Budget:

budget deficit = Less collection and more expenditure

Introduction:

Major issues of economy:

1. Balance of payment crises
2. Budget deficit

Pakistan also faces same issues. These both are known as twin economic problems.
The topic under discussion is budget deficit. As Pakistan collection is less and expenditure is
more. Example In FY 2021-22, the total amount left with the center (excluding the provincial
share i.e. 57.5%) is 4.1 trillion PKr while total expenditure was 8.4 trillion Pkr. Shortfall 4.3
trillion PKR. Issue is same in every fiscal year.
In FY 2022-23, the total collection left with the centre was 4.3 trillion PKR while the
expenditure was around 8.7 trillion PKR. The shortfall was around 4.4 trillion PKR.
In FY 2023-24, the budget deficit is 4.5 trillion Pkr.
The total collection in this FY excluding the provincial share is nearly 4.6 tillion Pkr while the
expenditure was nearly 9.1 trillion Pkr.
In FY 2024-25 including the provincial share, the total expenditure was above 18 trillion PKR
while the total collection target would be 13 trillion PKR. There would be 5 trillion PKR of
deficit.
In the last 10 FY, the average deficit was, 3.5 trillion pkr
In the last 20 FY, the average deficit was well above ~2.5 trillion pkr each year.

Source: economic survey of Pakistan

Source: Finance division of Pakistan
Source: IMF

Reasons for budget deficit:

1. Flawed taxation system results into lesser collection:
In FY 2022-23, 6.7 trillion pkr was collected. Expenditure was 9.1 trillion pkr.
After applying NFC award (National finance commission) the center was left with
around 3 trillion Pkr because 57.5% was given to the provinces while 42.5% left with
the center. The center also collected money from federal excise duty like Tax on
Hydrocarbons(HC) is only given by the center so the amount left with the center was
almost 4.6 trillion Pkr. The total expenditure was 9.1 trillion PKr. The deficit was 4.5
trillion pkr.
In the FY 2023-24, 7.4 trillion PKR were collected by the center.
In FY 2022-23, 6.7 trillion PKR were collected through taxes. The expenditure was 9.1
trillion pkr
In FY 2021-22, 6.1 trillion pkr was collected. Expenditure was 8.4 trillion pkr
In FY 2020-21, 4.7 trillion pkr was collected. Expenditure was 7.7 trillion pkr
In FY 2019-20, 4.1 trillion pkr was collected. Expenditure was 7.2 trillion pkr
In FY 2018-19, 3.8 trillion PKR were collected.
The improper documentation of the economy/Flawed documentation of economy.
The economy of country is not properly documented. The minimum 35% of economy
is not documented. (ref: IMF) It stated that either the business units are partially
documented or not documented at all. when business unit is too big to hide, it is
documented but partially documented. They are doing tax evasion.
One of the major tax evaders is real state business. Majority of societies deal in files.
The total land with society is usually less, while the files being issued or sold are
always more. The society would not show all the files to FBR. Minimum time to
develop society is 15 years and the society evade almost 15 years.
The price of the plot is primarily decided by purchaser and seller, the original price
would always be higher and the one being shown to FBR would be less. This is under
invoicing primarily to avoid taxes.
The second tax evader is builders and property dealers. The number of building
houses or buildings are more and they showed less.
Industries are also considering as major tax evader, as the country does not have
straight number of products being produced. Might be production is 100,000 and
shown almost 70,000 to FBR. They only mention GST on the products. They are
evading in the sales tax. With that it also evades income tax. As they show 70k
production instead of 100k. one of the major tax evaders in the industry is the
tobacco industry. The number of cigarette packets being produced will always be
more than the one being shown to the FBR. There is no proper criteria for identifying
how many products being produced by a particular industry.
Retailers are among the major tax evaders. There are around 66,000 retailers across
the country. For example, outlets of textile, shoes, gold, food etc. The product sold
are always more than shown to FBR. Gold smith, sold 100,000 products and the one
being shown to FBR could be 60k, 70k or maximum 80k.

Same apply on hotels, private hospitals, elite educational institutions, they all are tax
evasions.

