Hand Book of Public Finance

PUBLIC
FINANCE
HUMAIRA MOHSIN
BS 3rd YEAR
B1155057
Page |2
Contents
THEORIES OF PUBLIC EXPENDITURE GROWTH ........................................................................................................... 5
MEASURING SIZE OF PUBLIC EXPENDITURE: ........................................................................................................... 5
PUBLIC EXPENDITURE SHARES IN GDP:................................................................................................................ 5
PERCAPITA PUBLIC EXPENDITURE: ......................................................................................................................... 5
EXPENDITURE ELASTICITY: ....................................................................................................................................... 5
MARGINAL PROPENSITY TO SPEND:.................................................................................................................... 6
THEORIES OF PUBLIC SECTOR EXPENDITURE GROWTH: ..................................................................................... 6
THEORY OF ADAM SMITH: ..................................................................................................................................... 6
ADOLPH WAGNER LAW:........................................................................................................................................ 7
ENGELS LAW: ............................................................................................................................................................ 7
PEACOCK- WISEMAN MODEL OF SOCIAL DISTURBANCE: ............................................................................ 8
RICHARD MUSGRAVE DEVELOPMENT MODEL:.................................................................................................. 8
WAGNERS LAW: ........................................................................................................................................................... 8
EMPRICAL RESULTS: .................................................................................................................................................. 9
HYPOTHESIS TESTING: ............................................................................................................................................. 9
ENGELS LAW: .............................................................................................................................................................. 10
RELATIONSHIP BETWEEN ENGELS AND WAGNERS LAW: ......................................................................... 10
EMPRICAL RESULTS: ............................................................................................................................................... 10
RESULTS FOR DIFFERENT INCOME GROUP: ......................................................................................................... 12
LOW INCOME COUNTRIES: ................................................................................................................................ 12
LOWER MIDDLE INCOME GROUP: .................................................................................................................... 14
UPPER MIDDLE INCOME GROUP: ....................................................................................................................... 15
HIGH INCOME COUNTRIES: ................................................................................................................................ 17
A.C.PIGOU HYPOTHESIS: ......................................................................................................................................... 19
Conclusion: ................................................................................................................................................................ 20
HISTORICAL OVER VIEW OF PUBLIC SECTOR EXPENDITURES ......................................................................... 20
CAMPARATIVE STATIC ANALYIS OF PUBLIC EXPENDITURE 1980-81 and 2011-12:............................. 20
EFFECTS OF WAR ON PUBLIC SECTOR EXPENDITURES: ............................................................................... 25
ELASTICITIES OF FEDERAL EXPENDITURE: .......................................................................................................... 26
Elasticity of the Components of Federal Government Expenditure:............................................................. 27
MARGINAL PROPENSITY TO SPEND:................................................................................................................. 32
FORECASTING: ....................................................................................................................................................... 34
CONCLUSION: ........................................................................................................................................................ 35
Page |3
DIFFERENT MODES OF FINANCING PUBLIC REVENUE ....................................................................................... 36
PUBLIC ENTERPRISE: ............................................................................................................................................... 36
PRIVITIZATION: ....................................................................................................................................................... 36
BORROWING: ........................................................................................................................................................ 37
FEES: .......................................................................................................................................................................... 37
FINE AND PENALTY: ............................................................................................................................................... 37
GIFTS AND GRANTS: ............................................................................................................................................ 37
SPECIAL ASSEMENTS: ............................................................................................................................................ 37
TAX REVENUE: ......................................................................................................................................................... 37
CHARACTERISTICS OF TAX: ................................................................................................................................. 38
TYPES OF TAXES:.................................................................................................................................................... 38
CANONS OF TAXATION ........................................................................................................................................... 38
CANON OF EQUITY: ............................................................................................................................................. 38
CANON OF CERTAINITY:...................................................................................................................................... 39
CANON OF CONVENIENCE: ............................................................................................................................... 39
CANON OF ECONOMY: ...................................................................................................................................... 39
CONCLUSION: ........................................................................................................................................................ 40
TAX BUOYANCY AND TAX ELASTICITY: ................................................................................................................ 40
TAX ELASTICITY:...................................................................................................................................................... 40
Steps for Obtaining Elasticity of Tax Base: ...................................................................................................... 40
TAX BUOYANCY:.................................................................................................................................................... 40
SALES TAX REGIEME:.................................................................................................................................................. 41
EQUITY IN TAXATION: .......................................................................................................................................... 41
Adam Smith View on Equity in Taxation: ........................................................................................................... 42
John Stuart Mills View on Equity in Taxation: .................................................................................................. 42
LITERATURE REVIEW: .................................................................................................................................................. 43
EXCESS BURDEN OF INDIRECT TAX ................................................................................................................... 43
PROGRESSIVITY OF TAX:.......................................................................................................................................... 44
AVERAGE RATE OF PROGRESSION: .................................................................................................................. 44
LIABILITY PROGRESSION: ..................................................................................................................................... 44
RESIDUAL INCOME PROGRESSION: .................................................................................................................. 44
MARGINAL TAX RATE: ........................................................................................................................................... 45
TAXATION STRUCTURE IN PAKISTAN: ................................................................................................................... 45
CAMPARATIVE STATIC ANALYSIS 1985 AND 2012: ..................................................................................... 45
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NPV criterion and IRR CRIETERION: ........................................................................................................................ 48
PROJECT EVALUATION: ........................................................................................................................................ 48
NET PRESENT VALUE: ............................................................................................................................................. 48
INTERNAL RATE OF RETURN (IRR): ...................................................................................................................... 48
BENEFIT COST RATIO: ........................................................................................................................................... 48
CONFLICTING CONCLUSION: ............................................................................................................................ 48
CIRCULAR RAILWAY IN KARACHI: .......................................................................................................................... 49
DIRECT COST:.......................................................................................................................................................... 49
DIRECT BENEFITS:.................................................................................................................................................... 50
INDIRECT COST:...................................................................................................................................................... 50
INDIRECT BENEFITS:................................................................................................................................................ 50
SOCIAL DISCOUNT RATE FOR EVALUATION OF PUBLIC SECTOR PROJECT: ............................................... 51
ISSUES IN DETERMINING DISCOUNT RATE OF PUBLIC SECTOR PROJECTS: ............................................ 51
DISCOUNT RATE BASED ON RETURNS OF PRIVATE SECTOR: ..................................................................... 51
RATE OF TIME PREFERENCES: .............................................................................................................................. 51
IMPERFECT MARKET: .............................................................................................................................................. 52
GOVERNMENT BORROWING RATE: ................................................................................................................. 52
WEIGHTED AVERAGE: .......................................................................................................................................... 52
GENERAL PRACTICE ACROSS THE WORLD: .................................................................................................... 52
NATIONAL FINANCE COMISSION (NFC) AWARD: ............................................................................................. 52
FISCAL FEDERALISM AND DUTIES OF DIFFERENT TIERS OF GOVERNENT: .................................................... 53
RESPOSIBILITIES OF DIFFERENT TIERS OF GOVERNMENT: ........................................................................... 53
SOME ARGUMENTS ON TAXES: ......................................................................................................................... 54
LOCAL GOVERNMENT: ......................................................................................................................................... 54
CONCLUSION: ........................................................................................................................................................ 55
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SECTION #1
THEORIES OF PUBLIC EXPENDITURE GROWTH
MEASURING SIZE OF PUBLIC EXPENDITURE:
Government makes expenditure to provide basic amenities of life and to fulfill collective needs of
the people such as education, employment, roads, bridges, highways and a host of other services.
It is a duty of a sovereign to provide in a dignified way even to the poor of the society.
There are different ways of measuring public sector expenditure size; some of them are mention
below:
Public expenditure share in GDP

Per capita public expenditure
Expenditure Elasticity
Marginal propensity to spend
PUBLIC EXPENDITURE SHARES IN GDP:

Share of public sector expenditure = public sector Expenditure
Real GDP
This ratio tells us about the size of public sector relative to the national income. This method of
measuring size of public sector is quite common. The ratio is different for different countries. for
most of the countrys total government expenditure and GDP is available at national level. Ratio
public expenditure relative to GDP increases as country moves towards development.
We can calculate in a way similar share of current expenditures, development expenditures, and
health and education expenditure of public relative to GDP
PERCAPITA PUBLIC EXPENDITURE:
Public expenditure per capita = public sector expenditure
Population
This method tells us about the countrys standard of living. It tells us about government spending
on each individual. Change in population may also be a major determinant of the increase in the
total public expenditure in absolute terms. You may see increase in total public expenditure in
absolute terms but may not witness any fruitful development in the economy. Therefore this ratio
gives us a best estimate about per capita expenditure of government on public. If per capita
expenditures are increasing standard of living is also increasing.
EXPENDITURE ELASTICITY:
Expenditure Elasticity = % in public sector expenditure
% in real GDP
This ratio tells us about the percentage change in public sector expenditure due to per percent
change in real GDP.
When public expenditure is increasing at increasing rate elasticity is greater than 1 and the
public goods might be a luxury to an economy Such as highways, motorways, marinas and etc.
Public sector expenditure increasing at decreasing rate elasticity is less than 1 and the good is
necessity such as basic health facilities, elementary education, roads and etc.
Page |6
MARGINAL PROPENSITY TO SPEND:

Marginal propensity to spend = in public sector expenditure
Real GDP
This ratio tells us about marginal change in public expenditure that is, change in public sector
expenditure when real GDP change by one unit.
Per capita public sector expenditure is the best way to gauge the changes in the size of public
expenditure. Because this ratio give approximate information about the government spending on
each individual in a country, if this ratio is increasing countrys standard of living is also increasing.
THEORIES OF PUBLIC SECTOR EXPENDITURE GROWTH:
Theory of Adam Smith

Adolph Wagner Law
Engels Law.
Peacock wise man Of Social Disturbance
Richard Musgrave development model
THEORY OF ADAM SMITH:

Adam smith in his book wealth of nations, classified three areas of public expenditure
a) Defense against foreign aggression
b) Maintenance of internal police and order
c) Public work
Government should made expenditure on these areas because these projects cannot be
undertaken by a group of private individuals, furthermore, benefits associated with these goods
are not private therefore, and expenditure on defense, internal police and public works should be
made by public sector.
According to Adam Smith these expenditure are likely to increase overtime in absolute terms:
a) He argue that art of war is becoming more and more advance therefore in order to protect
country from external threats expenditure on defense are likely to increase. He also added
that, during 18 and 19th cent barbarian societies become rich by attacking more developed
and rich nations of the region so in order to protect wealth Expenditures on Defense are Bound
to Increase.
b) Similarly, in order to maintain internal peace government should impose some law and order
to ensure the protection of property and basic needs and rights. If protection to the property
is not guaranteed the pace of economic activity can slow down moreover, in this era, with
more sophisticated technology criminals are using more sophisticated weapon so there is a
need to equipped law and order institution with more decent technology.
c) Thirdly, as population increases, areas which become more and more crowded and
congested, in those regions public sector expenditures are increasing in absolute terms. In such
areas need for better road and infrastructure increases and thus Public sector Expenditures
are bound to Increase.
Page |7
ADOLPH WAGNER LAW:

In 1883, Adolph Wagner, a German social scientist put forward an idea which become
Increasing law of Government Activity during 19th cent rapid industrialization was taking place
and so public sector expenditure were increasing.. The law predicts that development of an
industrial economy will be accompanied by an increased share of public sector expenditure in
GDP, although he did recognize some limit to this increase.
The advent of modern industrial society will result in increasing political pressure for social progress
and increased allowance for social consideration by industry.
Wagner law public sector expenditure growth states following main points.
a) In progressing society, share public expenditure in economy grows because of three
reasons. Wagner himself identified as,
Providing administration and protection
Ensuring stability
Social and welfare activities
b) The increase division of labor would require state to take over functions previously
carried out by local communities, thus administration would become more centralized.
c) Development of the new technological process would lead to the growth of
monopolies in the private sector, in Wagners view private monopolies would not take
into account social needs of the society therefore government needs to expand public
expenditures to provide social benefits and services to the people such as education
and health.
MODIFICATION W.R.T ECONOMY OF PAKISTAN
Countries may witness increase in public sector expenditures during industrialization, some
countries such as Pakistan industrialization is progressed through borrowing from external sources
and in this way a lot of debt is incurred which has to pay in later years due to which public sector
expenditures are discouraged. Furthermore as society develops it may not always be the case
that people want more public goods like in Pakistan almost all rich peoples ant private sector
services such as private education, private hospitals etc.
where public sector expenditure were quite high during 1950 up to 70s industrialization was in
progress government was making huge expenditures in social over head cost, development
expenditures were much higher than current expenditures but all of this development and
industrialization was happened through borrowed money from external sources, furthermore after
1980s Pakistan has witness a continuous decreased in development expenditures, per capita
expenditure are still same at times showing falling trend.
ENGELS LAW:
An economic theory introduced in 1857 by Ernst Engel, a German statistician, proposed that as
income increases proportion of income spent on food falls (necessities), lodging and clothing
remains about same and on all other goods such as (luxuries) rises.
Thus by combining the two laws we can conclude that:
If public sector expenditure are increasing at increasing rate elasticity will be greater
than one. these goods may be termed as luxuries
Page |8
When public sector expenditure is increasing at decreasing rate elasticity will be less than
one. These goods are termed as necessities.
PEACOCK- WISEMAN MODEL OF SOCIAL DISTURBANCE:

