Weak fiscal policy can lead to higher inflation

ISLAMABAD — The new coalition government has been warned that a loose fiscal policy can lead to higher inflation, higher interest rates and crowding out of private investment, all of which can hamper growth and poverty reduction efforts, it is learnt.

By (By a correspondent)

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Published: Mon 7 Apr 2008, 9:38 AM

Last updated: Sun 5 Apr 2015, 11:36 AM

Informed sources said yesterday that PPP and PML(N)economic experts have advised the new government to early firm up its new fiscal policy to avoid accumulation of more serious economic problems.

Finance Minister Ishaq Dar is currently busy in finalising the white paper in which the recommendations of financial and economic experts of both the political parties will also be incorporated. The white paper is expected to be presented in the parliament within this month.

Sources said the new government has also been advised not to limit the taxation effort alone to the centre. They said that the provincial governments will have to do much more to enhance the provincial tax-to-GDP ratio from the current stagnant level of 0.5 per cent to at least 1.0 per cent of GDP in the medium term. It was also learnt that the failure in attaining the much talked about fiscal consolidation — a key to ensuring macro-economic stability, has eventually forced the ministry of finance to propose taxation on agricultural and services sectors as being remedies to get rid of the growing financial difficulties.

Interestingly, these new measures have been proposed at a time when the new elected government has taken over.

A new Fiscal Policy Statement 2007-08 report finalised by the ministry of finance has called for expanding taxation gradually into the agricultural and services sectors for bringing greater yields, and reducing tax evasion.

As private sector savings are often low in developing countries, a sound fiscal policy can play a central role in mobilising resources by raising revenue on the one hand and reducing less productive spending on the other. The importance of sound and rule based fiscal policy, therefore, cannot be over emphasised in a developing country like Pakistan.

“We must increase our revenues without hurting the growth momentum. It is the government’s intention to undertaker major tax reforms to improve the tax-to-GDP ratio, expand taxpayer base, increase tax compliance and make tax administration more efficient’, it said.

it also says that government should move to tax system that is based on moderate rates and wider base through rationalisation of exemptions. Despite recent reforms, it concedes, that tax effort remained modest in Pakistan owing to various structural problems.

The report reveals some important structural shifts in patterns of revenue and expenditure. On the revenue side, it says, that the tax-to-GDP or revenue -to-GDP ratio exhibits a secular decline over the last one and half decade. On the expenditure side, total expenditure and its components also exhibits a secular decline as percentage of GDP.

Fiscal deficit as percentage of GDP also declined substantially during the same period. However, reduction in fiscal deficit owes mainly to sharper reduction in expenditure-more so development expenditure-rather than improvement in revenue effort.

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