Tax Avoidance:
Majority of small businesses are not registered. When the business is too small that
it could easily be hidden, the owners would always hide such businesses. One of the
major example is the Wood industry. This industry does not pay off taxes at all
because the units are small and they are not being registered at all. The same applies
on small scale sports industry like the production of bat, ball etc at domestic level.
The stitching industry, embroidery industry are mostly not registered. Majority of the
Private clinics, laboratories, radiology at a small scale are not being registered at all
resultantly the shopkeepers across the country whether of cloth, sanitary, stationary,
or general stores do not pay taxes at all because they are not registered with FBR
even if they are their income is not properly shown in such ways they keep avoiding
taxes with ease in Pakistan.

Uneven or non equitable distribution of taxes on different sectors

In Pakistan salaried class is the worst hit. The ratio of taxes on the salaried class vary
from 27% to 49% depending on the salary size of the employee. Banking and
Telecom sectors are the major tax providers. Sales Tax on services is approximately
27%. Additionally, they have to pay off annual income tax too. Secondly, industry is
under serious burden. On one hand, the production cost is expensive especially the
prices of electricity and gas are at least 30% higher than that of India and
Bangladesh. On the other hand, they pay off 17% of GST. They also have to pay
annual income tax along with other taxes. Alone the cement industry paid more
taxes than the overall agriculture sector of Pakistan.

But on the other hand, agriculture is given tax exemption. Industry, in general,
contributes about 23% to the GDP of the country. And more than 35% to the overall
taxes of Pakistan. On the other hand agriculture contributes around 20% to the GDP
of the country. But its contribution to the tax system is almost zero. It is primarily
because the policy makers in the federal and provincial governments and assemblies
are being dominated by landlords.

The contribution of real estate to the taxation system of Pakistan is considerably less
than the size of the business.

The contribution of retailers and small shopkeepers has also been negligible to the
size of the business.

Indirect taxes more than direct taxes

In any healthy economy there is a striking balance between direct and indirect taxes.
Direct tax means tax on the producers like industrialists, agriculturalists, business
owners etc. Indirect tax is GST. In Pakistan the burden is on the consumer in the form
of GST while the producer and the business owners keep avoiding and evading taxes.

Administration problem with the taxation system of Pakistan

1. Problem of documentation:
The business units are not properly documented or not documented at all.
2. The business is not automated:
Many of businesses are not computerized or automated. Major businesses are
human dependent. A bigger chunk of tax collection is being done by the
inspector from the field and the state has to keep relying on the tax inspectors
data because the businesses are not properly or not automated at all.
3. There is rampant corruption in the FBR and other tax collecting departments as
the businesses are not properly documented or automated. Furthermore, the
salaries and other perks and privileges of the tax authorities have been less while
the power in their hands has been more resultantly more corruption and lesser
tax collection.
4. The state has not properly invested in the capacity building of FBR.
In 1999, FBR collected almost 300 billion Pkr.
In 2023, FBR collected 6.7 trillion Pkr
But the state spent on FBR very less.
International standards set by IMF, world bank, ECB, ADB etc.
“at least 2% of the collected amount must be spent on tax collecting bodies”.
This amount must be spent on their salaries, installation of tax offices at the grassroot level,
and documentation and automation of the businesses. While Pakistan spends 0.6% on FBR.
This is because documentation and automation of businesses could not be done by FBR.
Furthermore, salaries are less of IRS and Custom officers, resultant they might involve in
corrupt practices.

One major problem with the budget of Pakistan is less collection, because of flawed tax
collection. Until unless proper documentation, automation and proper spending on FBR,
sizeable increase in collection would remain in an elusive dream. In Pakistan indirect taxes
are more than direct taxes. The burden of taxes is totally on consumer not on producer. In
Pakistan more than 75% of the car owners are not tax payers.

