Transcript Public Finance

Public Finance
• Public Finance I: What is
public finance. What is
fiscal and monetary policy
and their implication
• Public Finance II: The
Structure of Government
and Taxation
• Finance III: Fiscal Deficits,
Foreign Assistance, and
Debt Management
Public Finance I
•
Understanding Fiscal Policy
•
Public Finance is the study of Government activities and how the Government finance those
activities
•
Public Finance is that part of finance which hovers around the central question of
allocation of resources subjected to the budget constraint of the government or
public entities.
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It is that branch of economics which identifies and appraises the means and
effects of the policies of the government.
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Public sector finance tries to examine the effects and consequences of different
types of taxation and expenditures on the economic agents (individuals,
institutions, organizations, etc.) of the society and ultimately on the entire
economy.
•
Public finance also analyzes the effectiveness of the policies aimed at certain
objectives and consequently to the development of procedures and techniques for
increasing the effectiveness of the policy.
Public Finance
• Understanding Fiscal Policy
– In economics, Fiscal policy refers to government attempts
to influence the direction of the economy through changes
in government taxes, or through some spending.
– It is the sister strategy to monetary policy which attempts
to stabilize the economy by controlling interest rates and
the supply of money.
•
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• Changes in the level and composition of taxation
and government spending can have positive
impact on the following variables in the
economy:
1. Aggregate demand and the level of economic
activity;
2. The pattern of resource allocation;
3. The distribution of income.
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• According to Wikipedia, an online
encyclopaedia, there are three possible
stances of fiscal policy
– neutral,
– expansionary and
– contractionary:
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• A neutral stance of fiscal policy implies
Government spending is fully funded by tax
revenue and overall the budget outcome has a
neutral effect on the level of economic activity.
• An expansionary stance of fiscal policy involves a
net increase in government spending through
rises in government spending or a fall in taxation
revenue or a combination of the two.
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• A contractionary fiscal policy (G < T) occurs
when net government spending is reduced
either through higher taxation revenue or
reduced government spending or a
combination of the two.
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• Objective:
– Fiscal policy is used by governments to influence
the level of aggregate demand –price stability, full
employment and economic growth
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• Keynesian economics suggests that adjusting
government spending and tax rates are the
best ways to stimulate aggregate demand.
• It works fine, especially in the time of
recession, providing framework for strong
economic growth and working toward full
employment.
Public Finance
• Background
• Before the Great Depression in the United States, the
government's approach to the economy was laissez
faire.
• But following the Second World War, it was determined
that the government had to take a proactive role in the
economy to regulate unemployment, business cycles,
inflation and the cost of money.
• By using a mixture of both monetary and fiscal policies
governments are able to control economic phenomena.
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• Is it balancing act?
• Let's say that an economy has slowed down,
unemployment levels are up, consumer spending is
down and businesses are not making any money.
• Facing this situation, a government thus decides to fuel
the economy's engine by decreasing taxation, giving
consumers more spending money while increasing
government spending in the form of buying services
from the market (such as building roads or schools).
Continues.....
• This in turn rekindles businesses and turns the cycle around from
stagnant to active.
• If, however, there are no reins on this process, the increase in
economic productivity can cross over a very fine line and lead to
too much money in the market.
• This excess in supply decreases the value of money, while pushing
up prices (because of the increase in demand for consumer
products). Hence, inflation occurs.
• When inflation is too strong, the economy may need a slow down.
• In such a situation, a government can use fiscal policy to increase
taxes in order to suck money out of the economy.
Continues.....
• Fiscal policy could also dictate a decrease in
government spending and thereby decrease the money
in circulation.
• The possible negative effects of such a policy in the
long run could be a sluggish economy and high
unemployment levels.
• Nonetheless, the process continues as the government
uses its fiscal policy to fine tune spending and taxation
levels, with the goal of evening out the business cycles.
Public Finance
• Who Does Fiscal Policy Affect?
– Unfortunately, the effects of any fiscal policy are not the same on
everyone.
– When a government decides to adjust its spending,
affect only a specific group of
people.
its policy may
– For example a decision to build a new bridge, for example, will give
work and more income to hundreds of construction workers.
– A decision to spend money on building a new space shuttle, on the
other hand, benefits only a small, specialized pool of experts, which
would not do much to increase aggregate employment levels.
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• Conclusion
• One of the biggest obstacles facing policymakers
is deciding how much involvement the
government should have in the economy.
• But for the most part, it is accepted that a degree
of government involvement is necessary to
sustain a vibrant economy, on which the
economic well being of the population depends.
Public Finance II
• Intro – Pakistan faces financial crunch
– Needs resource mobilisation – external and internal
– Taxation is one of the major source of revenue
generation
– Taxation system is inefficient, outdated, dysfunction
and riddled with corruption and structural flaws.
– It is all due to poor governance, weak state,
underdevelopment of the political and economic
institutions
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– So state being weak can not take action against the strong
lobby of urban industrialists and rural feudal landlords. So
they oppose any attempt to tax them directly.
– Tax reforms – withholding tax at source.
– This is considered as formidable tool against the
corruption of income tax officers and that the
minimization of contact between tax officers and citizenry.
– The other step was the conversion of sales tax to VAT
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– There are so many authors who describe Pakistani
tax system as Inadequate which is having ripple
effect on the rest of the economy.
– Fiscal adjustment is the major item on the policy
agenda.
– For that Pakistan has to find what Dr. Ishrat says
efficient and equitable way of mobilising
resources.
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• Function of the govt.
– Generate revenue by taxing people.
– Spend revenue on the provisions of law and order
– Defence
– Infrastructure and social development
– Government build roads, schools, hospitals, dams and
provide host of other services
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• Taxation structure varies from country to country depending on the
political dispensation of the country.