Peacock and Wiseman conducted study based on Wagner law and found out Wagner law are
still valid today. This theory is formulated of following separate ideas:
1. According to Peacock and Wiseman ability to raise taxes should be to the limited extent
not beyond the tolerance
2. Rise in public expenditure greatly depends upon revenue collection, economic
development results in substantial revenue to the government this enable to increase public
expenditures
3. The government cannot ignore the demands that people make regarding various services,
especially, when there is an increase in revenue collection at a constant rate of taxation.
4. Further it stated that during the times of war the tax rates are increased by the
government to generate more funds to meet the increase in defense expenditure. This is
known as displacement effect. Such 'displacement effect' is created when the earlier lower
tax and expenditure levels are displaced by new and higher tax rates, But it remains the
same even after the war as people become habituated to it. Such an increase in revenue
therefore gives rise to government expenditure.
MODIFICATION W.R.T ECONOMY OF PAKISTAN:
Government may not always increase taxes to finance war expenditures or to provide for
advanced and luxurious facilities to its people but they increase taxes to pay their past foreign
and domestic debt and interest payments. Like in Pakistan, high tax rates of GST on other services
are imposed to pay the foreign debts and interest payments.
RICHARD MUSGRAVE DEVELOPMENT MODEL:
According to Economist, Musgrave growth of public expenditure can be distinguished in the three
stages of development process.
1. The early stage of development where considerable expenditure is required on social
infrastructure also known as social overhead capital where private savings are insufficient
to finance the necessary expenditure.
2. The phase of rapid growth in which there is large increase private savings and investment,
thus public expenditure falls.
3. High income societies in which, there is an increased demand for private goods with
complementary public investment, public expenditures will be increasing at constant rate.
In conclusion public sector expenditure may be growing, falling or may remain constant
depending upon the type of good society is providing.
WAGNERS LAW:
A German economist Adolph Wagner presents a theory Rising Government Expenditure. During
19th century in Europe industrialization was taking place and increased public sector expenditure
were wittiness considerably. Wagner law of rising government expenditure states that as
economy develops overtime the activities and function of the government also increases.
Analyzing size of public sector that is size of the government relative to the degree of
Page |9
development is the central focus of Wagners law. Economic development means increase division
of labor, congestion, diseconomies of private sector furthermore large population forces
government to increase public investment, moreover as income of country increases and standard
of living gets more sophisticated people demand more public goods such as higher education,
better health services, parks, marinas, highways thus it is reasonable to expect that share of
public investment relative to GDP will increase over time. According to Wagner the scope of
public sector expenditure will continue to increase not only in absolute terms but also relative to
national income.
EMPRICAL RESULTS:
To check the validity of Wagners law I had collected sample from WDI of 162 countries
compromising low, lower middle, upper middle and high income countries.
For empirical testing function was linear to take the following form:
/ = + /
Where, Exp/GDP is dependant variable and GDP/Capita is independent variable, and are
intercept and slope respectively.
REGRESSION RESULTS:
Regression Statistics
Multiple R
0.394128786
R Square
0.1553375
Adjusted R Square
0.150058359
Standard Error
0.140775168
Observations
162
ANOVA
df
Regression
1
Residual
160
Total
Intercept
GDP/capita Variable
1
SS
0.583129737
3.170823669
MS
0.58312974
0.01981765
F
29.42477023
Significance F
2.11198E-07
161
Coefficients
0.017855543
3.753953405
Standard Error
0.056539995
t Stat
0.31580376
P-value
0.75256303
Lower 95%
-0.093805379
0.036858679
0.006794902
5.42446036
2.11198E-07
0.023439416
By running regression value of turns out to be 0.036 that is when GDP/capita is changing by
one percent, Expenditure share relative to GDP (EXP/GDP) change by 0.036 or 3.6%
HYPOTHESIS TESTING:
Relationship between expenditure to GDP ratio and GDP per capita is statistically significant, as
P- value of is less than 5, whereas linear association between two is only 15%. This may be due
to the fact of hetrosedastic cross sectional data.
P a g e | 10
Wagner LAw
150.2234857
282.0539712
364.877192
436.093057
607.725473
713.3371951
924.6116363
1207.355518
1505.39568
2086.292656
2573.686027
3209.850899
3840.544637
4492.656126
5716.967872
6295.585165
9669.554453
13874.33674
18301.92043
22658.49834
30700.47142
36054.87749
43234.45116
79295.53512
Public Exp/GDP
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Wagner LAw
GDP/Capita
Linear (Wagner LAw)
For Low income countries expenditure share relative to GDP on average is 20.94%, while for
lower middle income countries it is 30.41% on average whereas, for Upper middle income
countries the ration average turns out to be 30.78% and finally for high income countries the
ratio on average is 40.8%. Thus the EXP/GDP ratio is increasing as GDP per Capita is increasing,
that is, as country develops there is call for government to increase public sector exp. Thus our
result shows as economy gets richer and richer role of government in state activity increases.
ENGELS LAW:
Ernst Engel a German statistician developed an economic theory in 1857. Engel was studying
budget pattern of families and found that as income of a house hold increases, percentage share
of food In total expenditure decreases, on clothing remain same and on luxuries increases.
Goods for which elasticity is less than one are termed as necessities
Goods for elasticity are greater than one are termed as luxuries.
RELATIONSHIP BETWEEN ENGELS AND WAGNERS LAW:

Relationship between Engel and Wagner law is interesting; both these laws were developed
approximately at same time. Moreover Engels law can provide a theoretical basis for Wagners
law that is as national income increases percentage of public expenditure relative to GDP also
increases. If the elasticity public expenditure is greater than one, public goods can be included in
category of luxuries such as, highways, bridges, motorways, marinas, space exploration and etc.
If government expenditure is increasing at increasing rate elasticity will be less than that is
government only spends on basic needs such as elementary education, basic health services,
roads and etc.
EMPRICAL RESULTS:
Similar sample was used to calculate elasticity of public sector expenditure. Following functional
was used to obtain elasticity of an entire sample as well as of different income groups.
P a g e | 11
= + /
Coefficient will give elasticity of dependant variable which is per capita expenditure.
Elasticity of Exp/capita for entire sample of 162 countries turns out to be 1.14 which is slightly
greater than one
REGRESSION RESULTS:
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
ANOVA
0.97972192
0.95985504
0.959604134
0.382130724
162
df
Regression
Residual
Total
1
160
161
Coefficients
0.444812341
0.646092097
Intercept
GDP/capita Variable 1
SS
558.6226246
23.36382239
581.986447
Standard
Error
1.182646753
0.200430389
MS
558.622625
0.14602389
F
3825.556385
t Stat
P-value
0.37611598 0.709665537
3.22352364 0.003208113
Significance F
1.2545E-113
Lower 95%
-1.977729683
0.235529062
Expenditure per capita is increasing as GDP per capita is increasing. Thus it is prove that income
per capita is increasing that is as standard of living of people is also increasing , public sector
expenditure per capita is also showing an upward trend.
EXP/Capita
35000.00
30000.00
Exp/Capita
25000.00
20000.00
15000.00
10000.00
5000.00
150.2234857
282.0539712
364.877192
436.093057
607.725473
713.3371951
924.6116363
1207.355518
1505.39568
2086.292656
2573.686027
3209.850899
3840.544637
4492.656126
5716.967872
6295.585165
9669.554453
13874.33674
18301.92043
22658.49834
30700.47142
36054.87749
43234.45116
79295.53512
0.00
EXP/Capita
GDP/capita
2 per.
Mov. Avg. (EXP/Capita)
P a g e | 12
HYPOTHESIS TESTING:
Here in this case also Dependant variable which is expenditure per capita and independent
variable GDP per capita have statistically significant relationship, because p value is 3.22 which
is less than 5 % that is all parameters are lying within acceptance region. Linear association
between two variables measured through R2 is 0.95.
RESULTS FOR DIFFERENT INCOME GROUP:

LOW INCOME COUNTRIES:
ENGELS LAW:
Now value of is estimated for low income group, sample compromising of 30 low income
countries, value of is 0.64 and on average expenditure per capita is 78.64.
Public exp/Capita (low income countries)
Public Exp/Capita
200.00
150.00
100.00
50.00
0.00
0
200
400
600
800
GDP/Capita
Public exp/Capita (low income
As we can look in graph expenditure per capita is increasing as GDP per capita is increasing,
Graph is showing a rising upward trend. Hence government average spending increases as
average income of a country increases.
REGRESSION RESULTS:
Multiple R
0.520254152
R Square
0.270664383
Adjusted R Square
0.244616682
Standard Error
0.390229115
Observations
30
ANOVA
df
SS
MS
Regression
1 1.582344549 1.58234455
Residual
28 4.263805335 0.15227876
Total
29 5.846149884
Standard
Coefficients
Error
t Stat
Intercept
0.444812341 1.182646753 0.37611598
0.646092097 0.200430389 3.22352364
F
10.39110463
Significance F
0.003208113
P-value
0.709665537
0.003208113
Lower 95%
-1.977729683
0.235529062
P a g e | 13
WAGNERS LAW:
REGRESSION RESULTS:
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.371281879
0.137850233
0.108120931
0.07405477
31
ANOVA
Regression
Residual
df
1
29
SS
0.025428976
0.15903916
MS
0.02542898
0.00548411
Total
30
Intercept
X Variable 1
Coefficients
0.680653165
-0.079809951
0.184468136
Standard
Error
0.219246419
0.037063434
t Stat
3.10451212
-2.15333398
F
4.636847241
Significance F
0.039742011
P-value
0.004229688
0.039742011
For low income countries Wagners law is not satisfied, regression results are telling that as GDP
per capita increase by one percent on average expenditure per capita decrease by 0.07%.
Dividing countries into income groups, observations are less may be due to this factor Wagners
law is not satisfied.
0.60
0.50
0.40
0.30
0.20
0.10
0.00
150.22
213.67
241.87
264.21
302.60
340.93
362.40
364.88
387.69
408.15
422.16
452.14
513.77
558.32
607.73
570.34
Exp/GDP
Wagner's Law for low income countries.
GDP/Capita
Wagner's Law for low income countries.
Linear (Wagner's Law for low income countries.)
Linear Trend of graph is negatively sloped and is falling, as GDP/capita is increasing Exp/GDP
ratio is decreasing. In contrast to the theory of Wagners law
P a g e | 14
LOWER MIDDLE INCOME GROUP:

ENGELS LAW
For lower middle income group elasticity of dependent variable due to change in dependant
variable is to 0.97, elasticity coefficient has slightly increased for lower middle income countries.
On average expenditure per capita are 358.57.
REGRESSION RESULTS:
Multiple R
0.520254152
R Square
0.270664383
Adjusted R Square
0.244616682
Standard Error
0.390229115
Observations
30
ANOVA
df
Regression
1
Residual
28
Total
29
Coefficients
0.444812341
0.646092097
Intercept
SS
1.582344549
4.263805335
5.846149884
Standard
Error
1.182646753
0.200430389
MS
1.58234455
0.15227876
F
10.39110463
t Stat
0.37611598
3.22352364
P-value
0.709665537
0.003208113
Public Exp/capita (lower middle income countries)

