Political economy of fiscal reforms in the 1990s

In this paper, we attempt to explore the rationale behind the emphases on the improvement in both the deficit-to-GDP and the tax-to-GDP rations that have remained the cornerstones of Pakistan's fiscal refom effort in the 1990s. The analysis demonstrates that the efforts to increase the overall tax-to-GSP ratio did not prove to be successful. However, the contribution of various types of taxes to total tax collection did change. While the share of direct taxes and sales tax increased, that of import duties fell significantly. Import duties underwent drastic reduction mainly under the IMF pressure to liberalise trade more than required even under the WTO agreements. As the IMF-prescribed tax effort was deflationary, significant increases in output that could have fed back favourably into tax generation and budget deficit reduction could not be recorded. (Pak Development Rev/DÜI)