Public Expenditure Luqman

8/2/2019 Public Expenditure Luqman

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Public expenditure:

Public expenditure can be defined as the expenditure incurred by public authorities like

central, state and local governments to satisfy the collective social wants of the people is

known as public expenditure.

It is basically spending made by the government of a country on citizens' needs on items

such as pension, provision, infrastructure etc. Public expenditure was restricted only to a

small extent till 19th century due to laissez faire followed by the government, as classical

then believed money left in private hands could bring better returns. It was only in 20th

century when John Maynard Keynes pointed out the important role of public expenditure

in determining the level of income and distribution in the economy. Since then

governments expenditure has shown an increasing trend. Even though public expenditure

came into picture in 20th century, accelerating growth of government expenditure began

in late 70s.There are several factors that have led to enormous increase in public

expenditure through the years

Defense Expenditure: due to modernization of defense equipment by navy, armyand air force to prepare the country from war or for prevention.

Population growth: It increases with the increase in population, more ofinvestment is required to be done by government on law and order, education;

infrastructure etc. investment in different fields depending on the different age

group is required.

Welfare activities-: women welfare, mid day meals, pension provisions etc.Provision of public and utility services-provision of basic public goods given by

government (their maintenance and installation) such as transportation.

Accelerating economic growth: in order to raise the standard of living of thepeople.

Price rise: higher price level compels government to spend increased amount onpurchase of goods and services.

Increase in public revenue: with rise in public expenditure government is boundto increase the public expenditure.

International Obligation: maintenance of socio economic obligation, culturalexchange etc. (these are indirect expenses of government)


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Significance:

Public expenditure is the value of goods and services bought by the State and its

articulations. Public expenditure plays four main roles:

It contributes to current effective demand It expresses a coordinated impulse on the economy, which can be used for

stabilization, business cycle inversion, and growth purposes

It increases the public endowment of goods for everybody It gives rise to positive externalities to economy and society as a whole (or in

specific sectors and geographical areas), the more so through its capital

component. With its prioritized structure and its peculiar decision-making

processes, it substantiates the prevailing kind of State. In democracy, public

expenditure is an expression of people's will, managed through political parties

and institutions. At the same time, public expenditure is characterized by a high

degree of inertia and law-dependency, which tempers the will of the current

majority. Public expenditure can be financed through taxes, public debt, money

emission, international aid.

Classification of Public Expenditure:

Classification of Public expenditure refers to the systematic arrangement of different

items on which the government incurs expenditure. Different economists have looked at

public expenditure from different point of view. The following classification is a based on

these different views.

1.Functional Classification

Some economists classify public expenditure on the basis of functions for which they are

incurred. The government performs various functions like defense, social welfare,

agriculture, infrastructure and industrial development. The expenditure incurred on such

functions fall under this classification. These functions are further divided into subsidiary

functions. This kind of classification provides a clear idea about how the public funds are

spent.

2.Revenue and Capital Expenditure

Revenue expenditure is current or consumption expenditures incurred on civil

administration, defense forces, public health and education, maintenance of government

machinery. This type of expenditure is of recurring type which is incurred year after year.

On the other hand, capital expenditures are incurred on building durable assets, like


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highways, multipurpose dams, irrigation projects, buying machinery and equipment.

They are non recurring type of expenditures in the form of capital investments. Such

expenditures are expected to improve the productive capacity of the economy.

3. Transfer and Non-Transfer Expenditure

A.C. Pigou, the British economist has classified public expenditure as:-

1. Transfer expenditure2. Non-transfer expenditure

Transfer ExpenditureTransfer expenditure relates to the expenditure against which there is no corresponding

return. Such expenditure includes public expenditure on

1. National Old Age Pension Schemes,2. Interest payments,3. Subsidies,4. Unemployment allowances,5. Welfare benefits to weaker sections, etc.By incurring such expenditure, the government does not get anything in return, but it adds

to the welfare of the people, especially belong to the weaker sections of the society. Such

expenditure basically results in redistribution of money incomes within the society.

Non-Transfer ExpenditureThe non-transfer expenditure relates to expenditure which results in creation of income or

output. The non-transfer expenditure includes development as well as non-development

expenditure that results in creation of output directly or indirectly.

1. Economic infrastructure such as power, transport, irrigation, etc.2. Social infrastructure such as education, health and family welfare.3. Internal law and order and defense.4. Public administration, etc.By incurring such expenditure, the government creates a healthy conditions or

environment for economic activities. Due to economic growth, the government may be

able to generate income in form of duties and taxes.


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4.Productive and Unproductive Expenditure

This classification was made by Classical economists on the basis of creation of

productive capacity.

Productive Expenditure:Expenditure on infrastructure development, public enterprises or development of

agriculture increase productive capacity in the economy and bring income to the

government. Thus they are classified as productive expenditure.

Unproductive Expenditure:Expenditures in the nature of consumption such as defense, interest payments,

expenditure on law and order, public administration, do not create any productive asset

which can bring income or returns to the government. Such expenses are classified as

unproductive expenditures.

5.Development and Non-Development Expenditure

Modern economists have modified this classification into distinction between

development and non-development expenditures.

Development Expenditure:All expenditures that promote economic growth and development are termed as

development expenditure. These are the same as productive expenditure.

Non-Development Expenditure:Unproductive expenditures are termed as non development expenditures.

6. Grants and Purchase Price

This classification has been suggested by economist Hugh Dalton.

Grants:Grants are those payments made by a public authority for which there may not be any

quid-pro-quo, i.e., there will be no receipt of goods or services. For example, old age

pension, unemployment benefits, subsidies, social insurance, etc. Grants are transfer

expenditures.


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Purchase prices:Purchase prices are expenditures for which the government receives goods and services in

return. For example, salaries and wages to government employees and purchase of

consumption and capital goods.7. Classification According to Benefits

Public expenditure can be classified on the basis of benefits they confer on different

groups of people.

Common benefits to all: Expenditures that confer common benefits on all thepeople. For example, expenditure on education, public health, transport, defense, law

and order, general administration.

Special benefits to all: Expenditures that confer special benefits on all. Forexample, administration of justice, social security measures, community welfare.

Special benefits to some: Expenditures that confer direct special benefits oncertain people and also add to general welfare. For example, old age pension,

subsidies to weaker section, unemployment benefits.

8.Hugh Dalton's Classification of Public Expenditure

Hugh Dalton has classified public expenditure as follows:-

Expenditures on political executives: i.e. maintenance of ceremonial heads ofstate, like the president.

Administrative expenditure: to maintain the general administration of thecountry, like government departments and offices.

Security expenditure: to maintain armed forces and the police forces. Expenditure on administration of justice: include maintenance of courts,

judges, public prosecutors.

Developmental expenditures: to promote growth and development of theeconomy, like expenditure on infrastructure, irrigation, etc.

Social expenditures: on public health, community welfare, social security, etc. Public debt charges: include payment of interest and repayment of principle

amount.