Debt servicing:
The return of loan along with interest is another major issue with the budget of Pakistan.
Every year the minimum 38-40 % of the expenditure portion of the budget is allocated to
debt servicing. In the year 2021-22, the total expenditure was 8.4 trillion Pkr, while the loan
to be paid off was 3.4 trillion USD. In FY 2020-21, the total expenditure is 7.7 trillion while 3
trillion+ was allocated for debt servicing. In FY 2019-20, total expenditure 7.2 trillion and
allocation of debt servicing is 2.9 trillion. In the FY 2024-25, the federal government of
Pakistan has to pay off more than 20 billion USD to the external sources, more than 1.5
trillion PKR to the internal sources and more than 1.2 trillion PKR to the IPPs under capacity
payment. After applying NFC and giving the provincial share and paying off loan along with
interest almost no money is left with the center to spend on other heads.

Subsidies:
In 2021-22 budget, the total size of subsidies was 1.6 trillion pkr. In Fy 2022-23 the size of
the subsidies was more than 1.7 trillion PKR. In the last 5 FYs the average size of subsidies
was 1.5 trillion PKR. Out of which more than 200 billion pkr on electricity, more than 200
billion on gas, petrol and diesel, more than 200 billion pkr on Ehsas program. There are more
than 100 state owned enterprises majority of them are facing severe losses. The biggest loss
is faced by NHA, National Highway Authority. The second biggest loss is faced by PIA which is
currently more than 400 billion PKR. The third largest loss is faced by electric supply
corporation quetta. Fourth is the Peshawar electric supply corporation. Fifth is Railway. Sixth
is national steel mills karachi. On average, 400 billion pkr+ is being paid to these enterprises
every year. As for the industries, electricity, gas and for social welfare program. Subsidies are
required. The state own enterprises are burden on the budget of Pakistan.

Defense spending: Pakistan being faced with multiple security threats, both internal and
external. Internal like TTP, BLA. External threats like India, security situation of Afghanistan
and the maritime security threats in the Arabian sea.
Spending on defense is inevitable. Unfortunately, the economy of Pakistan is weak, it cannot
afford huge spending which is around above 1.7 trillion pkr in 2022-23. In FY 2024-25, the
defense spending would be 2.1 trillion PKR. Spending on military operation against War on
terror and separatist organizations in Baluchistan is other than routine defense spending.
Furthermore, the pensions retired military personnel was amounting more than 600 billion
PKR in the last budget and more than 800 billion PKR in the new budget is other than the
routine defense budget. The routine security spending other than policing is more than 3
trillion PKR.

Pensions: in the federal budget 2022-23, pensions were nearly 761 billion pkr. Retired
defense pension is 550 billion pkr. In FY 2024-25 federal budget, pensions allocation was
approximately more than 1014 billion PKR. More than 800 billion PKR would be for the
retired military personnel and approximately 200 billion PKR for the retired civilians.

Implications:
1. Increase in the public debt.
Collection is less and expenditure is more. Therefore, the government has to acquire
more and more loan to meet the expenses. Resultantly, the total volume of loan on
Pakistan jumped from 6 trillion pkr in 2008 to 53 trillion pkr in 2023.
In FY 2008-09, the total volume of loan in Pakistan was 6 trillion pkr
In FY 2012-13, it reaches to 12 trillion pkr
In FY 2017-18, it reaches to 29 trillion pkr
In FY 2021-22, it was 38 trillion pkr
In FY 2022-23, it was ~54 trillion pkr
One of the major reasons of loan increase is budget deficit.

2. Lesser allocation for developmental projects.

Industries, dams, canals, roads, and other infrastructure development less budget is
allocated.
3. Lesser allocation for social welfare expenditure
Health, education, research and development (R&D), police, etc.

