Budget

The federal budget has two main parts: the ordinary budget, which covers current expenditures, and the development budget (Public-Sector Development Programme), which covers capital investment and development programs (see table 4, Appendix). Current expenditures accounted for 78 percent of planned spending in the FY 1994 budget. Defense accounted for 26 percent of all expenditures, and debt service took up another 36 percent. About 25 percent of federal income was earmarked to be transferred to the provinces as statutory and discretionary grants. The provinces have their own budgets and limited powers to impose taxes. In 1991 the National Finance Commission, which includes the prime minister and the four provincial chief ministers, agreed to raise the proportion of funds going to the provinces. In return, the federal government is no longer responsible for financing provincial budget deficits.

Tax collections historically have constituted a smaller proportion of GDP than that of many other countries--between FY 1984 and FY 1992, they averaged 13.8 percent. The 1993 budget estimates called for an increase to 15.1 percent, up from 13.9 percent in FY 1992. Income and corporation taxes provided 12.9 percent of tax revenues in FY 1993. Tax evasion, however, is thought to be widespread. The agricultural sector was exempt from income tax until 1993, when a temporary levy on large landowners was introduced by the Qureshi government. In early 1994, it appeared unlikely that this tax would be reimposed by the new government led by Benazir, herself a large landowner in Sindh.

Indirect taxes are the main source of revenue. They provided 84 percent of tax revenues in FY 1991 and an estimated 83 percent in FY 1992 and FY 1993. Customs duties were expected to account for 35.0 percent of all government taxes in FY 1993. Excise duties made up 17 percent of revenues, and sales taxes made up 10 percent. Potential foreign aid donors consider the heavy reliance on indirect taxes regressive and inflationary and an impediment to the general policy of trade liberalization. Under pressure from the International Monetary Fund (IMF--see Glossary), the government reduced import duty rates in the FY 1992 and FY 1993 budgets.

In a three-year (FY 1992-94) policy statement made in agreement with the World Bank and IMF in December 1991, the government committed itself to important changes in the fiscal system. New measures extended the narrow base of both direct and indirect taxes, and administrative steps were taken to increase receipts of income and wealth taxes as well as general sales and federal excise taxes as a proportion of GDP. In FY 1993, however, the Nawaz Sharif government failed to meet its fiscal targets, and relations with the World Bank and IMF became strained. After the Qureshi caretaker government came to power in July 1993, fiscal discipline was restored, and in November 1993, the World Bank and IMF made substantial aid commitments to the new government of Benazir Bhutto12d to.

Data as of April 1994