Public Exp/Capita
1400.00
1200.00
1000.00
800.00
600.00
400.00
200.00
0.00
0
500
1000
1500
2000
2500
GDP/capita
Public Exp/capita (lower middle income countries)
Graph is showing a positive trend that as GDP per capita is growing government average
spending on its people is also increasing. Thus there is appositive relationship between two
variables. Most of the values are scattered around the mean value thus we can say that
regression line is perfectly fit.
Significance F
0.003208113
P a g e | 15
WAGNERS LAW:
For Wagners law value of is for middle income group turnout to be -0.112. That is as GDEP
per capita increase by one percent on average Expenditure to GDP ratio decrease by 0.112.
Here also Wagners law is not satisfied.
REGRESSION RESULTS:
Multiple R
0.190510268
R Square
0.036294162
Adjusted R Square
0.007090955
Standard Error
0.232770532
Observations
35
ANOVA
df
Regression
1
Residual
33
Total
34
Coefficients
1.098627721
-0.112784555
Intercept
X Variable 1
2.00
SS
0.067338312
1.788009977
1.855348289
Standard
Error
0.713762548
0.101168781
MS
0.06733831
0.05418212
F
1.242814257
Significance F
0.2729827
t Stat
1.53920617
-1.1148158
P-value
0.133288876
0.2729827
Lower 95%
-0.353533095
-0.318613987
Wagner law for Lower Middle Income Countries
Exp/GDP
1.50
1.00
0.50
578.57
637.95
713.34
767.34
821.01
916.95
927.48
949.01
1127.22
1207.36
1262.87
1490.09
1499.34
1553.00
1758.45
1887.52
2086.29
2262.39
0.00
GDP/Capita
Wagner law for Lower Middle Income Countries
As we can see in graph that for lower middle income countries, Wagners law is not satisfied. As
average income of a country is increasing expenditure to GDP ratio is decreasing.
UPPER MIDDLE INCOME GROUP:
ENGELS LAW:
Elasticity for upper middle income group countries, sample compromising 43 countries is0.97
whereas, on average expenditure per capita is 1338.69
P a g e | 16
public exp/capita (upper middle income counties)

3000.00
Public Exp/capita
2500.00
2000.00
1500.00
1000.00
500.00
0.00
0
2000
4000
6000
8000
GDP/Capiat
public exp/capita (upper middle income counties)
Linear (public exp/capita (upper middle income counties))
Graph is showing that as the GDP per capita increases of the countries in middles income group
expenditure per capita is also increasing; there is positive relationship between them.
REGRESSION RESULTS:
Multiple R
0.695039657
R Square
0.483080124
Adjusted R Square
0.470472322
Standard Error
0.343476985
Observations
43
ANOVA
Regression
Residual
Total
df
1
41
42
Coefficients
Intercept
-1.055102177
0.978502884
SS
MS
4.520381393 4.52038139
4.837034005 0.11797644
9.357415398
Standard
Error
t Stat
1.317428249 0.80088018
0.158078284 6.18998929
F
38.31596737
Significance F
2.32185E-07
P-value
Lower 95%
0.427817842
2.32185E-07
-3.715702471
0.659257317
WAGNERS LAW:
Wagners law for middle income countries is not proved. Value of slope estimate is -0.115,
Thus not showing positive relationship between independent variable GDP/Capita and
dependant variable Expenditure to GDP ratio.
P a g e | 17
Multiple R
0.036616813
R Square
0.001340791
Adjusted R Square
-0.023016751
Standard Error
0.106560667
Observations
43
ANOVA
df
1
41
42
Regression
Residual
Total
Intercept
Coefficients
0.403662887
X Variable 1
-0.01150629
SS
MS
0.00062506 0.00062506
0.465562209 0.01135518
0.466187268
Standard
Error
t Stat
0.40872035 0.9876261
0.049042376 0.23461934
F
0.055046236
Significance F
0.815671969
P-value
0.32912866
Lower 95%
-0.421764595
0.815671969
-0.110549377
Exp/GDP
Wagners Law For Upper Income Countries

0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
0.00
2000.00
4000.00
6000.00
8000.00
GDP/Capita
Wagners Law For Upper Income Countries
Here, in graph with the increase in average income, trend of Expenditure per capita is constant.
HIGH INCOME COUNTRIES:
ENGELS LAW:
Finally, for high income countries response coefficient that is elasticity turns out to be 1.07 and
on average Exp/capita is 11308.81.
P a g e | 18
REGRESSION RESULTS:
Multiple R
0.914257468
R Square
0.835866718
Adjusted R Square
0.832648419
Standard Error
0.278060713
Observations
53
ANOVA
df
1
51
52
Regression
Residual
Total
Coefficients
Public Exp/Capita
Intercept
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
-1.745019578
1.078980049
SS
MS
20.08120738 20.0812074
3.943205774 0.07731776
24.02441315
Standard
Error
t Stat
0.675989854 2.58142865
0.066951165 16.1159265
F
259.723087
Significance F
1.17727E-21
P-value
Lower 95%
0.012756933
1.17727E-21
-3.102125808
0.94456998
public exp/capita (high income countries)
GDP/Capita
Trend line of expenditure per capita with respect to GDP per capita is showing slightly increasing
trend.
WAGNERS LAW:
Slope coefficient turns out to be positive in the case of High income countries. When GDP per
capita increase by 1% expenditure to GDP ratio change by, 1.72%
P a g e | 19
REGRESSION RESULTS:
Multiple R
0.100432908
R Square
0.010086769
Adjusted R Square
-0.009323294
Standard Error
0.099260681
Observations
53
ANOVA
Regression
Residual
Total
df
1
51
52
Intercept
X Variable 1
Coefficients
0.22716042
0.01722893
MS
0.00512011
0.00985268
F
0.519666979
Significance F
0.474275378
t Stat
0.94135811
0.72087931
P-value
0.35095913
0.474275378
Lower 95%
-0.257292372
-0.030752084
Wagner Law For High Income Countries
0.80
Exp/GDP
SS
0.005120114
0.502486825
0.507606939
Standard
Error
0.241311376
0.023899882
0.60
0.40
0.20
7263.53
9669.55
11085.66
13703.47
14910.97
16833.88
18877.11
20976.46
22658.50
26053.39
29559.07
31101.36
34822.08
36237.39
38240.33
43234.45
53631.08
65088.39
0.00
GDP/capita
Wagner Law For High Income Countries
Wagners law for High Income countries is satisfied, having positive value of slope and a slight
increasing trend of expenditure to GDP ratio with increase in income.
A.C.PIGOU HYPOTHESIS:
A.C. Pigou hypothesizes that concentration of wealth may cause public sector expenditures to be
higher. For this purpose I have plot GINI index measure on inequality on horizontal axis, and
expenditure per capita on vertical axis. Zero value of GINI index shows perfect equality while 1
shows perfect inequality however this extreme situation is not found in the real world.
7000.00
6000.00
5000.00
4000.00
3000.00
2000.00
1000.00
0.00
GINI INDEX
1.00
3.00
5.00
7.00
9.00
11.00
13.00
15.00
17.00
19.00
21.00
23.00
25.00
27.00
29.00
31.00
33.00
35.00
37.00
Exp/Capiata
P a g e | 20
GINI INDEX
Gini Index
Linear (GINI INDEX)
In graph we can see that as income inequality is increasing that value of GINI is increasing
expenditure per capita expenditures are decreasing, because usually income inequality prevails
in those countries which are relatively poor that is have relatively less growth in their average
income and therefore they spend less on the public goods and services. As proved above by
Engel law. Hence the hypothesis present by A.C. Pigou is not proved with this data.
Conclusion:
In this part I have collected data from world development indicators and obtain the estimates of
public sector expenditures with respect to GDP to test the Wagners law and Engelss law. Hence,
Wagners law for overall countries was satisfied however for different income groups results
were not satisfactory of the hetrosedasticity in the cross sectional data. Engels Law was satisfied
for aver all country and for different income groups. While the same data was used to test A.C.
Pigou hypothesis which was also not proved with my data.
REPORT:
HISTORICAL OVER VIEW OF PUBLIC SECTOR EXPENDITURES
One of the important functions of the government is the provision of basic amenities of life, to its
people for increasing social welfare. Like food, health, education, roads, dams, highways, law
and order and defense are the areas in which government need to spend heavily for economic
development. For all these purpose government need revenue for which they tax people, taxation
also redistribute income from rich to poor.
CAMPARATIVE STATIC ANALYIS OF PUBLIC EXPENDITURE 1980-81 and 2011-12:
Public Expenditures are divided in two following categories.
Revenue Expenditures
Current Revenue Expenditure
Development Revenue Expenditures
These expenditures together constitute total development expenditure.
Capital Disbursement
Current capital disbursement
Development capital Disbursement
These Expenditures together are called development expenditure
P a g e | 21
Real Values
1980-81
Current
1,552.68
ii. Defense
745.61
iii. Law & Order
45.42
vi. Economic Services
51.32
vii. Subsidies
69.44
xviii. Education Affairs and
Ser
Xvi .Health Services
viii. Debt Servicing,
Investible Funds and
Grants
450.24
Current Expenditure
Development
358.43
Total Current Exp
1,911.11
1.Current Expenditure
340.50
a. Government
Investment
b. Loans and Advances
Development Exp (capital
2.Development
Disbursement)
Expenditure
725.88
Total Dev Exp
1,066.37
Total EXP
2,977.49
Total Revenue
2,258.72
As a % of Total Exp
Current
52.15
25.04
ii. Defense
1.53
iii. Law & Order
1.72
Vi .Economic Services
2.33
vii. Subsidies
Xviii .Education Affairs
and Services
0.00
xvi. Health Services
Viii .Debt Servicing,
15.12
Investible Funds and Grants
Current Expenditure
Development
12.04
Total Current Exp
64.19
11.44
a. Government Investment
Disbursement)
2.Development Expenditure
24.38
Total Dev Exp
35.81
2011-12
7,643.66
1,754.63
245.12
156.39
27.02
947.79
8,591.45
237.19
41.23
40.41
615.86
853.04
9,665.21
6,731.59
79.08
18.15
2.54
1.62
0.28
9.81
88.89
2.45
0.43
0.42
6.37
8.83
P a g e | 22
FEDERAL EXPENDITURE AS A PERCENTAGE OF TOTAL EXPENDITURE:

Total real public expenditures in 1980-81 were 2977.49 RS million out of which total current
expenditure compromises of 64.19% while total development were only 35.81%, in 2012 similar
trends can be seen current exp are 88.89% of total expenditure while share of development
expenditure has declined significantly only to 8.83%.
Looking into the categories of total current Expenditure its seems that Pakistan is the economy of
defense having 25.04% share in total expenditure in 1980-81 while in 2011-12 share has
declined to 18.51%, law and order is also another category included in current expenditure
compromise 1.53% of total expenditure while the share of law and order has increased to
2.54% in 2012. This minor increase is due to the increase in population, uncertainty and other
crimes.
We cannot compare expenditures; economic services, subsidies, education affairs and services
due to non availability of data in either of the two years.
Capital disbursement expenditures commonly known as development expenditures were35.81%
of total expenditure while there shared is decreased to 8.85% in 2012. In 1970s-80s Pakistan
economy was highly dependent upon easy loans from abroad so development expenditures in
2012. Over the periods Pakistan is experiencing a continuous decrease in its total development
expenditures. Proportion of development expenditure in total expenditure is quite low.
Development expenditure increase the productive capacity of the country, if the share of
development expenditure in total expenditure is decreasing continuously over the years, than in
future countries productive capacity will be less and growth will be retarded, which is the case in
Pakistan. Corruption and low fiscal efforts and increasing tax evasion all contributes towards less
developmental expenditures in the country. In sub categories of capital disbursement
expenditures I have taken government investment and loan and advances, there share in 2012 is
0.43% and 0.42% respectively; data for these expenditures was not available for 1980-81.
Current Expenditure% of Total
Exp
198081
Development Exp % of total Exp
1980-81
2011-12
201112
FEDERAL EXPENDITURES AS A PERCENTAGE OF TOTAL REVENUE:

Now we look at the share of federal expenditures in total revenue. Total revenue in 1980-81
was 2258.72 million Rs while in 2012 real tax revenue is 6731.59%. In 1980-81 total
expenditures was 84.61% of total revenue while development expenditures were 47.21%
however in 2012 total current expenditure as a % of total revenue increased to the substantial
extent i.e. 127.63% while development expenditure as a percentage of total revenue are only
12.67%.
Share of components of current and development expenditure; share of defense expenditure in
total revenue in 1981 is 33.0% as compared to 26.07% in 2012. Law and order share in total
revenue was 2.01% increase to a little extent by 1.63% i.e. to 3.64% in 2012, while share of
economic services and subsidies in 1981 is 2.07 and 3.07% respectively. Share of Pakistan in
P a g e | 23
human development resources is quite less educational affairs and service 2.32% and health
services 0.40%. Pakistan is 8th most populous country in the world and has large number of labor
force, by providing better human development resources Pakistan not only come out of vicious
circle of poverty but also can enhance nations productivity
As a % of total Revenue
Current
ii. Defense
iii. Law & Order
vi. Economic Services
vii. Subsidies
xviii. Education Affairs and
Services
xvi. Health Services
viii. Debt Servicing, Investible
Funds and Grants
Current Expenditure
Development
Total Current Exp
a. Government Investment
Disbursement)
2.Development Expenditure
Total Dev Exp
1980-81
68.74
33.01
2.01
2.27
3.07
2011-12
113.55
26.07
3.64
2.32
0.40
19.93
15.87
84.61
15.07
14.08
127.63
3.52
0.61
0.60
9.15
12.67
32.14
47.21
In conclusion, on expenditure side development expenditure are far less than current or non
development expenditure while Current and defense expenditures have increased by dramatic
amount
Current Exp % of Total
Revenue
Development Exp % of total