Solutions:
1. Increase in collection:
By proper documentations and automation of economy. Tax to GDP ratio in Pakistan
is less than 8%. Tax to GDP ratio in India is around 13%. In Bangladesh it is around 8%
Recommendations/ Measures
In the recent past, two major steps taken towards documentation and automation.
First of all, Track and trace system introduce in the industries. Track and trace system
helped in the rise of tax collection from industries but it was not applied on every
industry. Resultantly, sizeable increase in tax collection could not occur.
Secondly, Point of sale system was introduced in retailers and other big businesses. It
also helped in the documentation and automation of businesses. But it remained
restricted to major retailers and was not expanded to other businesses and
shopkeepers at the grassroots level.
Resultantly, sizeable increase in tax collection.
From 2000-2008, increase 300 billion to 1.4 trillion pkr.
From 2008-2013, reached to 2.4 trillion pkr.
 From 2013-2018, reached to 3.8 trillion pkr.
In FY 2020-21, reached to 4.7 trillion pkr
Real change occurs in 2021-22, reached to 6.1 trillion pkr.

Pakistan in last 25 years, crossed the target given by IMF - 300 billion Pkr.

Equitable distribution of taxes on all the sectors. Agriculture, real estate, and
shopkeepers of all kinds must be brought under the tax net. Thirdly, Pakistan has to
increase the tax base in order to increase the tax net. More and more people must
be made to pay taxes. There are more than 7 million car owners in Pakistan out of
which 80%+ are not tax payers. The more the documentation and automation, the
more the tax payers, lesser the corruption, and more the tax collection.

2. Privatization
100+ state owned enterprises must be privatized. PIA faces loss of more than 400
billion PKR. NHA faces loss of more than 600 billion PKR. National steel mills (NSM)
Karachi faces loss of 160 billion PKR.

The job of government is not to run businesses but to play the role of regulator.
Business is the job of private individuals therefore state-owned enterprises must be
privatized to decrease the burden on budget. MCB was privatized in the 90s by then
it was paying taxes well below 1 billion PKR but now it is paying off more than 30
billion PKR and the number of employees has not reduced in the bank. Karachi
electric supply corporation is performing way better as compared to supply provided
by the state in the 90s. The national overall loss in the distribution and transmission
system is 33%. But in K-electric the loss is less than 17%.

The more the enterprises are being privatized, the more the chances of growth in the
businesses. All the banks, telecom companies, distribution companies etc privatized
are performing way better than they used to be in the past.

Last but not least, the financial burden over the state would significantly reduce.
Every year the government of Pakistan has to pay the minimum 400 billion PKR+ to
these enterprises as bail-out packages. Secondly, the government has to pay salaries
to the employees in the respective enterprises. If they are privatized at least 1 trillion
USD of savings would be made to the government of Pakistan.

To do that the judiciary must not intervene in the executive decisions of privatization.
But such executive decisions must have parliamentary approval with a majority.
Furthermore, the government also needs to have strong nerves to deal with the
pressure of the protest of the employees. At the same time the government also
needs to protect the employees while privatizing the enterprises.

3. Install more and more businesses in order to revive the economy and increase taxes.
Businesses related to real estate of a variety, businesses related to agriculture are
numerous, businesses related to industries are even more. Last but not least
businesses related to IT sector is the major source of earning and tax collection for
 majority of economies in the world. Pakistan needs to do the same on focusing on
businesses in these diverse sectors. More businesses means more finance generation
means more taxes. More businesses means more jobs enabling more people to pay
off taxes. The end result would be the government would have more money to
spend.

Trade Deficit
Pakistan has been facing persistently higher trade deficit since long.In the FY
2022-23, the total trade deficit was more than 44 billion dollar. The total
imports were above 80 billion while the total exports were just 36 billion
dollars. In FY 2021-22, the total trade deficit was around 40 Billion dollar. In FY
2023-24 the total trade deficit was well above 44 billion dollars. In the last 5 FY,
the average trade deficit was well above 40 billion dollars. In the last 10 FY the
average trade deficit was well above 35 billion dollars. In the last 20 FY the
trade deficit was well above 25 billion dollars.( Source : economic division,
Economic Survey of Pakistan 2024, SBP )
Reasons for trade deficit:
1. Massive Imports of hydrocarbons. Hydrocarbon is the largest importing
product of Pakistan since today. In 2022-23, more than 23 billion dollars
 oil, gas and coal was imported. As Pakistan is producing lesser
hydrocarbons. Its per day oil need is around 5,88000 barrels out of which
83000 was produced rest were imported.Approx 1bcf (billion cubic feet )
gas was consumed by Pakistan out of which approx 36% locally produced
and the rest was imported in form of LNG. Pakistan imports
hydrocarbons because more than 64% of energy is produced through
hydrocarbon. Hydrocarbon import is more than 50% of overall trade
deficit & more than 25% of overall Import.(80 billion overall import in
which 23 billion was import of hydrocarbon).