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Determinants:

Public expenditure is determined by political will of the leading forces in the state: their

priorities, their desired state model, and their interpretation of current economic and

political phase. Past choices have relevant impact on public expenditure because of

inertia and instrumentalism. Bureaucracy may play an important decision role for the

actual expenditure. Sometimes considered as a completely exogenous variable, the public

expenditure would thus be fully in the hand of political decision-makers without

dependency from the economic context. Yet, policy makers may turn out to follow an

anti-cyclical broad control of public expenditure. Automatic stabilizers may be at work,

as with the case of support schemes for unemployment: in this case, higher

unemployment and disappointing GDP growth would lead to higher public expenditure

through unemployment benefits and financial support to firms. In a different political and

institutional context, public expenditure may, instead, positively respond to state

revenues. Higher revenues (and maybe even a public surplus) may lead to higher public

expenditure. Symmetrically, if there is an upper limit to public deficit and, because of arecession, tax revenue fall, the State may be forced to cut public expenditure. In this

context, public expenditure would turn out to be pro-cyclical.

Lawmakers facing elections are sensitive to the public opinion. Usually, low-income

social groupsare in favor of expanding public expenditure in social issues, as stimulus

for jobs, and provision of free or subsidized services. The rich tend to use less public

services and to be more worried by the amount of tax necessary to fund public

expenditure. The middle class is ambivalent and will react depending on the specific

frame that will be proposed by politicians. Specific expenditure categories and items have

their favorable and opponent constituencies. Certain large-scale projects can be thesubject of a national debate and the decision can depend on its outcome. The process of

public budgeting is crucial to influence the outcome, e.g. with the sequence of decisions

being capable of "leaving no money" for the "last" choices. The current level of public

deficit or surplus is ambivalently used to influence changes in the level of public

expenditure. For those who desire a more or less balanced budget, the surplus is an

invitation to spend, a deficit to cut. However, the same surplus can instead be directed to

tax cut and the deficit gap can be filled in by new taxes or more incisive fight to tax

evasion.

Impact on other variables:

A GDP component as it is, public expenditure has an immediate impact on GDP. An

increase of public expenditure raises GDP by the same amount, other things equal.

Moreover, since income is an important determinant of consumption, that increase of

income will be followed by a rise in consumption: a positive feedback loop has been
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triggered between consumption and income, exactly as in the case of shocks in export,

investment or autonomous consumption. The full extent of this mechanism will depend,

however, by the reactions of the other economic agents. Firms have to decide whether to

increase production or prices in response to demand. Moreover, if consumers interpret

the increase in public expenditure as a fall in their disposable income (i.e. after-tax

income),consumptionmay fall accordingly. Public expenditure is also told to crowd-out

investment, possibly through an interest rate increase, further leading, in a floating

exchange rate regime, to a currency appreciation.Exportswould then be displaced as

well. In more microeconomic terms, public expenditure may be directed to consumer

goods and thus substitute families' expenditure, as with the case of health drugs. By

contrast, in other cases, as with education, public expenditure may trigger further

consumption (books and all the other goods whose consumption depend on culture

levels).

Long-term trends:

In developed countries, it has always grown whatever the political orientation of the

government. Just the tempo can change. With a few exceptions, only under extremely

strong constraints has public expenditure been cut in absolute terms, so that this attempt

can be judged as difficult. Wars are episodes of extremely high public expenditure,

followed usually by a return to normality, unless the pressure of the ex-soldiers for social

advancement is met with an extension of the welfare state.

Business Cycle Behavior:

Public expenditure may turn out to be pro-cyclical or anti-cyclical depending on the

political and institutional attitude toward public deficit. During recessions, tax revenue

tends to fall, public budget usually depredates. Some governments react by reducing

public expenditure and freezing employment and wages in the public sector. Other

decides to spend more to stimulate the economy. The former risks to worsening GDP

dynamics and engendering a vicious cycle, which can be broken by international trade

dynamics, financial inflows or other variables. The second would provoke a deep public

deficit, waiting for GDP rebound and, possibly, new taxes. Still, real world data show

often little reaction of public expenditure to the cycle. Most cycles show public

expenditure as a stabilizing tool just keeping the same dynamics when the rest "goes

wrong Public expenditure by Federal Government:
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Fiscal Development 06-07:

A sound fiscal position is an essential prerequisite for achieving macroeconomic

stability which is increasingly recognized as a critical ingredient for promoting strong

and sustained economic growth and lasting poverty reduction. The importance of sound

fiscal policy cannot be overemphasized in the case of Pakistan as its chronically high

consolidated budget deficit (7 percent of GDP) and rising public debt burden (over

100 percent of GDP) have been the economys Achilles heal in the 1990s.

Pakistan has experienced serious macroeconomic imbalances in the nineties mainly on

account of its fiscal profligacy and accordingly paid a heavy price in terms of

deceleration in economic growth and investment and associated rise in the levels of

poverty. Considerable efforts have been made over the last seven years to inculcate

financial discipline by pursuing a sound fiscal policy. Pakistan has succeeded in reducing

fiscal deficit from an average of 7 percent of GDP in the decades of 1980s and 1990s

to an average of 3.5 percent during the last seven years. The associated public debt also

declined sharply from over 100 percent of GDP to 53 percent of GDP by end-March2007. Pakistans hard earned macroeconomic stability is therefore underpinned by fiscal

discipline. Adequate level of revenue generation is sine quo non for the public policy to

meet expenditure obligations. Inadequacy of revenue generation directly affects the

governments resource position and the availability of socially desirable public goods. In

Pakistans economic history and until recently the mismatch between revenue collection

and budgetary requirement was a norm rather than an exception.

Since the situation required radical changes, broad-based tax policy and tax

administration reforms were initiated by the Central Board of Revenue (CBR) to improve

upon the resource mobilization effort and increase tax compliance by providing congenial

environment to the taxpayers. The thrust of the reform has been at reducing tax rates,

broadening the tax base to hitherto untaxed or under-taxed sectors and shifting the

incidence of taxes from imports and investment to consumption and incomes. The tax and

tariff reforms are aimed at simplification of tax system, improvement in resource

mobilization, boosting economic activity to ensure robust economic growth, reducing

the cost of doing business for trade and industry, reducing tax burden for lower income

strata of the society and promoting a tax-payer friendly culture. During the last six years

from 2000-01 to 2006-07, tax collection by the CBR increased by112.8%.The revenue

deficit (th difference between total revenue and total current expenditure), a measureof government dies-saving, was at a deficit of 0.2% of GDP in 2005-06 compared to a

deficit of 2.2% in 2000- 01. It has further progressed towards a targeted revenue surplus

of 0.6 percent of GDP in 2006-07.The revenue surplus has significance in inter-

generational distribution of debt burden. Fiscal Responsibility and Debt Limitation Act

2005 envisages a revenue surplus starting from 2007-08. The structure of taxation has


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undergone considerable changes since the1990s. Firstly, the share of direct taxes in total

taxes(collected by the CBR) has increased from 18 percent to over 38.5 percent in July-

April 2006-07. The share of indirect taxes declined from 82 percent to 61.5

percent during the same period. Even within the indirect taxes, dramatic changes

have taken place. The collection from custom duty used to account for 45 percent of total

tax collection and 55 percent of indirect taxes in 1990-91, its share has now been reduced

to 18.6 percent and 32.3 percent, respectively. This is the consequence of the tariff reform

implemented by successive governments since 1990-91. The share of sales tax increased

at a relatively faster pace from 14.4 percent to 41 percent of total taxes and from 17.6

percent to 60.3 percent of indirect taxes during the same period. Central excise as a tax is

losing its importance and gradually being faded out. Its shares in total taxes and indirect

taxes were 22.5 percent and 27.5 percent, respectively in 1990-91. These have now been

reduced to 8.3 percent and 12.3 percent, respectively during the same period.