Revenue
1980-81
1980-81
2011-12
2011-12
PROVINCIAL EXPENDITURE AS a PERCENTAGE OF TOTAL EXPENDITURE:

Provincial total expenditure in 1980-81 was 845.91% which increased to 5104.14% in 201112. Current expenditures in total expenditures were 79.85% in 1980-81 that decreases to
P a g e | 24
69.39% in 2011-12. Provincial Development expenditures as compared to federal development

expenditures are increased in 2012; in 1980-81 share of development expenditure was 20.15%
That increases to 30.61% i.e. increases by 10.46%.
provincial Devlopment Exp % of
Total Exp
Current Exp
Development
Exp
Total Exp
Total tax
revenue
GDP Deflator
Provincial current Exp % of total

Exp
1980-81
1980-81
2011-12
2011-12
Provincial expenditure as % of total Expenditures

1980- 2011-12
real 1980Real 2011- % 0f t.exp (198081
81
12
81)
13,860 1,023,700
675.44
3541.72
79.85
3,498
451,600
170.47
1562.41
20.15
17,358 1,475,300
10,239 1,245,400
20.52
845.91
498.98
% of t.Exp(201112)
69.39
30.61
5104.14
4308.75
289.04
PROVINCIAL EXPENDITURE AS a PERCENTAGE OF TOTAL REVENUE:

Provincial total revenue in 1980-81 was 498.98 million Rs where as in 2011-12 it is decreased to
4308.75. Share of current expenditures in total provincial revenue in 1981 is 135.36% which is
decreased to 82.20% in 2011-12, while share development expenditure in total revenue in 1981
is 34.61% that has increased to 36.26% in 2012.
Provincial expenditure seems to be increasing at a constant rate. Relative increase in provincial
development expenditure may be due to the existence of local government that helps in the
efficient allocation of resources.
Current Exp
Development
Exp
Total Exp
Total tax
1980- 2011-12
81
13,860 1,023,700
3,498
451,600
17,358 1,475,300
10,239 1,245,400
Provincial % of tax revenue

real.v
Real.v
1980-81
2011-12
675.44
3541.72
170.47
1562.41
845.91
498.98
5104.14
4308.75
% T.tax Rev
(1980-81)
135.36
34.16
% T.tax Rev
(2011-12)
82.20
36.26
P a g e | 25
revenue
GDP Deflator
20.52
289.04
Provincial Current Expenditure

% of total tax revenue
provincial total devlopment exp

% of Total Tax Revenue
1980-81
1980-81
2011-12
2011-12
EFFECTS OF WAR ON PUBLIC SECTOR EXPENDITURES:

National emergencies such as wars may cause increase in share of public sector expenditure
relative to GDP. During war social upheaval reveals new problem and obligation which must be
taken by the government. As at times of national emergencies government pay war pensions, cost
of outlay increase and as wells expenditures incurred by industrial sector to equipped arm force
also increases
Federal Govt Exp
FY11
FY09
FY07
FY05
FY03
FY01
FY99
FY97
FY95
FY93
FY91
FY89
FY87
FY85
FY83
FY81
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
FY79
Federal Exp/GDP
Federal Govt Exp
Years
Linear (Federal Govt Exp)
This hypothesis is tested for Pakistan, In Pakistan expenditures rose sharply during wars of 1971
partition of West Pakistan, 1999 kargil war and 1980 Russia intervention in Afghanistan.
Pakistan up to 1970s was highly dependent upon the external resources, in the form of aid, grant
and foreign debt.
1n 1950 Due to Korean War, Pakistan exports jute and cotton and earn huge profits on its
exports. As a result export tax on jute and cotton increase during Korean War, increase in export
duty subsequently increase government revenue and so does public expenditures. In 1980s, USA
pledges military assistance to Pakistan because of Russian intervention in Afghanistan. During
P a g e | 26
those days Pakistan was getting easy loans from abroad, total foreign debt rose to 18 million
dollar. In 20011 attack on twin towers in New York and 2003 when USA forces invade Iraq
Pakistan again become front line sate but this time in war against terrorism. Pakistan was
spending heavily on the provision of public goods and services. Thus over all expenditure rose
sharply during the war and fell sharply thereafter.
During 1979-84 share of federal expenditure relative to GDP on average is 26.50% where as
share of provincial expenditure on average is 7.36%. In 1985-99 share of federal government
expenditure in GDP increase to 28.13% while that of provincial government is 8.90%. In 200012 share of both provincial government and federal government decreases federal government
share in GDP is 17.90% whereas, provincial government expenditure relative to GDP fell down
to 6.96%. Share of federal expenditure relative to GDP is higher in initial years and decreasing
in 2000.
Provincial Govt Exp
12.00
Pov EXP/GDP
10.00
8.00
6.00
4.00
2.00
FY79
FY81
FY83
FY85
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
0.00
Provincial Govt Exp
Years
Linear (Provincial Govt Exp)
At times of war main source of revenue generation is either through relatively high rates of
taxation than before, however borrowing was dominant force of war finance.
ELASTICITIES OF FEDERAL EXPENDITURE:
Elasticity measures the percentage change in total expenditures to the percentage change in
GDP. It is a built in response to the total expenditure to the change in GDP.
In this part I have estimated the elasticity of federal government expenditures and its components
current, development, education, defense and law and order.
Following functional form was used to estimate regression coefficient.
ln = + ln
Where coefficient will gave us elasticity of total federal expenditures.
P a g e | 27
Regression Results:
Regression
Statistics
Multiple R
0.518633945
R Square
0.268981169
Adjusted R Square
0.246136831
Standard Error
0.772906796
Observations
34
ANOVA
Regression
df
1
SS
7.033921914
MS
7.033921914
F
11.77452215
Significance F
0.001675595
Residual
32
19.11631727
0.597384915
Total
33
26.15023919
Coefficients
Standard Error
t Stat
P-value
Lower 95%
Intercept
4.430464594
1.310341347
3.381153012
0.001917122
1.761386624
GDP
0.325478376
0.094852874
3.43140236
0.001675595
0.132269395
Elasticity of total federal expenditures turn out to be o.32, means that when GDP change by 1%
total expenditures on average change by o.32%. Total federal expenditures are thus less
responsiveness o the change in GDP. Linear association between two variables that total
expenditures and GDP is 0.25 measures through adjusted 2 .
Federal government expenditures are less responsiveness to the change in GDP which is due to
the reason of low revenue generation and less fiscal efforts by the government.
According to Engels law; Goods and services which have elasticity less than one are included in
basic necessities. Usually for low and lower middle income countries elasticity of government
expenditures are less than one because they spend mostly on the basic amenities of life.
Elasticity of the Components of Federal Government Expenditure:
CURRENT EXPENDITURE
REGREESION RESULTS:
Regression
Statistics
Multiple R
R Square
Adjusted R
Square
Standard Error
Observations
ANOVA
0.897369377
0.805271799
0.799186543
0.223100244
34
df
Regression
Residual
= +
SS
1 6.586636685
32 1.592759009
MS
6.58663669
0.04977372
Significance
F
132.33162 6.6195E-13
P a g e | 28
Total
Intercept
X GDP
33 8.179395694
Coefficients
Standard
Error
4.167224878 0.378231213
0.314959871 0.027379368
t Stat
11.0176652
11.503548
P-value
Lower 95%
Upper 95%
2.01E-12
6.619E-13
3.39679311 4.93765664
0.25918992 0.37072982
Coefficient of elasticity, here is o.31.that gives elasticity of current expenditures for time series
data. It tell us that when GDP change by one percent total current expenditures change by
0.31%.
Elasticity of current expenditure is only less by 0.01%. Most of the revenue generated is used by
government in making current expenditures which is not a good sign.
DEVELOPMENT EXPENDITURES:
Elasticity for development expenditures is -0.089 that is when GDP increases by 1% development
expenditures decreases by 0.089%.
From 1960-70s development expenditures were high than non development expenditures
because Pakistan was getting easy loans from abroad. Pakistan economy is highly dependent
upon aid and much of the industrialization in 1960s and 70s were foreign funded however, now
Proportion of development expenditure in total expenditure is very less and is falling continuously
over last decade.
REGRESSION RESULTS:
SUMMARY
OUTPUT
Regression
Statistics
Multiple R
R Square
Adjusted R
Square
Standard
Error
Observations
ANOVA
Regression
Residual
Total
Intercept
X GDP
development
EXP
0.431190635
0.185925364
0.160485531
0.2690896
34
df
SS
MS
1
32
33
0.529198032
2.317094812
2.846292844
0.52919803
0.07240921
7.3084351
Significance
F
0.01089583
Coefficients
Standard
Error
0.456198899
0.033023286
t Stat
P-value
Lower 95%
18.4578097
-2.70341175
1.274E-18
0.0108958
8.420432482
0.089275539
Upper 95%
7.49118574 9.34967923
-0.15654177 -0.0220093
P a g e | 29
DEFENSE EXPENDITURE:
Elasticity of defense expenditure estimated is 0.13% which means that as GDP increases by one
percent on average defense expenditures increases by o.13%.
Pakistan spends greater part of the proportion of its revenue in defense. Almost of about 25% of
total expenditure was spend on defense in 1981 and in 2012 defense was 18% of total
expenditure. Pakistan spend greater proportion of their revenue in defense
Multiple R
0.664033184
R Square
0.44094007
Adjusted R
Square
0.423469447
Standard
Error
0.21384222
Observations
34
ANOVA
df
1
32
33
SS
1.154138918
1.463311837
2.617450754
MS
1.154138918
0.045728495
F
25.23894391
Significance F
1.85414E-05
Coefficients
5.420071493
0.131841584
Standard Error
0.362535695
0.026243202
t Stat
14.95044921
5.023837568
P-value
5.45668E-16
1.85414E-05
Lower 95%
4.681610451
0.078385931
Regression
Residual
Total
Intercept
X GDP
Defence Exp
48204
247831
284667
321751
362110
403948
446005
491325
534861
579865
625233
3632091
3922104
4593230
5191709
5448037
6418573
Defense Exp
2000.00
1800.00
1600.00
1400.00
1200.00
1000.00
800.00
600.00
400.00
200.00
0.00
GDP (constant)
Defense Exp
Defense expenditures are continuously increasing at a faster rate as GDP is increasing. Pakistan
allocates almost most of its revenue for financing defense expenditure. Defense expenditure
during 1979-1989 on average were 1067.27 million RS from 1990-2000 they have increased
P a g e | 30
to the significant extent 1627.11% but from 2001-12 mean defense expenditures were
1580.24 million RS , a gradual decrease in defense expenditure is seen
LAW AND ORDER:
Elasticity coefficient for law and order expenditure is 0.19%. Which is the change is expenditures
for law and order for per percent change in GDP.
Multiple R
0.734115841
R Square
0.538926068
Adjusted R
Square
0.518879376
Standard Error
0.205407402
Observations
25
ANOVA
df
Regression
Residual
Total
Intercept
X GDP
1
23
24
Coefficients
1.737757565
0.198085089
SS
1.13427573
0.970420621
2.104696351
Standard Error
0.502728356
0.038203975
MS
1.13427573
0.042192201
F
26.8835402
Significance F
2.95196E-05
t Stat
3.45665317
5.184933963
P-value
0.002142644
2.95196E-05
Lower 95%
0.697784732
0.119054145
Real Law & Order Exp
Law & Order Exp

120.00
100.00
80.00
60.00
40.00
20.00
0.00
Law and order
GDP Constant
Linear (Law and order )
Rate of increase in law and order expenditure is also very fast, law and order expenditures are
increasing, with the increase in expenditure. Only in 1999 law and order expenditure experience
a sharp fall. 95.54 In 1998 to 63.36 million RS in 1999. On average from 1979-1990 law and
order expenditures are 62.36 million RS increased to 95.24 million Rs from 1991-2003.
EDUCATION AFFAIRS AND SERVICES:

Elasticity coefficient for education turns out to be 1.01, which is slightly greater than one; it means
that educational expenses are luxury for Pakistan. Pakistan literacy level is one of the lowest in
P a g e | 31
the world. Government facilities have not been able to keep pace with growing demand for
educational services.
Multiple R
0.78471633
R Square
0.615779719
Adjusted R
Square
0.560891107
Standard Error
0.128025236
Observations
9
ANOVA
Regression
Residual
Total
Intercept
X GDP
df
1
7
8
Coefficients
-10.94893804
1.017738151
SS
0.183879921
0.114733228
0.298613149
Standard Error
4.706754259
0.303853671
MS
0.183879921
0.016390461
F
11.21871551
Significance F
0.012260237
t Stat
-2.326218331
3.349435103
P-value
0.052907705
0.012260237
Lower 95%
-22.0786433
0.299238392
Education Exp
Edu Exp
200.00
150.00
100.00
50.00
0.00
GDP (constant)
Education Exp
Educational expenditures are increasing gradually as GDP is increasing. From 2004-08

educational expenditures on average were 118.07 million RS while from 2008-12 they have
increased to 133.56 million RS
HEALTH SERVICES:
Elasticity of health services with respect to GDP is 0.072. I.e. when national income increases by
1% health services increase by o.o72% health services are very much less responsive towards the
change in income. In Pakistan health care system is inequitable mostly located in urban areas.
Which does not fulfill requirement of the majority of people? Spending o.o7% of GDP on health
services does not help either. According to UNIDO survey, 60% of all people in Pakistan have no
access to modern medicine, 30% have access to adequate sanitation and 79% have clean
drinking water.
P a g e | 32
Multiple R
0.111629134
R Square
0.012461064
Adjusted R
Square
-0.128615927
Standard Error
0.102343409
Observations
9
ANOVA
Regression
Residual
Total
Intercept
X GDP
df
1
7
8
Coefficients
2.218541235
0.0721902
SS
0.000925164
0.073319214
0.074244378
Standard Error
3.762580645
0.242900708
MS
0.000925164
0.010474173
F
0.088328108
Significance F
0.774939238
t Stat
0.589632873
0.29720045
P-value
0.573967124
0.774939238
Lower 95%
-6.678548205
-0.502178704
Health Exp
Health Exp
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
GDP (constant)
Health Exp
Health expenditure is also increasing gradually, with the increase in GDP. Health expenditure
from 2004-08 on average were 29.07 million RS while in 2008012 they have increased only to
27.21 million RS
Data for health services and educational affairs and services is available from 2004-2012.
Having only 9 observations in all therefore regression results may not be to the mark.
MARGINAL PROPENSITY TO SPEND:
Now, I have calculated marginal propensity to spend in public sector expenditure, it is defined as
increase in expenditure due to marginal increase in GDP. Marginal propensity to spend of public
sector expenditures was estimated through running following regression.
= +
Where Y a independent variable which is GDP, and C is dependant variable which in our case is
dependant variable. And cY are regression coefficient intercept and slope respectively. cY will
P a g e | 33
give us marginal propensity to spend. Marginal propensity to spend of overall government

expenditures is 0.00081; In Pakistan marginal propensity of public sector expenditures is very
less. Public sector expenditures on average increase by 0.00081 when GDP increase by one unit.
REEGRESSION RESULTS:
Multiple R
0.831935984
R Square
0.692117481
Adjusted R Square
0.682496152
Standard Error
1274.335348
Observations
34
ANOVA
df
Regression
1
Residual
32
Total
33
Intercept
X GDP
Coefficients
5113.558532
0.000818073
SS
116818661
51965778.5
168784440
Standard
Error
298.393645
9.6454E-05
MS
F
116818661.3 71.93574829
1623930.578
Significance F
1.08274E-09
t Stat
17.1369552
8.481494461
Lower 95%
4505.750569
0.000621603
P-value
1.1089E-17
1.08274E-09
HYPOTHESIS TESTING:
2 Which measures linear association between dependant and independent variable is 68.25%.
P value of elasticity coefficient is 1.082 which is less than five which shows that F statistics is
statistically significant.
CURRENT EXPENDITURES:
Elasticity coefficient for current expenditures is 0.0009. it is interpreted as when GDP increase by
one unit current expenditure increase by 0.0009 unit on average
Multiple R
0.887365102
R Square
0.787416824
Adjusted R Square
0.780773599
Standard Error
1109.632032
Observations
34
ANOVA
df
Regression
1
Residual
32
Total
33
Intercept
X GDP
Coefficients
3525.130897
0.000914382
SS
145943160
39401063.9
185344224
Standard
Error
259.827327
8.3988E-05
MS
F
145943160.2 118.5293155
1231283.246
Significance F
2.72236E-12
t Stat
13.56720611
10.88711695
Lower 95%
2995.879954
0.000743305
P-value
8.08168E-15
2.72236E-12
P a g e | 34
DEVELOPMENT EXPENDITURE:
For development expenditure elasticity coefficient is -9.37. If GDP increases by one percent on
average development expenditure decrease by -9.73%
REGRESSION RESULTS:
Multiple R
0.530039046
R Square
0.280941391
Adjusted R Square
0.258470809
Standard Error
350.4596531
Observations
34
ANOVA
df
1
32
33
Intercept
Coefficients
1584.389431
SS
1535597.76
3930302.99
5465900.75
Standard
Error
82.0623344
X GDP
-9.37939E-05
2.6526E-05
Regression
Residual
Total
MS
F
1535597.757 12.50263105
122821.9685
Significance F
0.001263623
t Stat
P-value
19.3071455 3.38769E-19
3.535905973 0.001263623
Lower 95%
1417.233926
0.000147826
FORECASTING:
In this section I have forecast public sector expenditures for next five years using time series data
from 1979-2010.
In order to forecast first we have obtain the growth rate of time series by fitting regression line
to time series and find slope and intercept coefficient.
= +
Where public sector expenditures total is dependant variable and T stands for time which is
independent variable. Slope will estimate the growth rate of time series
Multiple R
0.95814466
R Square
0.918041189
Adjusted R Square 0.915309228
Standard Error
642.9725857
Observations
32
ANOVA
df
Regression
Residual
Total
SS
1 138922529.8
30 12402412.38
31 151324942.2
MS
138922529.8
413413.7459
F
336.0375197
Significance
F
7.60433E-18
P a g e | 35
Coefficients
Intercept
X time
Standard
Error
-443431.225 24553.24896
225.6649751 12.31034639
t Stat
18.05998162
18.33132618
P-value
Lower 95%
1.15E-17 493575.6489
7.60433E-18 200.5238939
Upper
95.0%
-393287
250.8061
Through regression we find slope and intercept parameters. is equal to 225.66 whereas
intercept is -443431.225. Slope tells us that as time change by one unit total federal public
expenditures changes on average by 225.66 million RS. Thus by putting these values in above
equation we can define straight line. Our next task is to predict about public sector expenditures
for next five year so we will put T=2015.
= 443431.225 + 225.66
= 443431.225 + 225.66(2015)
= 11273.9
Thus the forecasted value total public sector expenditures for 2015 is 11273.9
CONCLUSION:
In a nut shell, Government expenditures in 31 years have not shown considerable progress.
Current expenditures are increasing as a percentage of total expenditures while development
expenditure have decreased dramatically, which is not a very good sign because if a country do
not invest in development expenditures its future productivity will not increase and will witness
poverty in the coming years as well. Furthermore, federal government expenditures in 1980s had
witness a sharp increase because of easy loans from external sources. Moreover elasticity of
overall federal expenditures is less than one indicating that as GDP increase by 1% total
expenditures increase by less than 1%, government expenditures in law and order, health and
educational sector have also less response towards the change in GDP, besides this marginal
propensity to spend of government expenditure is also very low and that of development
expenditures is negative.
P a g e | 36
SECTION #2
TAXATION
DIFFERENT MODES OF FINANCING PUBLIC REVENUE:
Government need to perform various political, social, economic and administrative activities, to
maximize social and economic welfare and to run the administrative affairs of the country such as
payment of salaries to government officials. In order to perform these functions government need
large amount of revenue.
There are two sources of public revenue:
NON TAX REVENUE

1. Public Enterprise
2. Privatization
3. Borrowing
4. Fees
5. Fine and Penalty
6. Gifts and Grants
7. Special assessment
TAX REVENUE
1. Personal Taxes
2. In- Rem Taxes
PUBLIC ENTERPRISE:
The government also gets revenue by the way of surpluses of the public enterprises. Some state
owned enterprise generated profits that are used to finance government activities. The
government entities that operate for profit are usually manufacturing and financial institutions,
services such as nationalized health care do not operate for profit. In the case of surplus from
government enterprises public purchase goods and services and government gets prices and
consequently, profits from selling such goods and services. However, in Pakistan most of the public
enterprises are running in losses such as PIA, WAPDA, Pakistan railway and etc.
Government cannot depend fully upon this mode of revenue generation as most of the public
enterprises in most of the developing countries run at a loss due to miss management and
corruption furthermore, there is an element of choice, if individual will buy goods and services
from public enterprise only than the public firms will earn revenue and thus profits.
PRIVITIZATION:
Privatization is a transfer of government assets to private sector. Government often turns to
privatization, for two reasons to increase efficiency of the public owned enterprises and for
revenue to fill budgetary gaps i.e. shortfall in cash flow
This way of generating revenue is very limited. Through this mode government can only get one
time income; revenue cannot be used for indefinite period of time. Privatization is also a bilateral
transfer in which government sell its assets to private ownership and so get revenue.
P a g e | 37
BORROWING:
Borrowing or deficit financing is also a source foe generating revenues. Government borrows
funds through issuing bonds or directly borrowing from financial institution. Government can
borrow funds from two sources:
Internal borrowing
External borrowing
Internal borrowing includes bonds issued to the general public and borrowing from domestic
financial institutions. In short, debt owed to lenders within the country. Whereas, external
borrowing include borrowing from foreign financial institution like World Bank, IMF and ADB and
other countries. However in case of external borrowing country has to face certain conditions.
In case borrowing either internal or external government has to pay principal amount and the
interest at the time of the maturity.
FEES:
A fee is charged by public authorities for rendering certain services for the citizens of the state.
E.g. fees charged for issuing passport or driving license.
Unlike taxes there is no compulsion involved in case of fees. Fees are a direct payment for the
service rendered, to the payer and government guarantees the services to the payee.
FINE AND PENALTY:
Fine and penalty are imposed as a punishment for breaking certain laws and for the non
fulfillment of certain rules and regulation. Government imposes tax to obtain revenue and
penalties are imposed to prevent people from breaking laws. This not a major source of revenue
GIFTS AND GRANTS:
A proportion of government revenue also comes from gift and grants, Gifts are given by
individuals and private organization this is an important source of revenue at times of emergency
such as floods and wars, whereas grant is from foreign countries. This is not a fixed source of
revenue for the government and is not in the control of the government.
SPECIAL ASSEMENTS:
It is an additional charge levied on private property for public improvements that enhance the
value of the property E.g. Due to Public Park in the locality or some other developmental project
people may experience an appreciation in the value of their asset. This is mostly practiced in the
developed world.
TAX REVENUE:
Taxes are the compulsory payments, made by the subject of the state, as per some pre set laws, to the
government without leaving the government with any liability to the payee, the taxpayer
Taxes are the first and foremost source of public revenue.
P a g e | 38
CHARACTERISTICS OF TAX:
Due to the following reasons tax is considered a superior mode of revenue generation for the
government as compared to the other sources:
1. Taxes are the compulsory payment which is to be paid by every member of the society.
2. It is the unilateral transfer an individual has no right to directly demand social service in
return to his payment of tax.
3. Individual has no choice except to pay tax when it is levied, if he fail to do so, individual
will have to face a penalty however, in case of other modes of generating public revenue
such as borrowing there is no compulsion on the individual to buy government bonds.
4. Tax structure is defined by the government and individual has no right to modify it.
TYPES OF TAXES:
Personal Taxes: include tax on the receipts of personal services and on personal
expenditure. E.g. paying tax on the rented income.
In-Rem Taxes: Taxes against a thing or the property e.g. property tax, sales tax, etc.
Taxes are the most important source of the government revenue. Tax differ from other sources of
revenue, tax are compulsory payments unlike, borrowing, fees, and gifts. Taxation in a modern
Government is thus needed not merely to raise the revenue required to meet its ever-growing
expenditure on administration and social services but also to reduce the inequalities of income
and wealth. Through tax policy consumption is crowd out which in turn keep inflation rates at a
low level.
CANONS OF TAXATION
a good tax system is one which is designed on the basis of an appropriate set of principles.
Canon of taxation is the main basic principles set to build a good tax system. Adam Smith was the
first who laid down four canons of taxation in his famous book Wealth of Nation.
Four canons of taxation are:
Canon of equity
Canon of convenience
Canon of certainty
Canon of economy
CANON OF EQUITY:
The subject of every state ought to contribute towards the support of the government, as nearly as
possible, in proportion of their respective abilities.
It is the principle of justice. It lays the moral foundation of the tax system. The principle of Equity
does not mean that every individual should pay tax at same tax rate but, According to this
principle every individual should pay tax to the government according to his ability to pay, the
amount of the tax paid should be in proportion of the income of the individual. I.e. the rich should
pay greater amount of tax to government because without the protection of the government such
as police, defense etc. they could not have earned their revenue. This principle clearly points
towards Benefit principle and as well as ability to pay, i.e. taxing higher incomes at higher rates. If
there is no equity in tax system compliance of cost may decline, furthermore there should also be
P a g e | 39
equity in public expenditures, public policies should not be only designed for rich or poor people
only there should be optimality in expenditure policies as well
CANON OF CERTAINITY:
The tax which each individual is bound to pay ought to be certain, and not arbitrary
According to this canon of taxation tax payer should know in advance how much the tax is to be
paid, at what time he has to pay the tax, in which form and what is the mode of payment.
Government should also be certain about the amount of revenue collected by the way of tax.
Uncertainty in taxation encourages insolence and corruption and tax evasion. A part from certainty
from tax payer view, there should be certainty in tax policies if the tax laws are changing
frequently greater will be uncertainty and greater will be the risk. If government policy remains
stable for a very long period of time, government policies will not be adding to the uncertainty only
economic uncertainty will be there this will encourage business activities. Therefore to refrain from
frequent changes in tax laws ad valorem tax rate should be imposed rather than unit tax rate
because ad valorem tax rates are self adjustable when price change due to inflation.
CANON OF CONVENIENCE:
Every tax ought to be levied at the time, or in the manner, in which it is most likely to convenient for
the contributor to pay it.
The canon of certainty says that time and manner of payment should be certain but canon of
convenience says that time and manner of payment should be most convenient to the tax payer.
For example land revenue is collected at time of harvest and income tax is deducted at source. In
now a days tax can be filled through E-filling system which is less costly and convenient to the
taxpayer. Other examples are withholding tax which is income tax deducted at source. , sales tax
deducted at the factory level. Moreover tax laws should be simple so there is no difficulty to the
tax payer in calculating his tax liability without hiring any legal advisor. Convenient tax will
encourage people to pay tax this will also increase the tax revenue as compliance of tax will
increase.
CANON OF ECONOMY:
Every tax ought to be so contrived as both to take out end to keep out of the pockets of the people as
little as possible over and above what it brings into the public treasury of the state.
This principle states that the administrative cost of collecting the tax should be as low as possible.
If the salaries of government officials involve in the collection of the tax revenue eat up a big
portion tax is uneconomical. Cost of collecting the tax should be low than the amount of the
revenue collected, in this way large amount of collection will directly go to the government and
therefore, can be used for public welfare and development programs. It will be of no use to impose
tax which are to widespread and difficult to administrate, furthermore making tax laws is not
enough, if there is no effort by the government to ensure that the individuals are paying tax
therefore the is a need to compel individual to pay tax which is called the administrative
strength. If there is higher administrative strength, lesser will be tax evasion and greater will be
the administrative cost so there is tradeoff. Tax rates should also be within tolerable limits, in
place of having high tax rates on few tax base we should impose small tax rate on variety of
economic goods in this way excess burden of tax will be comparatively less. The canon of
economy says that we should strength the tax collecting department to the optimal extent.
P a g e | 40
CONCLUSION:
A good and an efficient tax system is a one, which is compromise on above mention canons of
taxation. A tax system should be based upon the grounds of equity that is according to their
ability to pay. Mode of payment should be convened to tax payer furthermore, tax laws, tax
rate, and time of payment should be pre defined to taxpayer moreover, and tax should be
efficient in term of administrative cost. In short tax system should be just, certain, convenient and
economical however there is tradeoff between certain principle such as simplicity and equity,
controlling tax evasion and administrative cost therefore we have to compromise on some
principles when designing tax policy keeping in view the requirement of your economy.
TAX BUOYANCY AND TAX ELASTICITY:

The elasticity and buoyancy of taxes help to determine how changes in tax base will impact on
the tax revenue yield. Formula for computing elasticity and buoyancy is same but they are
essentially different.
TAX ELASTICITY:
The measure of elasticity of tax system tells us about the responsiveness of tax yield to the
changes in the national income. It is defined as percentage change in total yield associated with
% change in the GDP keeping all the things constant that is without any change in the tax rate
and tax laws. Formula for calculating tax elasticity is as follows.
= % /%
Elasticity can take negative or positive value; if the elasticity of any tax base is greater than one
indicate that as GDP increases the amount of the tax revenue yield from that activity increases to
a greater extent. Taxes which have elasticity greater than one are. Those taxes are desirable
which have elasticity greater than one because they do not demand frequent changes in the tax
laws for increasing required revenue.
Steps for Obtaining Elasticity of Tax Base:
First we have to multiply tax rate with amount of tax base, without changing tax rate
We need to calculate % change in tax revenue, without changing tax rate.
Than we need to calculate % change in tax base.
All monetary values should be deflated first that is converting in real terms.
Finally, by dividing % change in tax revenue (without changing tax laws) by % change in
tax base we can get elasticity between any two points in time.
For calculating elasticity of time series we have to take natural log of the above formula.
TAX BUOYANCY:
Buoyancy measures total response of the revenue from any tax due to change in income. It shows
the growth in the total revenue caused by the increase in GDP. While calculating buoyancy we
take in to account the changes in the tax laws, tax policy and administrative efficiency. Thus the
revenue change in any given period may be affected by all these factors and as well due to
change in the tax base. Formula for calculating tax buoyancy is as follows.
= % /%
P a g e | 41
Here numerator is % change in real tax revenue during the period as observed. Buoyancy is
usually greater than one because tax rates increases over time.
SALES TAX REGIEME:
Sales Tax
50.00
40.00
30.00
20.00
10.00
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0.00
Sales Tax
We can see that there certain shit overt the time period usually cause by level effects that is
change in tax laws and policy.
At the time of independance1947 sales tax was a provincial tax later it becomes federal tax
in 1948 and all sales tax revenue were permanently transferred to the federal government in
1952. Sales tax Act 1952 was changed into sales tax Act 1990.
In i980s government decided to substitute sales tax by value added tax. It is levied at each
stage of supply chain. Initially it was levied on only certain supplies of goods made by
imputers and manufacturers only. Basic features of new tax system were based on self
assessment, input tax deduction and audit based procedure. Later VAT was extended to
retailers , wholesalers as well for some product expansion in tax base remain less therefore to
overcome this problem in 2000 policy was introduced that all manufacturers, importers,
distributors, wholesalers and retailers were required to register for GST furthermore
government will only do business with those enterprises which were register in value added
tax scheme. Manufactures were only required to register if their taxable turnover exceeds 5
million RS. In 2003 sales tax were withdrawn on supplies on vegetable ghee and cooking oil
whereas, sales tax on imported vegetable oil increase from 15% to 20%, GST good and
services tax was imposed at different rates in 2003 ranging from 10% to 23%, Due to the
multiple rate administrative cost increased so the uniform GST rate 15% was introduced in
2004. In 2010 increased to 1605 in 2011 tax rate was further increased to 17% but in 2012
decreased again to 16%
Pakistan has low tax to GDP ratio but in I990 due to introduction of value added tax sales
tax revenue increased from 20% during 1990s to about 40% in 2010.
EQUITY IN TAXATION:
Concept of equality in taxation is shaped by two important theories Ability to pay principle and
benefit principle.
P a g e | 42
Ability to pay principle:

This is the most popular theory of justice in taxation according to this theory tax payers should
pay according to their capacity to pay that is rich should be taxed more heavily than individuals
with less income.
Benefit Principle:
According to this principle taxes are levied on the basis of benefits received by the people from
goods and services. Individuals who receive more benefits should pay more tax.
This principle is hard to apply because of many of those who receive public goods and services
such as poor, sick and unemployed people are unable to pay tax.
Adam Smith View on Equity in Taxation:
The subject of every state ought to contribute towards the support of the government, as nearly, as
possible, in proportion to their respective abilities that is, in proportion to the revenue which they
respectively enjoy under the protection of state
Adam smith in his first maxim thus combines both benefit and ability to pay principle.
According to this maxim tax is to be levied in the same proportion as benefit derived from the
government.
John Stuart Mills View on Equity in Taxation:
as government ought to make no distinction of person or classes in the strength of their claims on it,
whatever sacrifice it require from them should be made to bear as nearly as possible with the same
pressure upon all, it must be observed, is the mode by which least sacrifice is occasioned on the whole. If
anyone bears less than his fair share of burden some other person should more than his burden .Equality of
taxation therefore as maxim of politics means equality of sacrifice
John Stuart mill, tax is to be imposed on the individuals with same preferences and different
income in such a way that real burden of tax that is loss in utility remains same. Mill advocate
progressive tax structure, below a threshold level of income individuals are not taxed but beyond
that threshold level as income increases tax rate increases as well thus satisfying ability to pay
principle.
According to Mill benefit principle is in contradiction to the ability to pay principle as poor
receive more benefits from public good and services and have less ability to pay. According to
Mill benefit principle would lead to regressive tax structure while Mill was of the view of
progressive tax structure which is more equitable as compared to proportional rate structure.
Under proportional rate structure everyone is taxed at same rate even those individuals who live
below poverty level. However, for same loss in utility proportional rate structure generates more
revenue as compared to progressive rate structure.
The benefit approach has advantage of linking the expenditure and tax sides of budget policy,
the benefit approach ideally allocate that part of the tax which defrays the cost of public
services but it cannot serve redistribution objectives while ability to pay approach serves the
income redistribute problem but it leaves the provision of public services undermined.
P a g e | 43
LITERATURE REVIEW:
EXCESS BURDEN OF INDIRECT TAX
The issue of excess burden of indirect taxes and optimal tax commodity taxes is one of the oldest
lines of study in the field of public finance dating back to 1876 till yet. Alfred Marshall was the
first who give the concept of excess burden, excess burden of tax is the loss in the consumer
surplus more than tax revenue generated by the government, later on this excess burden was
made popular by the work of Harberger (1964). What causes the excess burden is question of
further interest, D.Walker (1955) claims that magnitude of excess burden varies directly with the
degree of substitution effect, however, in contrast to J.G Head and C.S Shoup (1969) in their
article Excess Burden the corner case summarizes that, relationship of excess burden and
substitution effect do not hold in the corner case, magnitude of excess burden of indirect tax rises
from zero toward a maximum positive magnitude of substitution effect and then falls back toward
zero as substitutability becomes perfect. Excess burden of indirect tax and direct tax is also a
long debate, J.S Dodgson (1983) in his article On the accuracy and appropriateness of alternative
measures of excess burden use indifference curve analysis to show that loss in utility with indirect
tax is greater as compare to the lump sum direct tax. Similarly, Edgar K Browning (1976) in his
article marginal cost of Public funds states that marginal welfare cost for income tax is lower
than relative to other tax, furthermore taxes are levied to finance expenditure program ,
collection of tax revenue involve some marginal cost which is a direct tax burden plus sum welfare
loss (E.B). Marginal welfare cost is the social opportunity cost of welfare program according to
Edgar.K.Browing; Pigou (1947) expenditure program will be efficient only if benefits associated
with expenditure program only exceed revenue plus the excess burden. Thus establishing the
superiority of direct tax over indirect tax
in terms of welfare and efficiency loss
Henderson(1948) argues that direct tax raises given amount of revenue much painlessly than
indirect tax, however W.J Corlett (1953); D.C Hague (1954) in Complementarily and excess
burden of taxation concludes that if leisure is constant i.e. if money is held constant direct tax
proves superior but if leisure is not constant indirect tax can be more superior by stating that if a
higher indirect tax is levied on the commodity that is more complementary with leisure, individual
will choose to work harder to raise its real income and so will move towards higher indifference
curve. Thus indirect tax is more superior if individual have control on working decisions. A part
from the controversy what cause the excess burden how to measure excess burden is also an
important line to study. The excess burden is commonly measured by the area associated with
Harberger triangle however Hause (1981) argues that measuring excess burden of tax on
Marshallian surplus or Harberger triangle can lead to serious error of estimating welfare loss as
Marshallian demand curve is more flatter and change with the type of commodity, other measure
of welfare loss of taxation are compensating variation (CV) and equivalent variation (EV). CV
and EV are both true measure of loss, former is defined as compensation needed at post tax
price which would restore individual at his original utility level while later is defined as
compensation to be at pretax rather than post tax price. J.S Dodgson I his paper estimate
measure of excess burden and found that when preferences are assumed to be stone Geary type
Harberger approximation provide better results of total loss than when they are assumed to be
Cob Doglus , it provide worse estimation. Having discus these issue the question which is raised
finally is what is the optimal tax policy that ensure Pareto optimal allocation of resources, in the
paper Uncertainty, optimal taxation and direct versus indirect controversy by Helmuth and
Firouz (1995) concludes that in world of uncertainty commodity tax are an essential part of
pareto efficient tax structure.
P a g e | 44
PROGRESSIVITY OF TAX:
A tax is a progressive tax if the ratio of tax to income rises as income level increases. For
proportional tax the ratio is constant with increase in income, whereas for regressive taxation
ratio falls with increase in income.
When average tax rate increases for higher income level tax is said to be progressive bur
degree of progression varies between different points of income level.
Following are the ways to measure the progressivity of tax:
Average Rate Progression