2. Declining Industrial Sector results in increase in trade deficit ; Since

2022 more than 200 industries closed in Pakistan. Textile industries like
Nishat, Lawrancepur, Kohinoor etc either completely or partially shut
down. Automobile industries like Suzuki, Indus, Honda, LG either
completely or partially close down their units. Mobile companies like
Samsung close down its unit in Pakistan. From 2007-16, more than 35%
of textile units close down and was shifted abroad, mostly to
Bangladesh. More than 80% of cottage industries were closed.

There are multiple reasons for declining industrial sectors in Pakistan;

First and formost the persistent load shedding in the country specially
from 2007-16, 2022-23 . Secondly Pakistan generates the most expensive
electricity in Asia and the third most expensive in the world that resulted
in de-industrialization . Thirdly the ratio of taxes specially the GST
(general sale tax) has been higher on Pakistani product. Resultantly,
Pakistani goods could not compete with the goods of Bangladesh and
India , specially in prices . the prices of Bangladesh and indian products
are cheaper than Pakistani product.
Fourthly there has been lack of ease of doing business in Pakistan. One
window operation has been a missing link in Pakistan . there are atleast
20-25 approvals needed for investing in Pakistan. While in India and
Bangladesh there is one window operation There is the facilitation in the
export and import of goods .In Pakistan there is facilitation for exports
but there are hurdles in imports even for raw material , this discourages
investors.
 Fifthly, Pakistan has been facing increasing shortage of dollar in the last
few years. In june 2021, the total reserves were well above 23 billion
dollars. But in 2023, it came down to around 7 billion dollar and Pakistan
was on the verge of default. Therefore, government imposed restriction
on the import of goods even half finish goods and raw material too, that
was needed for the industries of Pakistan. Resultantly half of industrial
sector decline in Pakistan and further decline in exports which means
more trade deficit.
Sixthly, the industrial sector of Pakistan has been persistently weak
primarily because of the lesser focus of the state on industrialization. It
was from 1958 to 66 and the early 1990s where industrialization was
partially focus in Pakistan. In 1970s the nationalization policy was a
major set back to the industrial sector of Pakistan. In 1980s the then
dictator did not have any focus on industrialization. The lesser policy
focus on industrialization resulted in weak industrial sector of Pakistan.
No country can become a potential until and unless it has a stronger
industrial sector but unfortunately the industries were not mostly
focused by the government that resulted into lesser production. Lesser
production means lesser exports. Lesser exports mean more imports.
Which means higher trade deficit.

3. Decline in Agriculture Sector of Pakistan resulted in more trade deficit;

There has been a unprecedented decline in the agricultural production
of the country in the last two to three decades. The biggest decline
occurred in cotton production of the country. Till 2000, one of the major
exports of Pakistan was cotton but now more than 35% of cotton is
imported.