The total expenditure remains more or less stable in a narrow band of 17 to 18.8 percent

of GDP during the last seven years. Substantial decline in interest payments from as highas7.5 percent of GDP in1998- 99 to2.7 percent of GDP in 2006-07, has provided fiscal

space to re-orient expenditure in favor of development expenditure. Resultantly the

share of current expenditure in total expenditure declined from 89 percent of

total expenditure in1998-99 to72 percent in 2006-07. In addition, the share of

development expenditure more than doubled from 11 percent to 28 percent in the

same period. The development expenditure bore the brunt of structural adjustment of

the 1990s as it declined from as high as 7.5 percent of GDP in 1991-92 t 2.5 percent of

GDP by 1999-2000. During the last seven years the development expenditure

improved from 2.2 percent of GDP in 2000-01 to 4.9 percent of GDP in 2006-07. Second

largest component of the current expenditure, namely, defense spending remained

stagnant at around 3.1 percent to 3.3 percent of GDP during the last seven

years. This shows strong focus of the government on removing infrastructural

bottlenecks and building physical assets. Non-defense-non- interest expenditure has

improved from 7.8 percent of GDP in 1999-2000 to 11.9 percent of GDP in 2006- 07.

Total revenues are budgeted at Rs. 1163.1 billion in 2006-07 compared to Rs 1087.0

billion in 2005-06, showing an increase of 7.0%. The Central Board of Revenue (CBR)

is targeted to collect Rs. 835 billion in 2006-07, which is 17.1 percent higher than last

years collection. CBR has exceeded the revenue target of Rs. 645.2 billion fixed for the

first ten months of current fiscal year (July-April 2006-07) by Rs. 11.3 billion. The netcollection stood at Rs.656.5 billion As against Rs.547.0 billion in the comparable

period of last year, thereby showing an increase of 20 percent. The direct taxes

contributed most of the increase as they have surpassed the target by Rs.52.4 billion and

recorded massive growth of 50.9 percent. This increase has compensated much of the

revenue shortages on account of sales tax and customs duties by Rs. 22.5 billion and Rs.


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19.0 billion, respectively owing to slowdown in imports. The massive than the anticipated

slowdown in imports growth from 30.6 percent to 10.3 percent during July-

April 2006-07, resulted in negative growth in dutiable imports with adverse

implications for import related taxes. Pakistan continues to maintain fiscal discipline for

the last several years. Total expenditure is targeted at Rs. 1536.56 billion or 17.4 percent

of GDP for the fiscal year 2006-07. Total expenditure was projected to be 8.6 percent

higher than last year (2005-06). During the first nine month (July-March) of

the current fiscal year total expenditure is estimated at Rs.1168.5 billion or 76 percent of

the annual target. Current Expenditure is targeted at Rs. 1126.19 billion for the current

fiscal year (2006-07) which means it would remain almost stagnant at the level of 2005-

06. During July-March 2006-07, provisional estimates show current expenditure of

Rs.925.3 billion which is 83.6 percent of the target. The higher increase in current

expenditures during the last two years is mainly on account of earthquake-related

spending amounting to 0.5 percent to 0.8 percent of GDP. Development expenditure is

targeted at Rs.435 billion for the year 2006-07.

During the first nine months (July-March) of 2006-07, development expenditure

amounted to Rs.242 billion or 58 percent of the yearly allocation. This expenditure is

likely to pick up in the last quarter the overall fiscal deficit is targeted at Rs. 373 billion or

4.2 percent of GDP for 2006-07. The Government is well placed to meet this target as

fiscal deficit during the first nine months remained at 3.1 percent of GDP or 73 percent of

the yearly target. On the basis of the developments on revenue and expenditure front, the

overall fiscal deficit during the first nine months (July-March) of the current fiscal year

stood at Rs.272.8 billion or 3.1 percent of GDP. Earthquake accounted for sizeable

amount of fiscal deficit and underlying fiscal deficit excluding earthquake expenditure is

targeted at 3.7 percent of GDP for 2006-07. Public debt burden continues to declinesharply for the seventh year in a row on account of prudent fiscal management. Public

debt was 85 percent of GDP in 1999-2000 but has declined sharply to 53.4 percent in

end-March 2007 a decline of 32 percentage points in just seven years is one

of the significant achievements of the government. During the year, public debt has

declined from 56.9 percent in 2005-06 to 53.4 percent of GDP a decline of 3.5 percentage

points in one year. Since public debt is a charge on the budget, its burden must be

viewed in relation to government revenue. Public debt was 627 percent of total

revenue in 1999-2000 but has declined to 400 percent in end-March 2007 a decline of

227 percentage points in seven years is not a mean achievement. External Sector Pakistan

has recorded a laudable export performance during the last several years, with exports

growing at an average rate of almost 16 percent per annum over the last

four years (2002-06). Beside sound macroeconomic policies pursued by the

government the strong and sustained growth in world economy also contributed

to impressive export growth. Despite further improvements in the international

trading environment, Pakistans export growth witnessed abrupt and sharp deceleration to


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less than 4 percent in the first ten months of the current fiscal year after growing at an

impressive rate of 16 percent per annum until June 2006. Pakistans import growth on the

other hand, slowed to a normal level in the current fiscal year after surging at an average

rate of 29 percent per annum during the last four years. Four years of strong economic

growth strengthened domestic demand which triggered a consequential pick up in

investment. The rise in investment demand led to a massive surge in imports. Though

Pakistan continued to maintain its strong growth momentum in the current fiscal year,

import growth has decelerated to a trend level for a variety of reasons including the

pursuance of tight monetary policy during the year. The slower growth imports are likely

to improve trade deficit as percentage of GDP compared to last years. Exports were

targeted at $ 18.6 billion or 12.9 percent higher than last year. Exports during the first ten

months (July-April) of the current fiscal year are up by 3.4 percent rising from $ 13.46

billion to $ 13.9 billion in the same period last year. Export of food group declined by 3.5

percent. This decline is caused by a 2.6 percent and 14.3 percent decline in exports of rice

and fruits. Export of rice declined due to lesser production caused by adverse weather

condition which kept the domestic price higher. It was more profitable to sellwithin the country than to export.

