MEDIUM-TERM FISCAL FRAMEWORK (MTFF) TOOLKIT

Transcription

1 MEDIUM-TERM FISCAL FRAMEWORK (MTFF) TOOLKIT Sub-National Governance Programme MEDIUM - TERM FISCAL FRAMEWORK (MTFF) TOOLKIT, GOVERNMENT OF THE PUNJAB

2

3 LIST OF TABLES AND FIGURES Table 1 GDP Estimation Method 1 Table 2 GDP Estimation Method 2 Table 3 Results - GDP Estimation Table 4 of FBR Tax Collection - Method 1 Table 5 of FBR Tax Collection - Method 2 Table 6 of FBR Tax Collection - Method 3 Table 7 of FBR Tax Collection - Method 4 Table 8 Results - of FBR Tax Collection Table 9 Punjab share in Federal Divisible Pool Table 10 Trends in Straight Transfers & Federal Grants Table 11 Results - Straight Transfers & Federal Grants Table 12 of Provincial own Tax Revenue - Method 1 Table 13 of Provincial own Tax Revenue - Method 2 Table 14 of Provincial own Tax Revenue - Method 3 Table 15 Results - of Provincial own Tax Revenue Table 16 of Provincial own Non-Tax Revenue - Method 1 Table 17 of Provincial own Non-Tax Revenue - Method 2 Table of Provincial own Non-Tax Revenue - Method 3 Table 19 Results 1 - of Provincial own Non-Tax Revenue Table 20 Results 2 - of Provincial own Non-Tax Revenue Table 21 of Provincial Current Exp - Salary bill Method 1 Table 22 of Provincial Current Exp - Salary bill Method 2 Table 23 of Provincial Current Exp - Salary bill Method 3 Table 24 of Provincial Current Exp Pension Method 1 Table 25 of Provincial Current Exp Pension Method 2 Table 26 of Provincial Current Exp Pension Method 3 Table 27 of Provincial Current Exp Non Salary Expenditure Table 28 of Provincial Current Exp Non Salary Expenditure Table 29 of Provincial Current Exp PFC Table 30 Results - of Provincial Current Expenditure Table 31 Net Revenue Receipts Table 32 Net Capital Receipts Table 33 Foreign Programme Loans Table 34 Foreign Assistance & Programme Grants Table 35 The Resource Envelope Table 36 Overall size of Provincial Budget M E D I U M - T E R M F I S C A L F R A M E W O R K T O O L K I T, G O V E R N M E N T O F T H E P U N J A B

4 LIST OF ABBREVIATIONS OPM MTFF NFC FBR GDP GRP SBP ADB YoY MTBF CAGR HY WoT BE RE ABS FD PRA GST FY SNE DMU UIPT NPCF SNG CDL GP Fund TMA SCARP P&D PPCBL Oxford Policy Management Medium Term Fiscal Framework National Finance Commission Federal Board of Revenue Gross Domestic Product Gross Regional Product State Bank of Pakistan Asian Development Bank Year on Year Medium Term Budgetary Framework Compound Annual Growth Rate Half Year War on Terror Budget Estimate Revised Estimate Annual Budget Statement Finance Department Punjab Revenue Authority General Sales Tax Financial Year Statement of New Expenditure Debt Management Unit Urban Immovable Property Tax Net Provincial Consolidated Fund Sub-National Governance Programme Cash Deposit Loans General Provident Fund Tehsil Municipal Administration Salinity Control and Reclamation Programme Planning and Development Punjab Provincial Cooperative Bank

5 TABLE OF CONTENTS List of Tables and Figures List of Abbreviations 1 Introduction 1.1 What is MTFF? 1.2 Why MTFF? 2 Estimation of Revenue Receipts 2.1 Estimate of GDP Data and Information Required Estimating Nominal GDP Results and Decision 2.2 Estimating FBR Tax Collections Data and Information Required Estimating FBR Tax Collections Results and Decision 2.3 Computation of Punjab s Share in Federal Divisible Pool Data and Information Required Computation of Share in Federal Divisible Pool 2.4 Estimation of Straight Transfers and Federal Grants Data and Information Required Estimating Straight Transfers and Federal Grants Results and Decision 2.5 Estimating Provincial Own Source Tax Revenue Data and Information Required Estimation of Provincial Tax Revenue Results and Decision 2.6 Estimating Provincial Own Source Non-Tax Revenue Data and Information Required Estimation of Provincial Non-Tax Revenue Results and Decision 3 Estimation of Provincial Current Expenditures 3.1 Data and Information Required 3.2 Estimating Provincial Current Expenditure Budget A01 Salary A04 Pension A Non-Salary I II