Liability Progression
Residual Income Progression
Marginal tax rate.
AVERAGE RATE OF PROGRESSION:

It is referred to as change in the effective tax rate to change in income. It is measured by taking
the derivative of average tax rate with respect to income or average rate of progression gives
the slope of curve by plotting effective tax rate against income. The value of coefficient is
positive, greater than zero for progressive tax. The effective tax rate tends to flatten and
progression tends to decline as we move up the income scale. if average tax rate is held constant
than all brackets rate will increase by rising percentage points. Degree of progression is
measured through following formula
LIABILITY PROGRESSION:
It is referred as the ratio of percentage change in liability to the percentage change in income or
it is defined as elasticity of tax liability with respect to income. The coefficient measures the slope
of the curve obtained by plotting tax liability on the double log chart. For progressivity the
coefficient is greater than 1. Coefficient of liability also decreases as income increases. If liability
progression is held constant and tax rate are to be increased, all brackets rates will increased in
same percentage points.
? /( )
RESIDUAL INCOME PROGRESSION:
It is referred to as to the ratio of percentage change in after tax income to the percentage
change in before tax income or it is the elasticity of after tax income with respect to before tax
income. It gives the slope of a curve by plotting before tax and after tax income on log chart. For
residual income progression trend is reversed i.e. rise in progressivity is reflected in declining
coefficient; progression is indicated by a coefficient less than one. If the residual income is held
constant brackets rates increased by falling number of percentage points.

In above formula y1 and y0 are lower and higher income levels respectively and T0 and T1 are
the corresponding tax liabilities.
P a g e | 45
MARGINAL TAX RATE:

It is referred to as derivative of marginal tax rate with respect to income. It is used to measure
progressivity of tax, incremental increase in income are taxed at progressive rate. For
progressivity of tax coefficient turns out to be positive. Following formula is used
We can measure progressivity through above mention methods.
TAXATION STRUCTURE IN PAKISTAN:

CAMPARATIVE STATIC ANALYSIS 1985 AND 2012:
One of the major functions of the government is to provide basics facilities to its people such as
basic health, primary education, basic sanitation housing extra, Furthermore in order for
accelerating economic growth and development government needs to invest in social over head
cost like roads, highways, dams and host of other services. To carry out all these objectives
government needs revenue to for that government tax its people.
Pakistan tax structure include direct and indirect tax, in the categories of indirect tax we have
income tax , corporate tax, wealth tax, workers welfare tax and capital value tax whereas major
indirect tax are customs duties, federal excise duty and sales tax.
BASIC FACTS:
In 1985 real total tax revenue generated by government is 1944.79RS million, mostly coming
from indirect tax i.e. 82.32% while only 17.68% of tax revenue is generated through direct tax.,
similar trend can be seen in 2012 total real tax revenue generation was 6731.59%, share of
indirect tax in total revenue is 62.38% while that of direct tax is 37.62%
Revenue Share 1985
Others
Sales Tax
Excise
Duties
Custom
Duties
Direct
Tax
Wealth
Income Tax
Tax
Corporat
e Tax
Welfare
Tax
Capital
Tax
Indirect
Tax
P a g e | 46
Revenue Share 2012

Others
Sales Tax
Direct
Tax
Income
Tax
Excise
Duties
Custom
Duties
Corporati
on Tax
Indirect
Tax
Wealth
Tax
Capital
Welfare
Tax
Tax
Receipts
Direct Taxes
Income Tax
Corporation Tax
Wealth Tax
Workers Welfare
Tax
Capital Value Tax
Indirect Taxes
Custom Duties
Federal Excise
Duties
Sales Tax
Others
FY85
9,312
9,071
180
12
FY12
731900
731600
0
0
Real Values
FY85
343.87
334.97
6.65
0.44
49
0
43,353
23,371
200
100
1,213,800.00
218200
1.82
0.00
1600.92
863.04
0.69
0.35
4199.42
754.91
0.09
0.00
82.32
44.38
0.01
0.01
62.38
11.21
565.29
172.60
0.00
422.09
2799.96
222.11
29.07
8.87
0.00
6.27
41.59
3.30
Tax Revenue
GDP Deflator
52,665 1,945,700.00 1944.79

27.08 289.040
15,308 122000
4,674 809300
0
64200
Real Values
FY12
2532.18
2531.14
0.00
0.00
% T.revenue
Fy85
17.68
17.22
0.34
0.02
% T.revenue
Fy12
37.62
37.60
0.00
0.00
6731.59
COMPARATIVE ANALYSIS:
A share of direct tax revenue in 1985 is 17.68% in total revenue where as in 2012 share has
increased to 37.62%. Looking into the categories of direct tax we come to know that income tax
is a major tax base. In 1985 share of income tax in tax revenue is17.22% which has increased to
37.60% in 2012, while share of corporate tax in total tax revenue in 1985 was only 0.34%,
despite of the impressive industrialization that took place in 1960s contribution of cooperate tax
actually declined as a % of total revenue receipts. Share of wealth tax is 0.02and 0.08% of
workers welfare tax. Data for capital value tax in 1985 was not available. In 2012 significant
source of direct tax revenue is income tax having 37.60% of share in total tax revenue, while
o.o1% of total tax revenue comes from workers welfare tax and capital value tax.
P a g e | 47
direct tax % of total tax revenue
FY85
FY12
Indirect tax relative to in 1985 is 82.32% which decreased to 62.38% in 2o12. Major source of
indirect tax in 1985 was custom duty having share of 44.38%, second is federal excise duty
collecting almost 29.07% of total tax revenue i.e. taxation on a trade because contribution of
trade has become substantial in economic development with high tariff and import substituting
industrialization, Whereas, sales tax become a major source of revenue collection in 2012,
Collecting almost 41.54% whereas share of sales tax in 1985 is only 8.87% increasing to a
significant extent by 32.67%, reasons for such change may be due to the fact that as economy
grows consumption needs also increases so does the revenue collected from those goods. Second
major source of revenue in indirect tax is custom duty having share of almost 41.59% while share
of excise duty in 2012 is 29.07%.
indirect tax % of total revenue
FY85
FY12
Pakistan tax collecting effort is quite poor as compared to same income group. Main source of
revenue for the government is indirect tax, which may be termed as inequitable as well as
inefficient. Pakistan only collects 3.91% of GDP as tax.
We see that over the period of 27 years structural reforms very little have changed. Share of
direct taxes is much time as large as compared to the share if indirect taxes, within the category
of indirect taxes, import duty used to dominate and provide largest source of revenue to the
government, but today sales tax is the largest source of the revenue.
P a g e | 48
SECTION #3
PROJECT EVALUATION
NPV CRITERION and IRR CRIETERION:
PROJECT EVALUATION:
Financial resources of public sector are very limited and have to be used in a way that delivers
most of the benefits to the people. Government should satisfy the principle of maximum social
advantage. In order to undertake any project we need first to analyze its cost and benefits this is
called the project evaluation. If benefits are greater than the costs the project is worthwhile to
undertake.
Following are the criteria used to evaluate public or private project.
Net present value

Internal rate of return
Benefit cost ratio.
NET PRESENT VALUE:

According to this criteria only those project should be under with the positive net present value,
secondly, if two projects are mutually exclusive the preferred project is the one with higher net
present value. NPV criterion shows the absolute or direct benefits accruing to the firm or to the
general public.
Decision Rule:
NPV= >0 we can accept the project
NPV=<0 reject the project
NPV=0 project is marginally acceptable.
INTERNAL RATE OF RETURN (IRR):
It is that discount rate at which NPV of the particular project is zero.
Decision Rule:
If interest rate is less than IRR net present value is positive, project is desirable
If interest rate is greater than IRR net present value is negative, project is undesirable.
BENEFIT COST RATIO:
It is the ratio of present value of benefits to the present value of cost.
Decision rule:
If the ratio is greater than one project is desirable.
CONFLICTING CONCLUSION:
Two mutually exclusive projects A and B with same time period and net present value at
zero rate interest however project B has greater benefits in accruing in earlier period.
P a g e | 49
Whenever any project has most of the benefits accruing in earlier time period has greater IRR
and is desirable over any other project, Therefore Project B is more desirable over A. Here
net present value and IRR give same conclusion.
Two mutually exclusive projects A and C having same IRR but different NPV at zero rate
of return. Suppose project A has NPV=50 while NPV of project C=100. In this case two
criterions can lead to conflicting conclusions. If IRR method is used to evaluate project since
two projects have same internal rate of return it will lead to conclude that two projects are
indifferent. However using NPV criteria will tell that project C is more desirable because it
have higher NPV at any given rate of interest less than IRR. Here NPV is more
appropriate to use.
Two mutually exclusive projects A and D having Different internal rate of return project A
NPV at zero rate of interest is equal to 50 and that of project D NPV is 30. Likewise, IRR
for project D is greater Than IRR of project A , net present value profile of these two
project is such that two net present value curve intersect at i* . I* is rate of interest at
which NPVA= NPVB, this rate of interest is called super rate of interest, in this case this rate
of interest will be used to judge the desirability of the project. For any interest rate less
than I* project A will be more desirable and for any interest rate less than I* project D will
be more worthwhile. If we use IRR than we can make wrong conclusion that project D is
more desirable.
Two projects have uneven life can lead to wrong conclusions on the basis of NPV and IRR
criterion, therefore first we need to make two projects equal in terms of time period for
that purpose we have to look for the possibility of reinvestment.
Thus NPV and IRR criteria can lead to different and conflicting solutions we should not use them
unconditionally we have to look at other factors as well.
CIRCULAR RAILWAY IN KARACHI:

Karachi is one of the largest metropolitan cities in the world, size of the economic activity is badly
affected by the lack of effective and efficient transport system and so the city is not able to
perform to its optimal level. Congested roads is an indicator that city is facing an economic hurdle
to its economic performance. Traffic congestion, accidents are economic cost through loss in time
value. Government is making efforts to resolve this problem through Karachi circular railway
program.
Suppose cost of this project is 1.58$ billion, 290 trains are expected to operate with automatic
ticket gates and elevator, 139 underpasses and three over head bridges total length of the
circular railway will be 50km. life of the project is 25 years.
Following are cost and benefits associated with this project.
DIRECT COST:
Direct cost in the construction of the railway includes
Capital cost
Operating cost
Maintenance cost
Interest payment
Cost of laying infrastructure
P a g e | 50
Cost of railway tracks

Purchasing trains
Fuel
Arranging seating capacity to cater large population.
Direct cost in the circular railway in Karachi involves investment or capital cost, since tax revenues
are not enough to finance this project therefore government will have to take loan from external
sources therefore direct cost also includes payment of interest rate. Then came the cost of
construction of railways, infrastructure and finally government needs to buy trains here we can
also include operational cost like cost of fuels or energy resource. Capital cost can increase
because of inflation, delay in schedule, and competitive bidding environment for raw materials
DIRECT BENEFITS:
Direct benefits are as follows
Time saving
Cost saving
Providing safety
Low freight rates
Reduced congestion
Circular railways in Karachi will obviously have some direct benefits to the people, railways
system in Karachi will save the precious time of the commuters furthermore it will be more saved
as compared to other number of transports which have risk of accidents moreover, low freight
rates as compared to high fares of taxis and rickshaw will save the cost of the people. Traffic
congestions on road will also be reducing that maintains the beauty of the city.
INDIRECT COST:
Indirect cost includes:
Noise pollution
Air pollution
Water pollution
This program will be harming the environment through air pollution because of emission of green
house gas that is carbon dioxide, water pollution during construction process and noise pollution
because of the engines of train.
INDIRECT BENEFITS:
There are numerous indirect benefits associated with this project:
Enhancing competition
Reduced cost of production
Increases sales
Diversity of goods
Increasing employment
Increase in standard of living
Increase in property value
Many people will witness that due to this expenditure program economic activities will increase,
through railway system different areas of Karachi and the suburbs will be linked more closely as
P a g e | 51
a result market size will increase, demand for the goods will increase thus increasing the share of
sales in the market as size of market will be increased more diversified goods and services will
be available to the people. Furthermore cost of obtaining raw materials from far by places will
decrease, decrease in the cost of production and increase in sales will tempted firms to employ
more labors as result employment will increase which will increase quality of life. Moreover,
property value will also increase; as suburbs around Karachi will be connected through circular
railway system people from suburbs can come more easily to receive better quality education
from urban areas.
Thus circular railway in Karachi seems to be more beneficial but one cannot say it clearly by
looking only at the numbers of cost and benefit we have to further analyze by converting these
cost and benefits in to monetary value , discounting them and judging the desirability on the basis
of NPV, IRR or BCR criteria.
SOCIAL DISCOUNT RATE FOR EVALUATION OF PUBLIC SECTOR PROJECT:

Discount rate is a rate that is used to convert cost and benefit over time to present value. Present
value of a future amount of money is you will be willing to pay today to receive benefits in
future. Whenever monetary value over in different time period we need to discount them.
Monetary value of two different time period is not directly comparable.
ISSUES IN DETERMINING DISCOUNT RATE OF PUBLIC SECTOR PROJECTS:
Choosing an appropriate discount rate is crucial for cost and benefit analysis.
To undertake any public sector project government raise revenue through taxation or borrowing.
When tax is levied for this purpose it discouraged private investment and consumption. Hence,
following issues are taken into consideration while determining discount rate for public sector
projects
DISCOUNT RATE BASED ON RETURNS OF PRIVATE SECTOR:
It is a market rate of return that is used as discount rate for evaluating present value of the public
sector cost and benefit. it is basically the opportunity cost of government. For example: suppose
economy yields an annual rate of return equal to 16% if the government extracts 10,000RS from
private sector for a public project and 10,000 is entirely at the expense of private sector
investment, society looses 160RS that would have been generated by private sector project, thus
opportunity cost of the government is 16% rate of return. Social opportunity cost approach to
discount rate implies that government should analyses before taking resources out of the private
sector by making sure that society will receive greater welfare than society would have received
if the resources remain n private sector, i.e. net return on government project should be greater
than net return on private investment.
RATE OF TIME PREFERENCES:
Government forces citizen to consume less in present and in return they will have more in future.
Arte of time preferences is a rate at which individuals are willing to trade present consumption for
future. Social rate of time preference is appropriate if public sector project is finance through
taxes that reduces consumption not investment.
P a g e | 52
IMPERFECT MARKET:
In imperfect market due to market distortions rate at which people are willing to trade present
consumption for future consumption fifer from market rate therefore we need to adjust price which
is known as shadow price of capital.
GOVERNMENT BORROWING RATE:
Government borrows funds to fianc project. Long term borrowing interest rate and interest rate
of all government bonds is the actual opportunity cost of financing.
WEIGHTED AVERAGE:
It is not possible to know whether a government is financing a particular project from private
consumption or private investment therefore we can take the weighted average of all approaches
of discount rate which will reflect the forgone private consumption and as well as forgone private
investment.
GENERAL PRACTICE ACROSS THE WORLD:
USA uses two discount rates when evaluating public project. 7% and 3%, 7% is estimate of
private return on investment and 3% is a discount rate at which society discounts future
consumption. In UK growth is 2.5% based on optimal growth rate method. In Pakistan discount
rate is set by Karachi interbank offer rate (kIBOR) which is 10%.
SECTION #4
FISCAL FEDRALISM
NATIONAL FINANCE COMISSION (NFC) AWARD:
NFC national finance commission award is a body constituted by president of Pakistan which is
meant to divide financial resources from divisible pool to the provinces. The NFC is supposed to
announce an award on annual basis on which divisible pool is determined.
Certain types of taxes are collected by federal government from each province from which
Almost 90% of revenue is collected at the federal level and remaining 10% is distributed
between two tiers of government. Provincial government has access to the resources from divisible
pool of federal taxes as per prescribed formula, currently the divisible pool is shared among
provinces on the basis of population share, and Punjab gets 57.88%, Sindh 23.28%, KPK
13.54% and Baluchistan 5.30%.
What kind of taxes to be include in divisible pool and formula of distribution is the centre debate
of the NFC award. Following are the provincial concerns related to NFC award.
As, most of the revenue is generated from Sindh and Punjab and almost all custom duties
are collected from Karachi port, therefore Sindh on generating most of the revenue
argues for getting substantial share in financial resources.
Baluchistan since get the least share of financial resources argues that it is a largest and
scattered populous province. Therefore require more resources so that everybody in the
large province will get benefit from pubic provision of goods and services.
While KPK argues on the ground that it has mountainous geographical terrain and public
sector expenditure are therefore relatively higher as compared to Sindh and Punjab.
Punjab sole interest was on the population criteria.
P a g e | 53
Provinces have big deal of concern about revenue generation, since most of the revenue
yielding tax such as import duties; income tax, corporate tax, excise duty and sales tax
are under federal government.
Finally, Islamiziation process had caused loss of revenue from entertainment tax and land
revenue.
Thus there is a need of adding additional factors in NFC formula such as infrastructure,
poverty, backwardness and revenue generation so that equitable distribution of resources
can take place. While in India fiscal federalism has been strength by allowing provinces to
collect sales tax.
NFC award is a step towards strengthening fiscal federalism because it will result into o more
equitable and efficient allocation of resources and opportunities for serving poor.
FISCAL FEDERALISM AND DUTIES OF DIFFERENT TIERS OF GOVERNENT:

Fiscal federalism is the relationship between different levels of the government that provide basic
goods and services and have some scope for decision making. This achieved by introducing such
policies that can be implemented through some form of negotiation. So that all members can
share in the nations building.
A decentralized system compromising of central, provincial and local government can bring direct
benefits and enhance efficiency in the provision of basic goods and service. Division of fiscal
responsibilities among different level of government is called fiscal federalism.
Pakistan is parliamentary federation compromising of 4 provinces and federally administrated
tribal areas.
According to fiscal a federalism theory responsibilities allocated to the federal government should
be macro in nature while provincial and local government should be responsible for providing for
providing those goods and services keeping in view the desirability of the people of that region.
RESPOSIBILITIES OF DIFFERENT TIERS OF GOVERNMENT:
Following are the responsibilities which should be undertaken by federal and provincial
government.
First, Federal government should provide those goods and services which spillover effects
for example higher education have positive externalities associated, people from rural
areas might come to urban areas for receiving education the benefits of which can travel
back to those areas as well. If provincial government provides all such goods that they will
disregard national social benefit and so will under produce that good or service.
Second,, activities which are macro in nature and have national interest associated with
them , these activities should also be undertake by federal government such as polices for
macroeconomic stabilization, controlling inflation, money supply and dealing with foreign
affairs.
Third, those national goods should be produced by federal government which have free
rider problem if locally produced. Such as defense facility. If every province in Pakistan
produces their own defense it may have a possibility that optimal level of defense facility
may not be provided.
fourth, For certain good and services cost per person falls as certain good and services
decreases, therefore to exploit economies of scale federal government should be
responsible for the provision of these goods and services.
P a g e | 54
Fifth, In case of income distribution program if these were the responsibilities of the
provincial or local government, we can expect immigration of poor people from rest of
the country and rich people will start leaving that region because of high tax rate. As
poor population will increase in the region the cost of the program and ultimately
distribution program will be abolished.
Sixth, In order to fianc expenditure federal government can collect taxes such as
corporate tax, income tax, excise tax, However in our country federal government collects
95% of the tax revenue, sales tax is also collected by the federal government. And then is
divided among provinces according to their population share. If federal government
collects its own revenue only than tax rates will be low furthermore, there will be two tax
rates prevailing in the economy provincial and federal as result cost of compliance of the
tax payer will increase. However, it is argued that sales tax should be given back to the
provinces as per the share of revenue generation because it is the bread and basket of
the provinces.
Seventh, Responsibilities under provincial government include law and order, justice, urban
transport, maintenance of highways and college. People differ from region to region and
so does their culture and taste therefore it is important that provincial or local government
should carry out expenditures keeping in view the preferences of their people.
Eighth, For this purpose decision making authority of provincial government should increase
as well as sales tax should be part of provincial tax revenue, other source of revenue for
provincial government are property tax , license fees, electricity duty , vehicle tax, tax on
value added on goods and services, agriculture tax, further more distribution of revenue
from federal government to provincial government should not be based only on the basis
of population share but other factors such as, revenue generation, density of population ,
geographical terrain, poverty and backwardness should be taken in account.
If Federal government wants to increase spending of any facility they can give conditional
grants to the provincial government in order to increase the social welfare. in this way
local autonomy is maintained and yet externality is corrected.
SOME ARGUMENTS ON TAXES:
Ninth, Some arguments on the taxation are, there are certain taxes that that cannot be
imposed provincial or local level such as corporate tax because if these taxes are under
provinces than in provinces where corporate income taxes are relatively high corporation
may leave that province and move to some other one due to this substitution there will be
dead weight loss but will not happen so in case of federal government. However
agriculture land can be tax by provincial government, if tax rates are higher in one
province than in other there will be dead weight loss because of no substitution effect.
Therefore tax on immovable property can be imposed by provincial government.
LOCAL GOVERNMENT:
Tenth, Local government is responsible for the provision of local public goods whose
benefits are largely confined to local residents, Such as street light, city roads, public
libraries, solid waste management, townships and primary and secondary education,
because local government know better that in which areas they need more schools about
density of population in their locality and etc . Local government major source of revenue
are gross annual rental value of properties, as most of the property tax collected by
P a g e | 55
provincial government is transfer to local government therefore provincial government put

low fiscal efforts as result local government also have negative impact.
Finally, in local government system people are more linked to their representative instead
of federal government. Local government has better knowledge about the problems,
issues of the residents, furthermore decentralization accounts for giving accountability, and
local people can be empower.
CONCLUSION:
Thus the goods which have free rider problem, have external effects and have national interest
should be provided by the federal government. However, Decentralization of local services along
with higher flows of fund to local government from provincial and federal government is likely to
improve overall level efficiency and the provision of goods and services in the country.

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PUBLIC

Public expenditure share in GDP

PUBLIC EXPENDITURE SHARES IN GDP:

MARGINAL PROPENSITY TO SPEND:

THEORIES OF PUBLIC SECTOR EXPENDITURE GROWTH:

Theory of Adam Smith

THEORY OF ADAM SMITH:

ADOLPH WAGNER LAW:

PEACOCK- WISEMAN MODEL OF SOCIAL DISTURBANCE:

RELATIONSHIP BETWEEN ENGELS AND WAGNERS LAW:

RESULTS FOR DIFFERENT INCOME GROUP:

Wagner's Law for low income countries.

LOWER MIDDLE INCOME GROUP:

Public Exp/capita (lower middle income countries)

Wagner law for Lower Middle Income Countries

public exp/capita (upper middle income counties)

Wagners Law For Upper Income Countries

public exp/capita (high income countries)

Wagner Law For High Income Countries

FEDERAL EXPENDITURE AS A PERCENTAGE OF TOTAL EXPENDITURE:

Development Exp % of total Exp

FEDERAL EXPENDITURES AS A PERCENTAGE OF TOTAL REVENUE:

Development Exp % of total

PROVINCIAL EXPENDITURE AS a PERCENTAGE OF TOTAL EXPENDITURE:

69.39% in 2011-12. Provincial Development expenditures as compared to federal development

Provincial current Exp % of total

Provincial expenditure as % of total Expenditures

PROVINCIAL EXPENDITURE AS a PERCENTAGE OF TOTAL REVENUE:

Provincial % of tax revenue

Provincial Current Expenditure

provincial total devlopment exp

EFFECTS OF WAR ON PUBLIC SECTOR EXPENDITURES:

Federal Govt Exp

Federal Govt Exp

Provincial Govt Exp

Real Law & Order Exp

Law & Order Exp

Law and order

EDUCATION AFFAIRS AND SERVICES:

Educational expenditures are increasing gradually as GDP is increasing. From 2004-08

give us marginal propensity to spend. Marginal propensity to spend of overall government

NON TAX REVENUE

TAX BUOYANCY AND TAX ELASTICITY:

SALES TAX REGIEME:

Ability to pay principle:

Average Rate Progression

AVERAGE RATE OF PROGRESSION:

MARGINAL TAX RATE:

We can measure progressivity through above mention methods.

TAXATION STRUCTURE IN PAKISTAN:

Revenue Share 2012

52,665 1,945,700.00 1944.79

direct tax % of total tax revenue

Net present value

NET PRESENT VALUE:

CIRCULAR RAILWAY IN KARACHI:

Cost of railway tracks

SOCIAL DISCOUNT RATE FOR EVALUATION OF PUBLIC SECTOR PROJECT:

FISCAL FEDERALISM AND DUTIES OF DIFFERENT TIERS OF GOVERNENT:

SOME ARGUMENTS ON TAXES:

provincial government is transfer to local government therefore provincial government put

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