Exports of textile manufactures grew by 6.2 percent. Prominent among these are

export of knitwear (13.9%), readymade garments (6.8%), made up articles (8.9%),

cotton yarn (4.6%), and towels (2.6%). Exports of other textile materials registered a high

double digit growth of 17.2 percent. Export of raw cotton, cotton cloth and bed

wear on the other hand registered a decline. Exports of engineering goods increased by

6.7 percent while exports of petroleum products declined by 2.7 percent. In other

manufactures categories of exports, all items including carpets, rugs & mats, sports

goods, leather products, surgical equipments and chemical & pharmaceutical productsregistered negative growth. Exports of most of these items have been on the decline for

quite some time. In absolute term the overall exports posted an increase of $ 452.1

million in the first ten months of the current fiscal year over the same period last year. Of

this increase, 114.1 percent or$ 516.1 million was contributed by textile manufactures

while all other items increased by 64.8 percent or $ 293.2 million. This increase

of $ 809 million was offset by a decline of exports of rice ($ 59.3 million) and other

manufacturers ($ 296.6 million) leaving a net increase of $ 452 million. The less than

satisfactory export performance of textile manufacturers can be attributed to a variety of

factors.First; it appears that Pakistans textile exporters could not compete with its

traditional competitors. Second, the discriminating and tied-dumping duty of 5.8

percent on the bed linen export also affected Pakistans competitiveness. Third, poor

quality of cotton on account of contaminated cotton issue has also adversely affected the

export of spinning industry. Fourth, the rise in prima cotton price (a genetically

modified version) which is imported from the US is a critical input for

producing higher quality bed wear and fabrics, has made these items less


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competitive in the international market. Pakistans export suffers from serious structural

issues which need to be addressed primarily by textile manufacturers with government

playing its role of facilitating and providing some financial support on temporary basis.

Pakistan textile products are low value added and of poor quality therefore fetches low

international price. The machinery installed in recent years are old relative to

Pakistans competitors therefore, these machines are power intensive, less productive

and carry higher maintenance cost. Increased wastage of inputs also adds to their costs.

Pakistans labor is less productive because little or no efforts have been made to impart

training or improving their skills. Pakistans exporters spend little money on research and

development. Pakistan export houses lack capacity to meet bulk orders as well as they are

unable to meet requirements of consumers in terms of fashion and design. It is generally

argued that Pakistans exporters are uncompetitive in terms of adherence to contracted

quality and delivery schedule. Pakistans competitors are investing heavily and creating

better economies of scale. These are structural issues and must be addressed by

the industry itself with government playing its role of a facilitator and providing

some temporary financial assistance to address short term issues mentioned earlier.Pakistan's exports are highly concentrated in a few items namely, cotton, leather, rice,

synthetic textiles and sports goods.

These five categories of exports account for 77.2 percent of total exports during the first

nine months of 2006-07 with cotton manufacturers alone contributing 61.5 percent,

followed by leather (4.5%), rice (6.6%), synthetic textiles (3.0%) and sports goods

(1.6%).The degree of concentration has changed little from last fiscal year. Pakistans

exports are highly concentrated in few countries including the US, UK, Germany, Japan,

Hong Kong, Dubai and Saudi Arabia. These countries account for one-half of Pakistans

exports with US alone accounting for 28 percent. Pakistan needs to diversify its exportsnot only in terms of commodities but also in terms of markets. Heavy concentration

of exports in few commodities and few markets can lead to export instability.


Fiscal Policy: Fiscal year 2007-08 proved to be a difficult year for Pakistan, with several

political and economic events transpiring unexpectedly. These events include heightened

political tensions, soaring global oil prices, the international and domestic food inflation

phenomena, a slowdown in global economic activity, and the troubled law and order

situation prevalent in the country. However, the most important aspect was the non-responsive stance on account of political expediency, that is, not responding to the policy

challenges emerging on Pakistans economic scene during most part of the fiscal year

2007-08. All these events have had adverse consequences for fiscal discipline. Because of

the instability experienced at the onset of 2007-08, the fiscal deficit is expected to miss

the target of 4.0 percent of GDP this year by a wide margin.


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Total revenues collected during the current year stood at Rs 1545.5 billion, higher than

the targeted level of Rs 1476 billion. This increase of Rs 69.5 billion from the budgeted

revenues was mainly due to higher than targeted non-tax revenues. There are expectations

that the FBR may fall short of its targeted level with total tax collections of Rs 1.0

trillionRs. 25 billion less than the original target. It is also anticipated that the

government may receive an additional Rs. 103 billion from non-tax revenues, reaching to

Rs. 483 billion. Slippages in provincial tax revenues amounted to Rs. 8 billion. Pakistans

tax revenue-to-GDP ratio stood at only 9.5 percent of GDP during 2007/08 as compared

to an average of 18 percent for other developing countries, indicating that substantial tax

policy reforms are still needed to broaden the tax base. The indirect tax-to-GDP ratio

stood at around 6 percent, while the direct tax-to-GDP ratio was calculated to be 4

percent. The government recognizes the need to broaden the tax base and reduce marginal

tax rates which would stimulate investment and production. The overall services sectors,

including wholesale and retail trade, as well as agriculture, are potential candidates for

broadening of the tax bases. Gross and Net tax collection has increased by 12.3% and

16.3% respectively. In absolute terms, these collections have gone up by Rs. 89.9 billionand 107.1 billion, respectively. Among the four federal taxes, the highest growth of

28.9% was recorded in the case of federal excise receipts, followed by sales tax (19.5%),

direct taxes (12.5%) and customs (11.4%). The collection of direct taxes has suffered a

substantial shortfall during July-April FY 07-08. The total expenditure for 2007-08 was

budgeted at Rs. 1875 billion11.9 percent higher than last year. Current expenditure on

the other hand was budgeted at Rs. 1378 billion which was atprevious years level.

Development expenditure was targeted at Rs 496 billion16.7 percent higher than last

year. On the basis of revenue and expenditure projections, the overall fiscal deficit was

targeted at Rs 398 billion or 4 percent of Gapes against 4.3 percent last year. However,large slippages have occurred on the expenditure side mainly on account of subsidies on

oil, power, fertilizer, wheat and other foods. Two factors had a significant impact on the

budgetary outlook. Firstly, oil prices continued to rise at a greater pace, reaching as high

as $ 115 per barrel in May 2008 an increase of over 116 percent during the fiscal year.

Secondly, the lack olfaction on the part of the government aggravated the fiscal situation

as the high international price of oil was not passed on to the domestic consumers.

Consequently, the oil subsidy is projected to rise to Rs 175 billion over shooting the

targeted level by Rs 160 billion. Hoarding, smuggling and mismanagement of wheat

operations forced the government to import 1.7 million tons of wheat at all time high

prices. Interest payments surpassed their targeted level by a significant margin. A sum of

Rs. 375 billion was budgeted for interest payments in 2007-08 whereas they are estimated

at Rs. 503.2 billion, thereby surpassing the targeted level by staggering Rs 128.2 billion.

