Budget Deficit

 What is Budget deficit?

In the fiscal year 2020-2021 the total budget deficit was 4 Tn Pkr. This was the shortage.
Moreover, in the year 2019-2020 the total budget deficit was 4.1 Tn PKR. In the year 2018-
19 it was again 4 trillion PKR. In the last 1 decade or so the average shortfall of the budget
deficit has been 3.5 trillion plus on average every fiscal year.

 Reason for shortfall?

1. Collection is less and expenditure is more.
a. Problems with the collection systems?
i. Flawed taxation system: The biggest source for a state for revenue collection
is through taxation or privatization of state-owned enterprises such as
railway, land and so on. It also earns money through issuance of licenses in
the sectors of telecommunication, construction and so on. However,
taxation system still remains the most important and it is flawed in Pakistan.
In the year 2021 total collection made was 4.9 trillion out of which 2.8
trillion were given to provinces; consequently, leaving the center was left
with 2.1 trillion. Collection through federal excise duty – belonging
exclusively to center and responsible for duties on exports and imports –
was 1.6 trillion. This combined with 2.1 trillion accumulated 3.7 trillion;
whereas, the total expenditure was 7.7 trillion. In simple words the taxation
system is flawed. The reasons for these are:
 Tax evasion and avoidance: This is the biggest issue. The economy of
the country is not properly documented. The business unit is either
partial documented or not documented at all since beginning. E.g.,
industrial sector. The mega and medium sized industries are
documented but just partially, meaning they do not disclose the
original data of their production e.g., flour mills. The number of
packets they sale are not disclosed due to which they are not taxed.
Similarly, sugar industry does not show on every packed. Similarly,
tobacco industry which does not show every packet. There is Urea
industry or fertilizer industry where every packet is not taxed hence
tax is not fully paid. This is common in every industry. Hence, until
track and trace system is not implemented in industrial sector -
which will tax every unit, product and packet – the mega and
medium sized industries will continue to evade tax. In contrast,
many of the small industrial units are not documented at all. E.g.,
more than 70% of the sports products such as bats, footballs and so
on are made in home industries due to which they are not
documented. Similarly, stitching is not just done by mega and
medium industries but also by small and cottage industries and they
are not registered. Real estate business is also avoiding paying taxes.
IMF has identified 23 mega real estate projects in Pakistan who are
not paying taxes as per their work. In all the private societies the
 sale and purchase of plots are done within society. The letter is also
issued by the society. As a result, the total number of plots being
shown on the paper are less while the plots being shown is always
higher. This difference continues for 5-6 years due to which
allotment letters are given. After that it again restarts. During this
time the invested play with these money and do not pay tax on it.
Similarly, the charges on the sale and tax of plots are collected by
society. The state meanwhile does not know how much tax
accumulates on those plots or how many times they have been sold
or bought. Similarly, society deals in files and those files are not
documented. Only societies know about those files or the property
dealers or the ones who want to buy files. State does not know
about the total number of files being bought or sold. Hence, after
industry real estate is one of the major tax evaders. Moreover,
according to finance minister retailers last year did a business of 20
trillion PKR; whereas, only 4.8 trillion was showed in tax. This is also
the story of goldsmiths. The 4th biggest tax evader are the hoteling
and restaurant industry whether in food or hotels or wedding halls.
5th is the private education industry. According to a report in Dawn
around 70% of the educational facilities in Pakistan are being
provided by private education sector especially medical, law
colleges and the elite school system. The big educational institutes
are documented; however, partially and do not show their annual
income. In peripheries, the middle-class school systems are not
registered with the FBR. 6th is the private health system. At least
60% if not more, health facilities are being provided by private
sector. They include from mega hospitals – partially documented –
to clinics – not documented at all. Big laboratories – partially
documented – and small – not registered at all. Hence, there is tax
evasion.
 Administrative problems with the taxation system of the country are
numerous. The biggest issue is the lack of documentation due to
which there is tax evasion. Hence, till businesses are not properly
documented there will be tax evasion and tax avoidance and this
problem is of the FBR. Moreover, even if documentation is done it is
mostly done on paper or on field where the power rests with
inspector of Inland Revenue and Customs/FBR. It is not automated
meaning there is excessive human intervention and the whole
system is dependent on human intervention. Hence, till human
intervention is not stopped and everything is not automated this
problem will continue. Furthermore, in FY 1998/1999 it collected
just above 300 billion PKR; whereas, in FY 2020-2021 it collected 4.9
trillion PKR collection. In short, the increase was worth 4.6 trillion
PKR by FBR; however, still only 0.6% of the total collection is spent
on FBR. IMF, World Bank, and Asian Development Bank argues that
spending on FBR should be at least 2%. If done not only will the
financial allocation for automation will increase and the
documentation but also the salaries of the employees of FBR will
 increase due to which corruption will also stop. Moving on, in 2010
18th amendment was introduced along with 7 th NFC award. Through
this money was divided between center and provinces. Also,
taxation powers were shifted to the provinces e.g., taxes on real
estate were given to the provinces, taxes on the agriculture sector
were given to provinces, industries installed by provinces would be
taxed by the provinces and so on. However, till now provinces have
not built their tax collection facilities and are dependent for their
budget on the allocation made by the center.
 Corruption in taxation department
 Direct taxes are less and indirect taxes are more in Pakistan. Finance
minister on the floor of the house stated that in a population of 22
crore only 30 lacs are paying direct taxes. The remaining are paying
indirect taxes.
2. Debt servicing: In FY 2020-2021 collection was less and 7.7 trillion was the expenditure
portion. However, the allocation for debt servicing was 3 trillion meaning out of 7.7
trillion, 3 trillion was allocated for debt servicing. In FY 2021-2022 8.4 trillion is the total
expenditure. Out of this 3.4 trillion has been allocated for debt servicing. Hence, the
biggest issue for budget of Pakistan after flawed taxation system is debt servicing.
3. Subsidies: This is also a big problem of Pakistan. In the FY 2020-2021 Pakistan gave
subsidies worth 1.6 trillion PKR. More than 200 billion PKR subsidy was given for
electricity. More than 50 billion $ for gas, industries were given bail out packages e.g.,
general sale tax (GST) was reduced. Similarly, more than 200 billion PKR was distributed
within the social welfare program – Ehsaas program. 144 billion PKR were distributed
among the worst affected of Covid-19 – the lower class. Moreover, loans and subsidies
were given for housing schemes and Kamyaab Jawan Program. No doubt, all these
subsidies are required; however, it cannot be argued that the state-owned enterprises
have become a white elephant for the country. They are constantly causing a financial
drain out. E.g., Pakistan State Oil (PSO), Pakistan post office, Pakistan railway, National
highway authority (NHA), National steel mills Karachi, Pakistan Airlines and so on. There
are 32 different mega enterprises that are owned by the state and they all are in huge
loss and the government needs to bail them out every year.
4. Defense spending: Pakistan has been facing existential security threats of both external
– India, Afghanistan crisis and its turmoil, Maritime security threats in the Arabian sea -
and internal nature – seperatist organization in Pakistan like BLA, BRA, BRF and so on,
and terrorist organizations like TTP, ISKP and so on. Hence, there are multiple security
threats to Pakistan; as a result, high allocations for defense as the government needs to
allocate substantial amount to its defense. In current FY it is 1.32 trillion PKR. This is a big
problem for Pakistan and it is our need of the hour. Combined with poor economic
conditions and weak standings of the economic pillars of Pakistan the country,
economically, has suffered badly.