Pakistan was a major exporter of fruits like apple, tomato, mangoes,

watermelon etc. There has been a sizeable cut in production of
Mangoes, Watermelon etc, but now Pakistan has to import tomatoes
and apples. Pakistan had been one of the major producer of vegetables
like, potato, onion, lady finger, green chilies etc. but now Pakistan has to
import onion, lady finger etc. There has been a sizeable cut in production
of Mangoes, Watermelon etc.
 There are numerous reasons for the decline of agricultural production of
Pakistan. First of all, repeated floods have destroyed the crops and
livestock in country specially floods of 2022 and 2010. More tha 35% of
agriculture land across Pakistan was drowned in flood water in 2022. And
the worst effects were green chilies, cotton, rice, etc. more than 100,000
buffaloes and cows along with other cattle died.
Secondly, there has been shortage of water for irrigation. On one hand
Pakistan faces the threat of flood, on the other it faces the problem of
water shortage especially at the time of harvesting. The main crop of
Pakistan is wheat which is harvested between December to April and
May. And the water availability at the specific time is low because there
is no melting of glaciers and lesser proportion of rainfall.
Thirdly, there has been a potential decline of the canal system of
Pakistan. Pakistan had the largest canal system in the world till 1980s.
but now there are series of problems with the canal system of the
country. The main canals are full of mud and they are not properly
cleaned every year. The secondary canal is partially concrete and they
faced the problem of mud water leakage and seepage. The tertiary
canals are not paved at all. And faced the problem of leakage and
seepage.
Fourthly, the agriculture of Pakistan faces the danger from the increasing
urbanization of the cultivated land. From Islamabad to Lahore there are
more than 300 residential societies in the making. Islamabad has
expanding till Attock on one hand and Gujar khan and Fateh Jang on the
other. The same is the tragedy with Karachi Lahore and other cities. In
the past most of these lines were cultivated but now real estate mafia
control them that resulted in the decline of agricultural productivity.
Agriculture had been one if the bigger contributor to the overall
production of Pakistan. Cotton, onion, apple, tomato, meat, etc. ere
exported in the past now they are imported. There is a long list of
agriculture goods productivity of which is declined resultantly their
export is also decreased. All this resulted in decline of agricultural goods
that caused more trade deficit.
4. Unprecedented increase in the size of Population resulted in the
increase of import that caused more trade deficit: In 1998 Census,
 (conducted by PBS) the total population was 140 million but in 2023 it
reached to almost 250 million. This has resulted increase in demand of
products. The local production sector is unable meet the demand.
Resultantly there has been an unparalleled increase in imports that
caused more trade deficit.

Implications of Trade Deficit:

1. Decline in dollar reserves of the country; In 2023-24, the total trade
deficit was approx. 44 billion dollars. It means this amount of dollar
moved out of country. In 2022-23 again 44 billion dollar moved out of
the country. In 2021-22, the trade deficit was nearly 40 billion dollars. It
means 40 billion dollar moved out of the country. In 2020-21, nearly 40
billion moved out. In the last 10 FY, more than 30 billion dollars each
year moved out from country because of trade deficit. Resultantly, the
state had to face acute shortage in current account and the foreign
accounts. It means trade deficit is the major reason for increasing and
dangerous decline of dollar reserves. causing balance of payment crisis.
2. Decline in dollar reserves results in the devaluation of PKR, cause
inflation.
The price of PKR is directly linked with the availability of dollar reserves.
The more the dollar reserves the stable the PKR. The decline in the dollar
reserves, the decline in the PKR. Trade deficit results into depleting dollar
reserves that causes devaluation of PKR. The devaluation of PKR causing
inflation. Every imported product is purchased in dollar but sold in the
local market in PKR. And rupee got devalued against dollar. Resultantly
the price of imported goods has shoot up. For example, diesel, patrol,
gas etc. got expensive that caused increased the per unit price of
electricity, increased in the transportation cost and even an increase in
the production of industrial and agricultural goods causing an unparallel
inflation in the country in the year 2022 and 23.
3. A decline in dollar reserves faces the country with threat of default.
4. State is compelled to acquire loan

Solutions of Trade Deficit:

 1. Adopt protectionist measures. Impose higher taxes on the import of
foreign products. This would discourage the import of foreign goods and
results in the decrease of imports which would result in decline in the
trade deficit.
2. Increasing focus on local sources of electricity generation.
3. Industrial Reforms like bail out packages, providing electricity on
subsidies rates, Uninterrupted & tax free import of raw material,
attracting investors from China to invest in 9 special economic zones
announced under CPEC, political stability and physical security to local &
foreign investors in industrial sectors etc.
4. Reforms in Agriculture Sector, for example modernization of the
irrigation techniques, revamp the canal system, ban on urbanization of
agricultural land, seed development program in order to increase the per
acre crop yield etc.

Multiple reason and massive negative implementation while major steps should have to be
taken to convert the budget deficit to budget surplus.