The adverse developments on the revenue and expenditure sides resulted in massive

slippages in the overall fiscal deficit for the year 2007-08. Against the target of Rs 398

billion or 4 percent of GDP the overall fiscal deficit is likely to be Rs 683.4 billion or 6.5


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percent of GDP the highest in the last ten years. In order to counter massive gaps

between budgeted and estimated targets in current expenditure, the government made

efforts to mobilize more resources on the one hand, and postpone development spending

on the other. An adjustment of Rs 100 billion was made in development expenditure.

Domestic and external shocks not only increased the size of the fiscal deficit but they also

changed the composition of financing. The borrowing requirements increased from Rs

324 billion to Rs 683.4 billionan increase of 111 percent. External resource inflows

were adversely affected by these shocks and against the budgeted level of Rs 193 billion,

only Rs 119.4 billion is likely to materialize. In addition to this, Pakistan could not

complete the transaction of Global Depository Receipts (GDRs) of the National Bank of

Pakistan and could not launch sovereign and exchangeable disbursements of multilateral

banks and privatization proceeds were not materialized. These developments had

adversely impacted the external resource inflows which remained below the budgeted

level. Thus, the brunt of adjustments on the financing side fell on domestic sources.

Against the budgeted financing of Rs 131 billion from domestic sources, it increased to

Rs 564 bonds. Furthermore, some of the expected billion. Within domestic sources, thebulk (82.2 percent) of financing came from banks while the remaining Rs 100 billion or

17.8 percent came from non-bank sources. Most importantly, the borrowings from the

State Bank of Pakistan (SBP) reached an alarming level. Consequently, the money supply

growth for the year 2007-08 is expected to breach the target of 13.7 percent.

Public debt as a percentage of GDP (a critical indicator of the countrys debt burden),

which stood at 85 percent in end-June 2000, declined to 55.2 percent by end-June 2007

a reduction of almost 30 percentage points of GDP in seven years. The declining trend in

public debt is likely to be reversed in 2007-08, mainly on account of yawning fiscal and

current account deficits and a sharp depreciation of the rupee vis--vis the US dollar. Byend-March 2008 the public debt as percentage of full year GDP stood at 53.5 percent.

However, more damage has been done to public debt in the last quarter (April-June) of

the current fiscal year which means a further widening of the fiscal and current account

deficits, increased borrowing from domestic and external sources to finance the deficits,

and a sharper adjustment to the exchange rate. The year 2007-08 is likely to end with

public debt at around 56 percent of GDP marking the first time in a decade to see a

reversal in trends. Public debt in rupee terms has increased by 15.8 percent in the first

nine months (July-March) of the fiscal year 2007-08. By end-June 2007 total domestic

debt stood at Rs. 2610.2 billion which was estimated at 30 percent of GDP. The

outstanding stock of domestic debt rose by Rs 409.9 billion and stood at Rs. 3020.1

billion by end-March 2008 or 30.3 percent of GDP. The domestic debt had increased by

15.7 percent by end-March 2008 over end-June 2007. The increase in domestic debt

mainly emanates from floating debt (27.1%) while the other two components, unfunded

and permanent, witnessed a modest growth of 6.1 percent and 9.4 percent, respectively.


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The government has decided in the economic stabilization program to adhere to the fiscal

deficit target reverently and during the first nine months (July-March) the fiscal deficit

hovered around 3.1 percent of the projected GDP for 2008-09 which is consistent with

annual fiscal deficit target of 4.3 percent. The fiscal improvement in the first nine months

(July-March 2008-09) has largely based on reduction of oil subsidies and a cut in

development spending. All meaningful efforts to expand revenues particularly by

broadening the tax base will only work in the medium-term. The financing patterns of

fiscal deficit remained dominated by the banking system which financed 85 percent of the

fiscal deficit and only 15 percent were financed by the non-bank sources. The

government remained well ahead of the SBP financing limit allowed by the Economic

Stabilization Program. The overall FBR tax collection remained less than satisfactory and

actually witnessed deceleration in real term. Resultantly, the FBR tax collection to GDP

ratio is likely to deteriorate around 9 percent of GDP as against the target of bringing it in

to the vicinity of 10 percent of GDP. Tax Revenue collected by the FBR amounted toRs.898.6 billion during the first ten months (July-April) of the current fiscal year, which

is 17.7 percent higher than the net collection of Rs.763.6 billion in the corresponding

period of last year. The net Direct tax collection was estimated at Rs. 332.5 billion

against the target of Rs 496 billion which implies a growth of 16.9 percent during Jul-

April 2008-09. Indirect taxes grew by 18.2 percent during Jul-April 2008-09 and

accounted for 62 percent of stake in overall tax revenue.

The sales tax collections grew by 22.2 percent and stood at Rs.358.9 billion as against

Rs.293.6 billion in comparable periods last year. The net customs duty collection has

inched up from Rs.114.9 billion in 2007-08 to Rs.117.2 billion in 2008-09, therebyshowing modest growth of 2.1 percent. The net collection of federal excise stood at Rs

90.0 billion during Jul-April 2008-09 as against Rs. 70.6 billion in the corresponding

period of last year thereby, showing an increase of 27.5 percent. Despite a decline in

fiscal deficit in the first nine months of 2008-09, the growth in domestic reaccelerated

reflecting non-availability of financing through external sources. The stock of domestic

debt grew by Rs.484.1 billion during July-Marc2008-09. This strong growth in the

domestic derelicts non-realization of privatization proceed and reduced availability of net

external financial nude to increase in external debt repayments maturing stock of foreign

currency bonds. The main contribution came from 17.5 percent rise floating debt which

increased by Rs.286 billion the stock of permanent debt has increased bRs.44 billion.Unfunded debt witnessed a grow to 15.1 percent or Rs.154.2 in Jul-March 2008-0mainly

because of uncertainty in the financial market and very attractive rates offered by NSS

schemes.


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Fiscal Development 09-10:Pakistans public finances have come under increasing strain over the past two years

due, in large part, to substantial outlays on electricity subsidies. Despite a sharp

upward adjustment over the past two years, amounting to over 60% for some

consumer categories, electricity tariffs have still not reachedcost-recovery for thepublic sector utilities. In large part, this is due to two adverse developments in

operation for much of the last over one year. First, lower rainfall reduced power

generation from the dams. Second, the adverse shift in the energy generation mix

towards fuel oil, has been accompanied by a near-doubling of international oil prices

between January 2009 and April 2010. The continued hemorrhaging of fiscal resources

by the power sector is also partly a result of unchanged end-user tariffs between 2003 and

2007. Lower than budgeted external assistance pledges also compounded

difficulties in fiscal management during 2009-10. It led to sharp cutbacks in outlays

for the public sector development program, which had been pitched at an

unrealistically high level. The heavy recourse by the government to borrowing fromthe domestic banking system led to fears of crowding out of the private sector.

However this was obviated by weak credit demand from the private sector, as well as

improved liquidity in the banking system. Nonetheless, there was an unintended

consequence: interest rates moved upward as a result. After a sluggish start, however, and

despite a difficult economic situation, tax collection has risen nearly 14% for July to

April 2009-2010, as compared to the corresponding period of 2008-09.