 Implications on Pakistan:
1. Loans are repeatedly acquired and that too in trillions both from indigenous and foreign
sources. In the year 2008 the total loan was 6 trillion PKR out of which foreign loan was
60 billion $. In 2013 it increased to 12 trillion PKR out of which foreign loan was 76
billion $. In 2018 total loan was 30 trillion PKR and foreign loan became 98 billion $. In
 2021 it increased to 42 trillion PKR out of which 124 billion $ was foreign loan. Hence,
when there is such a deficit more loans are taken to re pay it.
 Reasons for phenomenal increase in loan?
a. Budget Deficit: This is the biggest reason. It became the major reason for
acquiring loans from internal sources such as state bank, and commercial
banks such as IMF, WB, ADB, China, KSA, UAE and so on.
b. Depleting dollar reserves: Whenever the dollar reserves deplete in a
country, the country takes a loan. The reasons dollar reserves deplete is
because of trade deficit. This is the biggest reason. In FY 2020-2021 the
trade deficit was 30 billion $. Moreover, debt servicing which was 12.4
billion $ in FY 2020-2021 also caused depleting dollar reserves. Hence, a
total of 42 billion $ went outside and through remittances 29 billion $ came.
Still there was a shortage of 13 billion $ plus. This shortage was fulfilled by
taking loan. In short, if loan was not taken dollar pressure would increase.
This is because all trade in the world happens in dollars. That dollar goes
through state bank’s foreign account. Pakistan’s imports are more and
exports are less. This is why dollars fly from the country. Moreover, loans
are also taken in dollars and need to be re paid in dollar.
c. Loan taking for financing projects has always been a healthy action;
however, sadly, in Pakistan that has not been the case.
 Impacts on Pakistan:
a. Debt Trap: Meaning to pay off the loan the government has to acquire more
loan from internal and external sources.
b. Conditionalities have to be accepted. The latest mini budget is the response
of IMF conditionalities.
 Solutions:
a. Acquire more loan; however, the process of loan taking must end
somewhere.
b. Tax reforms
c. Promote the production sector i.e., industry, agriculture, businesses, and so
on. If done so there will be wealth generation with state, dollar inflow and
decrease in budget deficit.
2. Lesser allocation for developmental projects and that is why it is always low in Pakistan.
3. Social welfare activities related to Human Development Index (HDI) are less as
expenditure on them is less.
4. Inflation and price hike as the government has to pay off the loans and to meet the
expenditure. For this they make things expensive; consequently, inflation rises. This has
what been happening in Pakistan e.g., gas, electricity and so on made expensive.

 Solutions:
1. Tax reforms:
a. Documentation of industries, societies, businesses
b. Digitalization/automation
c. Track and trace system
d. FBR salaries should be revised
2. Increase production base. Till it is not done there will be no chance for economy revival.
Industry and agriculture need to be increased.
3. Moreover, businesses need to be promoted. Servicing sector should be promoted
especially Information Technology sector (IT).
4. Facilitate Pakistani diaspora