharges increased by Rs 5.0 billion after consumer prices were increased on 16th August 1999. In effect, the massive decline in surcharges during FY00 was not only the result of an increase in international oil prices but also on account of switching receipts from ODS to GST.

Non-Tax Revenue
The federal budget for FY00 envisaged a target of Rs 141.7 billion for non-tax revenues, while revised receipts stood at Rs 131.1 billion representing a shortfall of Rs 10.6 billion . Non-tax receipts, however, showed an impressive increase of 69.1 percent over FY99. The additional revenue generated in FY00 stood at Rs 53.6 billion, in which receipts from property and enterprises contributed Rs 24.2 billion, followed by civil administration (at Rs 22.6 billion) and miscellaneous receipts (at Rs 6.8 billion).

Receipts from property and enterprises, with a share of 56.7 percent in non-tax receipts, comprise interest and dividend income earned by the federal government on loans extended to provinces and various institutions, and shares held in various public sector enterprises. Receipts from civil administration comprise fees, fines, rents, service charges earned by various organs of state, and transfer of SBP profit to the federal government. Finally, miscellaneous receipts are made up of oil and gas royalties, sale proceeds, workers participation fund, passport fee, airport tax, foreign travel tax, etc (see Table IV.3).

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The Federal Budget FY01
Revenue
Gross revenue receipts are projected at Rs 594.6 billion: an increase of 14.5 percent over the revised FY00 budget. Total expenditures, on the other hand, are projected at Rs 694.3 billions, which is 5.8 percent lower than the revised budget estimate of FY00. This signals the government’s resolve to reduce the revenue-expenditure gap through a simultaneous increase in revenue, and reduction in total expenditure.

Net revenue receipts have been estimated at Rs 412.1 billion, a 9.3 percent increase over the revised estimates of FY00.

Tax revenues are projected at Rs 435.7 billion indicating a 23.9 percent increase over the revised estimates of FY00. An improvement in both direct and indirect taxes is envisaged, with the former expected to rise by 25.2 percent and the latter by 23.3 percent. Within direct taxes, a 21.4 percent increase is expected under income taxes and 126.9 percent in wealth tax . Although the targets appear to be optimistic, these take into account the on-going Tax Survey and the new Tax Amnesty Scheme. Under indirect taxes, customs revenue is estimated to increase by 12.7 percent and sales tax by 43.8 percent, while revenue from CED is expected to decline by 7.7 percent over the revised budget estimates of FY00.

A break-up of the budget estimates for indirect taxes, indicates sales tax as the prime source of revenue. This is based on three factors:

1. The government is expecting the impact of the GST extension (in the energy sector) to continue into FY01,
2. GST has been levied at the retail level from 1st July 2000, and
3. The government is not only substituting CED with sales tax, but also extending the scope of sales tax.

Although the government is trying to raise direct taxes, indirect taxes will remain the mainstay of fiscal efforts, as the share of direct taxes in total tax revenue is expected to decline in FY01.

Non-tax revenues are projected to decline by 7.8 percent in FY01, from Rs 131.1 billion in FY00. In terms of a breakdown, civil administration receipts are projected to decrease by 18.3 percent from the FY00 revised estimates, which is primarily attributable to lower SBP profits in FY01. Transfers to provinces are estimated at Rs 182.5 billion against Rs 142.3 billion in the revised budget for FY00. One possible explanation for this increase might be the imposition of agriculture income tax by provinces with effect from 1^st July 2000, and the levy of sales tax on select services.

In conclusion, it should be stated that the thrust of the tax policy is on widening the tax base, increasing equity in the incidence of taxes and simplifying the tax procedures. Towards this end, the government is reducing the number of federal taxes, and providing specific concessions within its tight fiscal position. The concessions to industry on fresh investments specifically to the Information Technology (IT) sector are quite generous, while the abolishment of wealth tax has also been welcomed.

Expenditures
The ratio of federal government expenditure to GDP is projected to decline from 23.2 to 19.8 percent in FY01. However, defense and debt servicing continue to dominate. The reduction of Rs 9.9 billion in defense expenditures is due to the shift of military pensions (of Rs 26.1 billion) to general administration. If this is shifted back to the defense budget to keep the figure comparable with the previous year, defense spending actually rises by Rs 16.2 billion, accounting for more than one third of net revenue receipts during FY00.This explains the 146.6 percent increase in expenditures under general administration (see Table IV.4).

The 2.6 percent decline in debt servicing was driven by domestic debt while external debt servicing has risen by 8.9 percent over the previous year. This decline in domestic debt servicing is on account of the rate cuts on NSS instruments and a fall in T-bill rates during FY00. The higher interest payment on external debt is mainly the result of increased interest payment on rescheduled debt.

The federal government has allocated Rs 96.4 billion for development expenditures compared to Rs 108.6 billion in revised budget estimates for FY00 . The budget also indicates a reduction in subsidies by 18.0 percent in FY01, from Rs 14.4 billion to Rs 11.8 billion. It should be noted that a portion of these subsidies is related to KESC and WAPDA. Additionally, a major amou