As a percent of GDP, however, tax collection remains low. All told, the developments

outlined above are likely to result in a moderate over-shoot of the budgeted target for

the overall fiscal deficit. Against a budgeted 4.9% of GDP, the revised outturn in2009-10 is projected to be 5.1%. During the outgoing year, the basis was laid for

two fundamental, potentially game-changing, developments in public finances.

First, the Seventh National Finance Commission (NFC) Award was successfully

concluded after a lapse of 19 years, with a fundamental shift in the basis for

determining the vertical (from Centre to Provinces), as well as horizontal (between

Provinces) distribution. Effective the from July 1, 2010, the 7NFC Award will more

than double the quantum of annual resource transfer to Constitutional the Provinces.

With the devolution of expenditures to the Provinces under the 18Amendment set

to become effective from 2011-12, the interim period is likely to cause a degree

of strain on federal finances. Second, in a major policy effort to broaden the tax base,legislation was laid before the national as well as provincial assemblies to introduce

an integrated, broad-based and modernized system of the GST (leading to a Value

Added Tax (VAT)) as originally intended in 1990. Key elements include concerns

about the lacunae introduced in the legal framework over time. This requires

needed amendments to the law at both national and provincial levels. In addition,


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modernization of the tax administration to ensure arms length dealing with

taxpayers, with verifiable and timely refunds, and addressing concerns with rent

seeking and governance in the FBR. It is estimated that the move to VAT could

yield up to 3 percent of GDP in additional revenue over a period of three to five years,

although the estimates for the coming year by leading tax experts are appropriately

modest at around 0.7 percent of GDP. Looking ahead, easing the budget constraint

assumes even greater urgency. Addressing two decades of under-investment in critical

sectors of the economy social sector, water reservoirs, physical infrastructure,

including the increasing need for maintenance of existing capital stock cannot be

postponed for much longer and will require vast resources. Catering to a rapidly

rising population, inconjunction with the need to put in place targeted socialsafety nets, will further add to the resource requirements. Meeting the expected

expenditure requirements in the medium term will require redressing the

fundamental weaknesses in the structure of public finances. These perennial weak

links have remained unaddressed in the past, and include a low, and declining, ratio of

tax collection to GDP; weak incentives for improvements in provincial finances,which could possibly have been weakened further by the new NFC award; and,

leakages in public sector expenditure.

Economic reform:

Cognizant of the limitations of the growth strategy followed in the past, which has

inevitably produced boom-bust cycles followed by a balance of payments crisis, the

government has embarked on a fundamental change of the development paradigm.

The new development strategy seeks to foster sustainable and more equitable

growth by means ofstructural improvements in the productive sectors of Pakistans

economy, involving a broad range of policy actions across sectors. The current status

of some of the important reforms is as under: Raising the Tax-to-GDP ratio is a key

pillar of the governments economic strategy. To this effect, a proposed law to

implement a broad-based Value Added Tax (VAT) with minimal exemptions from

July 1, 2010 has been presented to Parliament. In addition, other measures such as

improving tax administration and reinstating tax audits have been taken. The

cumulative effect of these policy measures is expected to be an increase of

Pakistans Tax-to-GDP ratio to 13 percent by 2013 (from 8.9 percent in 2008-09). Under

Social Protection, the government has launched the Benazir Income Support

Program (BISP). An allocation of Rs 70 billion has been made in the Federal Budget2009-10, with the aim of targeting 5.5 million poor and vulnerable Households in

Pakistan with a cash transfer of Rs 1,000 per month to each. The size of BISP

makes it the largest social protection scheme in the countrys history, and it works in

conjunction with other safety nets such as Bait-ul-Maal, Zakat Fund, and provincial

programmers such as the Sasti Roti scheme. A Cabinet Committee on Restructuring


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(CCoR) has been formed to restructure key Public Sector Enterprises (PIA, PEPCO,

Railways, TCP, USC, Pakistan Steel Mills, NHA) with a view to stop leakages

caused by annual losses amounting to approximately 1.5% of GDP. The eventual aim is

to turnaround these PSEs into profitable, self-sustaining ventures under Public-

Private Partnership mode. Under reform of the power sector, electricity tariffs have

been raised between 40-55% in less than two years, in an effort to reduce the

level of subsidies absorbed in the budget, while simultaneously moving to a full

cost-recovery tariff for the power utilities. Under a new Act of parliament,

adjustment in tariff for changes in fuel prices for power generation has been made

automatic. The government successfully concluded the Seventh National Finance

Commission (NFC) Award only the fourth in Pakistans entire history, and the

first for the last 19 years. This Award greatly augments the quantum of resource

transfer from the Centre to the Provinces. In conjunction with the higher resource

transfer to the provinces, the Centre will also devolve some major

functions/expenditure heads to the sub-national governments in line with the

provisions of the 1973 Constitution.


FISCAL DEVELOPMENTS: Fiscal performance both revenues and expenditures

have been affected by the floods and the policy adjustments in the face of global rise in

prices of energy. The original estimates had to be revised in the light of these

unprecedented happenings. Preliminary data suggests that the fiscal deficit is likely to

remain between 4-4.5 percent of GDP in the first nine months of the current fiscal year.

Part of the increase in the fiscal deficit is explainable on account of higher security related

expenditures and the floods, however significant contribution to this increase came fromhigher subsidies, delay in adoption of tax measures, non-realization of auction of 3-G

license and several petroleum related incomes which were affected due to non-resolution

of circular debt problem in full. The emerging fiscal situation has reinforced the urgent

need to broaden the tax base, rationalize expenditure and to better insulate the economy

from shocks. Although, initially a relatively higher reliance had to be placed on bank

borrowings, particularly from SBP, over time this imbalance has been corrected and the

share of non-bank borrowings has been significantly increased. Beginning with the Jan-

March quarter, the constraint of zero SBP borrowing on a quarterly basis has been fully

adhered to. At the End of March, SBP borrowings were recorded at minus Rs.16 billion

compared to the level outstanding at end June, 2010. A number of steps were adopted toimprove debt management which essentially focused on reducing reliance on bank

borrowings. Government now aims to restrict banks investment in government securities

only to the extent required for meeting statutory requirements. For this purpose extensive

marketing efforts are taken to encourage sell-down by banks of government securities to

non-bank institutions and individuals while the system of national savings schemes is


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strengthened for mobilization of non-bank resources from the individuals. The delayed

taxation measures led to the revision of FBR target from Rs.1667 billion to Rs.1588

billion. However, with slowed economic activities, including a decline in the real growth

rate, the growth in revenues in the first nine months was below expectation. Accordingly,

a need for mid-course adjustment was felt. Accordingly, as part of fiscal consolidation a

major effort was launched in March whereby three tax measures with a revenue potential

of Rs.53 in a quarter were adopted. These included the imposition of a one-time flood-

surcharge on income tax, an additional excise duty of 1% on some selected luxury items

and removal of exemptions on many goods subject to sales tax. With these measures part

of the revenue lost in the first three quarters due to delay in tax measures will be recouped

and the impact of reduced revenues on fiscal deficit. The revised FBR target of Rs.1588

billion, though formidable, remains on track.

