ISLAMABAD:- The Finance Ministry has admitted that 18th amendment in Constitution and 7th NFC award has pushed up the budget deficit of the country. The non-borrowing from State Bank has also effecting the government’s fiscal position. 

The Finance Ministry has issued Medium Term Budget Strategy Paper on Wednesday. According to the strategy paper, “the major fiscal challenge being faced by the Federal Government since the introduction of the 18th constitutional amendment and 7th NFC Award is transfer of 57.5 percent of divisible pool taxes and the straight transfers to the provinces, constituting almost 59.7 percent of the gross federal revenues, which leaves very limited fiscal space for current and development spending for the Federal Government.”

The paper further said that “the government will work on the new NFC Award. It is high time to consider sharing of expenditures on social sector and other subjects including health, education, agriculture and community development with the provincial governments. Federal PSDP shall focus on core strategic national level development projects only.”

It further said that the fiscal deficit is the key driver of macroeconomic instability in country as it doesn’t only increases the debt but also puts a strain on the current account balance.

“The fiscal deficit was Rs.4,000 billion per annum on average during last three years. From FY 2014 to 2018, however, the fiscal deficit was only Rs.1,671 billion per annum. The key reason for a high fiscal deficit in the last 4 years has been the decrease in tax-to-GDP ratio of the country from 11.7 percent to 8.5 percent”, the paper further said.

On the other hand, there were slippages in expenditure which further exacerbated the fiscal deficit situation in the country.

The government has a policy for next fiscal year to reduce the budget deficit through increasing tax-to-GDP ratio and curtailing unnecessary expenditure.

On the expenditure side, the Government will strive to rationalize untargeted subsidies, reduce the losses of public sector enterprises through improved governance and cut down ostentatious expenditure through an austerity drive, said in the paper.

The expansion of the Treasury Single Account beyond Divisions and Attached Departments will be continued and the effectiveness of result-based budget management will be improved for greater accountability for the public expenditure, according to the strategy paper.

To broad the tax base, the greater effort will be made to document revenue buoyant sectors. For this purpose, the scope of role of NADRA and SBP will also be enhanced as data 17 source for identifying persons who are outside of tax net. As regards indirect taxes, FBR will also continue to focus on sectoral industrial analysis and prioritize sectors with high revenue potential apart from plugging leakages of indirect taxes through creating incentives for taxpayers to help stop leakages.

In order to eliminate distortions from the tax system, broadening of tax base, filling the gaps in supply-chain, providing a level playing field to all and documentation of the economy, the Government will review exemptions in tax laws.

The government intends to review policy with a view to end all unnecessary and discriminatory exemptions.

The volume of litigation of taxes has been increased and more than Rs.4 trillion tax revenues are stuck in litigation at various appellate fora. In order to address this problem, the government is considering to engage panels of professionally sound advocates and ‘Special Prosecutors’ in certain cases with aim to putting maximum efforts to get resolved the pending issues while protecting the revenue.

Government has been facing Fiscal Deficit and in order to finance the deficit, Government has to borrow on higher rates from domestic market through government securities which is further increasing due to raising of SBP Policy Rate and other factors. The non-borrowing from SBP has been effecting the fiscal position of the Government.

The strategy paper further said that the Debt to GDP ratio will increase and record at around 72.4 percent at the end of ongoing fiscal year primarily due to higher federal fiscal deficit and depreciation of Pak Rupee against US Dollar.

However, Debt-to-GDP ratio is expected to reduce to 69.1 percent at the end of the next fiscal year (FY23) on the back of fiscal consolidation efforts of the government.

According to the strategy paper, there are three scenarios are built upon the forecasts presented earlier to illustrates the fiscal and debt implications including higher cost of funding, external shocks and non-fiscla adjustment and higher cost of funding and non-fiscal adjustment.

Higher cost of funding assumes an increase in the cost of the new borrowing implying higher expenditures. In particular, the exercise uses a higher interest rate for each new financing instrument than the baseline scenario. This increase generates an increment in the fiscal deficit, not affecting the primary deficit.

External shock and non-fiscal adjustment assumes lower petroleum & gas levies and surcharges and, at the same time, higher subsidies. The scenario assumes half petroleum & gas revenues and double expenditure in subsidies compared to baseline.

Higher cost of funding and non-fiscal adjustment combines weakening revenues due to lower economic growth and growing expenditures due to higher subsidies as calculated in the previous scenarios

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