• The political dispensation of Pakistan is consisting of Federal, Provincial
and local governments which are invested with powers to generate
revenues.
• There are 92 districts, 4 city district governments, 307 tehsil government,
30 city towns and 6,022 union councils.
• Ayub introduced Basic Democracies, Zial ul Haque Local Bodies and
Musharraf District Government with more administrative and financial
powers.
• Since Pakistan is federal state with more concentration of power in
Islamabad, federal government has got more powers with regard to
revenue generation.
Legislative
responsibilities
Services
Defence,
Federal
External affairs and foreign aid
Post, telegraph, telephone, radio and TV
Government
Currency and foreign exchange
Institutes for research
Nuclear energy
parts and aerodromes
Shipping, air services, railways and national highways
Stock exchanges
Geographical and meteorological surveys
Censuses, mineral oil and natural gas
Industries.
Federal/Provincial Population planning
Electricity (except KESC)
governments
Curriculum development, syllabus planning and centres of
excellence
Tourism.
Social welfare and employment exchange
Vocational/teaching training
Historical sites monuments
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Provincial
governments
Law order , justice
Highways and urban transport
Agriculture extension and distribution of inputs
Irrigation and land reclamation
Secondary and higher education
Local
governments
Curative health
Land development
Primary education
Link roads
Intra-urban roads
Street lighting
Solid waste management
Fire fighting
Parks, playgrounds
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*Structure of the govt. and taxation
Federal government
Income tax
corporation tax
wealth tax
property tax
Sales tax
Excise duty
Import duty
Exports duty
Gas,
petroleum
surcharge
Foreign travel tax
Provincial government
Land revenue
Urban
immovable
property tax
Tax on transfer of
property
Agriculture income tax
Capital gains tax
Tax
on
professions,
trades ad callings
Stamp duty
Motor vehicle tax
Entertainment tax
Excise duty
Cotton fee
Electricity duty
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• Local tax and non tax sources under District Governments, 2002
• Zila Council
1.
2.
3.
4.
5.
6.
Education tax
Health tax
Tax on vehicles other than motor vehicle
Any other tax authorised by government
Local rate on lands assessable to land revenue
Fees in respect of schools, colleges and health facilities established
by or maintained by the district government
7. Fees for licences granted by the district government
8. Fees for specific services rendered by a district government
9. Collection charges for recovery of tax on behalf of the government
10. Toll on new roads, bridges, with the limits of a district, other than
national and provincial highways and roads.
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• Tehsil and Town Councils
1.
2.
3.
4.
5.
Local tax on services
Tax on the transfer of immovable property
Property tax on annual rental value of buildings and lands
Fee on advertisement and billboards
Fee for fairs, agricultural shows, cattle fairs, industrial exhibitions,
tournaments and other public events.
6. Fee for approval of building plans and erection and re-erection of buildings
7. Fee for licenses of permits and penalties or fines for violation of the
licensing rules
8. Charges for execution and maintenance of works of public utility like
lighting of public places, drainages, conservancy and water supply.
9. Fee on cinemas, dramatically, theatrical shows and tickets thereof, and
other entertainment
10. Collection charges for recovery of any tax on behalf of the government,
District Government Union Administration or an statutory authority
Public Finance
• Union Councils
1.
2.
3.
4.
5.
Fees for licensing of professions vocations
Fee on sale of animals in cattle markets
Market fees
Fees for certification of births, marriages and deaths
Charges for specific services rendered by the union
council
6. Rate for the remuneration of village and
neighbourhood guards
7. Rate for the execution of maintenance of any work
of public utility like lighting of public places,
drainage conservancy and water supply
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• It should be noted that district get some funds
from the centre in return for zila tax and octroi
which was taken over by the centre.
• For details on public finance, plz refer to page
210, 211 and tables thereon.
• Issues in Public Finances and Revenue
Mobilisation.
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• Issues in Public Finances and Revenue Mobilisation.
1.
2.
3.
4.
5.
Pakistan’s tax system is characterised by a number of structural
problems
Overdependence on the indirect taxes
Within indirect taxes, their is domination of taxes on international
trade which has promoted inefficiency, distorted allocation of
resources and encouraged illicit trade.
Effective tax base is narrow, there is less than one income tax
assessee per 100 persons and less than 60 per cent of imports
actually pay duty.
Tax administration is characterised by primitive and outmoded
procedures, complex laws and considerable arbitrariness and
discretion.
– World Bank too has shown concern over the resource
mobilisation and revenue generation.
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– Federal govt. collects almost 90 per cent of
revenue and provinces are given some funds from
divisible pool under NFC.
– Utilities such as education, health, water supply
and sanitation are dealt with by the provinces.
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– Fiscal discipline is the key to the macroeconomic stabilisation.
– It is held responsible for high inflation, low growth, a current
account deficit.
• Macroeconomic implications.
– IMF and World Bank terms ‘fiscal indiscipline’ as one of the
vexing problem undeveloped countries.
– Fiscal discipline is seen as pre-requisite for the macroeconomic
stabilisation.
– What govt. is doing is just opposite; most of time indulges in
spending beyond the resources, resulting into huge debt.
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• International comparisons
– According to Dr. Ishrat, Pakistan’s tax system is
inefficient one, even lagging behind the countries
as diverse and poor as Kenya, Gambia, Nicaragua,
Egypt, India and Sri Lanka.
– These countries have got much higher tax-GDP
ratio than Pakistan
– Tax-GDP ratio – find on the net.
Public Finance III
• Fiscal Deficits
• Foreign Assistance, and
• Debt Management
Public Finance
Conclusion