Fiscal Indicators:


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Fiscal Indicators: 2011:


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PUBLIC SECTOR DEVELOPMENT PROGRAMME: 2006-07

Review of the PSDP 2005-06The Public Sector Development Programme (PSDP) 2005-06 was approved by the

National Economic Council (NEC) in its meeting held on May 27, 2005 at Rs 272

billion(3.9% of GDP) with a Federal Programme of Rs 204 billion, including foreignassistancecomponent of Rs 41 billion. The allocations of the federal programme

included Rs 100.8billion (49.4%) for infrastructure, Rs 98.9 billion (48.4%) for the social

sectors and balanceddevelopment and Rs 4.3 billion (2.2%) for the production sectors. It

was also assessed thatprovinces would spend Rs. 68 billion through their Annual

Development Programmes.

Public Sector Development Program me 2006-07:The PSDP 2006-07, being the 2nd year of Medium Term Development Framework

(MTDF) 2005-10, has been formulated to achieve national objectives envisaged in theMTDF such as reducing poverty, achieving Millennium Development Goals (MDGs),

equitable development of regions and social groups, minimizing wastages and ensuring

sustainable development. Its strategic thrust is to facilitate the development of human

capital and private sector as the engines of growth. To this end adequate investments have

been proposed in human resource development and physical and technological

infrastructure. The size of the Federal PSDP 2006-07 is Rs 270 billion (including foreign

aid component of Rs 36.5 billion and operational shortfall of Rs 20 billion) with an

increase of 32% over 2005-06.

The provinces are expected to spend Rs 115 billion including foreign aid component ofRs.26.7 billion through their ADPs. The WAPDA is likely to spend Rs.30 billion from its

own resources outside the PSDP. The NHA has also been asked to raise additional Rs. 6

billion through securitization of toll revenues and other receipts. In addition, the

Earthquake Reconstruction expenditure would be Rs 50 billion. Thus the total investment

including outside PSDP by WAPDA & NHA would be Rs 470 billion. 4.7 The federal

size of PSDP of Rs. 270 billion for financial year 2006-07 represents 4.3 % of projected

GDP (mp) which is higher than the last years PSDP / GDP ratio of 3.9 %. The

PSDP/GDP ratio would be gradually increased and at the end of terminal year of MTDF

2009-10 it would reach 6.3% of the GDP. The Ministry-wise summary of PSDP 2006-07

is at Annex- 4.1. The overall position is given in Table -4.1


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Public investment is made for provision, expansion and modernization of socio-economic

infrastructure, employment generation, poverty reduction, good governance, removing

regional disparities and improving quality of life of the people both by the Government

entities and public sector corporations. For this purpose, the funds are allocated by the

federal, provincial and local governments to development projects and programs, as per

fiscal space available with the government, in the national budgets. The public sector

corporations mobilize their own resources. The Public Sector Development Program

(PSDP) is the main instrument for providing budgetary resources for development


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projects and programs. As a percentage of GDP, the PSDP has declined sharply from 7.5

percent in 1991-92 to 2.5 percent in 1999-2000 (Figure 5.1). By continued efforts of the

government through strong economic management, sufficient fiscal space has emerged

which led to the stability of macro-economic framework. Through consistent increase in

the PSDP size, a level of 4.3 percent of GDP has been achieved in the year 2006-07. The

MTDF emphasizes greatly on PSDP and seeks to increase the PSDP as a percentage of

the GDP from 3.1 percent in 2004-05 to 6.3 percent by 2009-10.

The PSDP 2007-08 has laid due emphasis on maintaining momentum of growth,

realization of core MTDF objectives, such as reducing poverty, achieving the MDGs,

ensuring equitable distribution of development funds across regions and various social

groups, empowering women and minimizing wastages. The PSDP 2007-08 has been

formulated with a view to avoiding a thin distribution of resources and the following

principles have guided the resource allocation in the PSDP:

completion of on-going projects;

initiation of important new approved projects;

initiation of un-approved but crucial projects;

implementation of public commitments made by the President and the Prime

Minister


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equitable/fair distribution of funds among the provinces; and

preparation of projects conducive to creating environment ofknowledge economy


The PSDP 2008-09 marks an important shift in Government priorities by layingemphasis on poverty alleviation while maintaining the momentum of growth. The five

major priority areas are:

comprehensive support program for poor and vulnerable groups; overcoming water and energy crises; uplift of Baluchistan, NWFP and Special Areas; reviving growth in agriculture and manufacturing; and Building up human resources to compete in the global economy.


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The strategic thrust of the Annual Plan and PSDP 2009-10 has been derived from Nine

Points Economic Agenda of the government. Major elements of the strategy are:

Ensure economic recovery consistent with stabilization. Maintain momentum of agriculture growth together with support policies

for revival of industries;

Address critical infrastructure gaps in water, power and transport forenhancing competitiveness;


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Increase reliance on indigenous energy resources, Achieve Millennium Development Goals and reduce poverty through a

comprehensive social protection system with an exit strategy;

Facilitate balanced development in the country by reducing regionaldisparities; and

Rehabilitation and reconstruction of conflict affected areas. In allocationof funds across sectors and projects for PSDP 2009-10, following guiding

principles in order of priority were adopted by the APCC.

Maximum allocation to projects which can be completed during 2009-10followed by projects that are likely to be completed in the next two years.

Initiation of important new approved projects. Social sector allocation should be protected as far as possible. Only unavoidable bricks and mortar projects be started. Un-approved important projects should only be financed with token

allocation.

Directives/announcements would be honored. Keeping in view of theabove principles the APCC finalized its recommendations and proposed

the total size of PSDP at Rs 595 billion. Out of this the federal

government programs amount to Rs 395 billion with an operational short

fall Rs 20 billion. The development requirements of provinces were

estimated at Rs 200 billion. In addition to this Rs 25 billion would be

spent by ERRA for rehabilitation and reconstruction of Earthquake

affected areas. The NEC on the recommendation of the APCC

subsequently approved the total size of PSDP 2009-10 at Rs 621 billion

(including foreign loan of Rs 72.0 billion) with an operational short-fall of

Rs 21 billion; which is higher by 14.8% than PSDP 2008-09.


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The total national development outlay stood at Rs 714 billion (4% of GDP) with federalprogram me of Rs 296 billion (including Rs 16 billion for ERRA) with foreign

exchange component of Rs 38 billion and Rs 424 billion (initial budgeted size was Rs

373 billion) for provincial programmers to be undertaken through ADPs. Broad sect oral

breakup of federal PSDP of Rs 296 billion for 2010-11 is indicated in Table 4.1 where

infrastructure and social sector received major shares respectively at 44% and 53%. The

catastrophic floods of July - August, 2010 wrecked havoc on people of Pakistan almost

in all parts of the country that has caused heavy damages to life and property. Physical

and social infrastructure, agricultural land & products, livestock, houses in both the rural

and urban areas, were badly damaged across the country. The rural economy particularly

agriculture sector was affected. For reconstruction and rehabilitation works, the

government took various measures for financing flood related works including support

from international donors. Accordingly, the provinces slashed their development

programmes from Rs 424 billion to Rs 266 billion. Federal PSDP 2010-11 was also

reduced from Rs 280 billion to Rs 180 billion. However, budget for ERRA was increased


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from Rs 10 billion to Rs 16 billion during 2010-11. To manage this reduction, PlanningCommission took the following steps to rationalize the development expenditure.

