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Fiscal Discipline In Pakistan’s Context

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By Author: Mr. Abbas Raza
Total Articles: 22
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Fiscal discipline is the mainstay of macro-economic management and the ultimate objective of sound fiscal policy. Fiscal imbalances i.e. the mismatch between government’s revenue and expenditure are the major reason for inflation and down gradation of currency. Since the revenues are lower in this case, so the government has to resort to borrowings to bridge that gap. On the revenue side, the government’s main inflows are through taxes. If this revenue stream is a bit dry. It indicates that the private sector machinery is not working at its full capacity. This means that GDP growth is impacted negatively as output levels and hence productivity is curtailed. This creates inflation.

Laffer curve is a known concept in terms of fiscal management. And deals with supply-side economics. It shows and measures the relationship between the tax rate and the amount of tax revenue collected by the government. The curve illustrates the laffer’s argument that cutting taxes can increase revenue. As the taxes are reduced the corporate sector will have surplus capital to reinvest into their businesses and enhance output levels through capacity building by allocating investments to install additional plants and machinery. This, in turn, will increase employment levels, which will subsequently give rise to consumption and spending. The profitability of the corporate sector will also be augmented, enhancing its ability to declare ample dividends. This will give a boost to their stock prices and enable them to tap equity markets for raising additional capital and repeat the cycle. This we have been witnessing in the US economy presently, where low-interest rates along with lower taxes and QE have caused the unemployment levels to come down significantly and this has also become the reason for the equity market rally.

In Pakistan’s context, the main causes of fiscal imbalance are increased in government’s expenditure and low tax collection. The high fiscal deficit should be plugged by reducing the government expenditure both developmental and non-developmental in addition to increasing the net revenue. The lowering of current account deficit is a right step, as it will reduce the ability of the government to relay of borrowing, and this will subsequently impact financial outlay in the form of debt servicing. To improve tax revenue the government should adopt the laffer’s curve concept and use of fiscal means for sustained economic development. The systemic risk is pretty high. The economy in the case of Pakistan is different, since as mentioned earlier private debt has a reduced impact on the GDP. So, if taxes are reduced along with the lowering of rates. It will significantly boost and widen the tax net plus lower rates will encourage private investment. This two-prong effect will subsequently give rise to economic activity and growth.

Globally, also the trend currently in vogue is to stimulate the economies through fiscal means. As monetary tools like interest rates and Quantitative Easing has largely become impotent in the regulation of economies. Especially the Eurozone area where the rates are currently negative and the US with low rates and taxes forms the ideal case for this scenario. So, the sole avenue left for these economies is to control economic development via public spending. As capital formation through other means looks farfetched in the way that it creates a debt burden which could be unsustainable in the long term. We in our country should also take a cue from the preceding and use fiscal measures as a prime tool for sustained growth in GDP.

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