All executing agencies were advised not to initiate new projects unless veryimportant with prior approval of the Planning Commission.

Ministries / Divisions / Executing agencies were advised to prioritize theirprojects for priority and protection as under:

Projects which are fairly at advanced stage of completion Projects of less-developed areas (Baluchistan, AJ & K, FATA, GilgitBaluchistan) and HEC Maximum possible protection to social sector projects. Contractual obligations at international level be honored. Bricks and mortar projects be discouraged Slow moving projects with less than 30% expenditure be deferred

As a result of the above, revised sectoral allocations of federal PSDP 2010-11 arePresented in Table 4.1.


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OUTLOOK OF UBLIC SECTOR DEVELOPMENT PROGRAMME FOR 2011-12

Federal PSDP 2011-12 has been formulated in line with objectives of Economic Growth

Framework. It articulates strategy where private sector investment could greatly be

encouraged by reforming and strengthening economic governance through reforms ininstitutions like taxation system, civil services, judicial system, commercial,

modernization of cities being locomotives of growth. The thrust of strategy is to focus on

software of economic growth (increase competitiveness to increase total factor

productivity, generate maximum demographic dividends, addresses economic

governance issues, reforms in institutions, innovations and technical know-how,

incentives based entrepreneurships, skilled human resources) so as to provide an

environment in which the hardwareof economic growth (physical infrastructure) could

work productively. Besides, the federal Government has also adopted three year Medium

Term Budgetary Framework (MTBF 2011-14). MTBF has been adopted with a view to

maximize utilization of constrained public funds for PSDP focusing on out-put based

budgeting system. Under this system, federal budget has been projected for medium

term period of three years. Accordingly, current as well as development budgets are

estimated as Indicative Budget Ceilings (IBCs) against the requirements of various

Ministries/Divisions. Advance indication of resources help to plan economic activities

during each Fiscal Year. Under restructured procedure, Ministries / Divisions have been

empowered to enhance efficiency and effectiveness of Governments spending. The

role of Ministries/Divisions has since been enhanced to focus on service delivery. Their

development programmes should reflect the highest sectoral policy priorities. The

Finance Division indicated the total development budget size of Rs 280 billion for federalcomponent for financial year 2011-12. Indicative Budget Ceilings (IBCs) of each

Ministry/Division were discussed by the high powered Priorities Committee co-chaired

by the Secretaries, Finance, Planning & Development and Economic Affairs Divisions

from 22nd April, 2011 to 26thApril, 2011. The Priorities Committee stressed on need to

focus on rational spending of public funds preferably against on-going projects for

delivery of speedy socio-economic benefits to the people. Keeping in view the increased

throw-forward of approved projects and reduction in the size of PSDP 2010-11 by Rs

100.00 billion, the Planning Commission estimated the requirement of Rs 365 billion for

the next year PSDP. Federal PSDP 2011-12 also emphasizes division between

provincial and federal subjects. For productive outcome under PSDP investment,

development priorities have been shifted from financing local nature projects of

provinces/districts to national level projects of Infrastructure in back-drop of 18th

Amendment and 7th NFC Award. To control looming energy crisis, substantial resources

are needed to be injected into this sector to realize targets of other sectors of the economy

such as agriculture, manufacturing and services. Programmes and initiatives have been


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encouraged for bringing innovations, technological know-how, entrepreneurship, andregularization of business and modernization of cities as locomotives of economic

growth. To finalize the PSDP 2011-12 on more realistic grounds, Priorities Committee

issued the following guidelines to Ministries / Divisions for setting priorities while

allocating funds to their projects within the indicative budget ceilings:

Projects nearing completion be fully protected Contractual bindings in projects with foreign donors be obliged Development Packages be protected Only new approved projects falling in governments priorities Projects with 30% expenditure may be deferred unless very critical

In view of squeezed financial envelope of federal PSDP with huge throw-forwardliability, the first and second priority of the Government was to allocate funds to the

projects of energy, water conservation and augmentation, roads, railway and ports sectors

being the primary responsibility of the Federal Government which are likely to be

completed by June, 2012 and June, 2013 respectively. Care has also been taken of core

social sector projects of Health, Education, Physical Planning & Housing, Governance,

Special Programmes (PWP-1 and PWP-II) which have direct impact on the socio-

economic conditions of the people, Special Areas Program (AJ & K, Gilgit Baltistan &

FATA) with the aim to bring these areas at par with the developed areas of the country.

Emphasis has also been laid on modernization of Science & Information Technology

infrastructure in the country. From current financial year, after abolishment ofConcurrent Legislative List, provincial projects/programs have been shifted to the

provincial governments. To this effect meetings were held with provincial government

son April 2 & 4, 2011. Three types of projects were placed before them:

Vertical programs Projects by location Projects under directives

Provincial Governments requested that though subject of health and population has been

devolved to the provinces but Federal Government may continue financing verticalprograms and projects/programs being implemented under Directives. This matter was

placed before Council of Common Interests in its meeting of April 28, 2011. It was

decided that Federal Government would finance health sector vertical programs. It was

also decided that Federal Government would finance Population Welfare programme and

projects initiated under directives during the period of current NFC award. Therefore,


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appropriate allocations have been earmarked to cater for the requirement of these

programs/projects. As far as other projects are concerned, these have been transferred to

the concerned provinces with their consent. These projects would be financed by

provincial Governments through their ADPs. The PSDP 2011-12 was placed before the

National Economic Council which approved it in its meeting held on 28th May, 2011 at

total size of Rs 730 billion (3.4 % of GDP), 58% higher than the revised allocation of Rs

462 billion. Of this, federal programme is of Rs 290 billion (including foreign assistance

component of Rs 36.8 billion), with Rs 10 billion allocation for ERRA. The federal

allocation this year is higher by 59% compared to 2010-11. The provincial development

programme is Rs 430 billion, 62%higher than last year revised estimate of Rs 266 billion

Public Sector Development Programme

Public investment is a broader concept which includes the Public SectorDevelopment Programme (PSDP), the investments made by the public

corporations and various authorities and entities of the federal, provincial and local

governments.

The PSDP is financed out of the budgetary resources and corporations normallymobilize their own resources.


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Objectives and Strategy

The Public Sector Development Programme (PSDP) is the main instrument for providing

budgetary resources for development projects and programmes.

Its strategic thrust is to facilitate thedevelopment of human capital and private sector as the

engines of economic growth.

PSDP will act as a catalyst for functioning markets andthe maximum exploitation of

opportunities created by globalization.

Documents

Public Expenditure Luqman