6 TABLE OF CONTENTS PFC Share 3.3 Results and Decision 4 Estimation of Financing Available for Development 4.1 Data and Information Required 4.2 Estimation of Financing Available for Development Calculation of Net Revenue Receipts Calculation of Net Capital Account Estimating Foreign Project Assistance and Programme Grants 5 Overall Size of the Provincial Budget

7 1. INTRODUCTION A good budgetary framework helps government provide efficient and effective service delivery. Finance Department plays an important central role in budgeting by enabling line departments provide public services to citizens. A good budgetary framework is based on the following three inter-linked dimensions: 1. Aggregate fiscal discipline; 2. Resource allocation to priorities, and; 3. Efficient and effective use of budget resources in service delivery. Aggregate fiscal discipline refers to preparing the budget within the given resource constraint. In order to achieve this objective, Finance Department prepares a Medium Term Fiscal Framework (MTFF). Therefore, preparation of MTFF is an important part of good budgeting practices around the world. By developing this document in the early part of the budget cycle, Finance Department estimates the resource envelope in the medium term and develops the budgets within these constraints. The estimates are updated every year with the help of latest information of relevant variables. This toolkit has been developed as a step-by-step guide to officers of the Finance Department to develop a good quality MTFF. Efforts have been made to avoid getting into overly technical methodologies and make it a simple and practical guide. The toolkit also comprises an M/s Excel based model to facilitate development of the document in future. It is hoped that the document will help institutionalise development of MTFF by Finance Department, Government of the Punjab, improve aggregate fiscal discipline and contribute to budget transparency in Punjab. Each year, the Finance Department prepares an MTFF for the Government that forecasts government s revenues (tax and non-tax revenue), expenditures, debt and other liabilities in the medium term. The document is prepared on rolling basis i.e. each year s fiscal framework is prepared for the next three years. It is prepared at the outset of the budget cycle. Most importantly, MTFF is a tool for instilling fiscal discipline in budgeting. As noted above, fiscal discipline means that government expenditure remains within the limit of its revenues. Apart from helping improve fiscal discipline, MTFF helps government/departments plan service delivery in the medium term on the basis of estimates of resources available to them. 1

8 2. ESTIMATION OF REVENUE RECEIPTS Revenue receipts of the Government comprise the following: Divisible Pool Transfers (under NFC Award) Tax Revenue Non-Tax Revenue As a first step to estimate revenue receipts, there is a need to gather the following information that will be used in the following steps: 1. Inflation Rates for the forecasting period 2. Gross Domestic Product (GDP) Growth rates for the forecasting period 3. Federal Board of Revenue (FBR) tax collections for the current fiscal year 4. provincial tax and non-tax collections for the current fiscal year 5. Information on straight transfers and federal grants from the resource section of the Finance Department The specific steps required to be followed for preparing the forecasts through the MTFF Toolkit are described below: Steps Instructions of Divisible Pool Transfers Step 1 Estimate of GDP (Section 2.1) Step 2 Estimate FBR Tax Collections (Section 2.2) Step 3 Estimate provincial share in the Divisible Pool transfers (Section 2.3) of Straight transfers and Federal Grants Step 4 Estimate Straight transfers and Federal Grants Section 2.4) of Provincial Own Source Revenue Step 5 Estimate Provincial Tax and Non-Tax Revenue (Section 2.5 & 2.6) 2.1 ESTIMATE OF GDP An estimate of nominal GDP (GDP at current prices), in the medium term, is provided by the Federal Government in its budgetary documents. This is usually made available in the document titled Budget in Brief. The estimates provided in this document are approximately 6 months old when the MTFF was developed. Therefore, there is always a need to review validity of this estimate in the light of latest available information. A few useful methods of estimating size of the nominal GDP in the medium term are explained as follows: DATA AND INFORMATION REQUIRED FOR THE ESTIMATION OF NOMINAL GDP Inflation Real GDP Growth rate 2

9 2.1.2 ESTIMATING NOMINAL GDP Nominal GDP can be estimated using one of the following three methodologies: 1. Econometric Model: This is a complex method that uses econometric techniques/ regression analysis to forecast the size of nominal GDP. Use of this technique without appropriate/high level expertise, the estimation could go extremely wrong. Therefore, this method is not recommended until the requisite expertise are not available with the Finance Department Real GDP growth rate and inflation: This technique requires availability of size of nominal GDP in the previous year, real GDP Growth Rate and Inflation for the years in the forecasted period. These statistics could be obtained from a number of sources i.e. Budget documents of the Federal Government, Asian Development Bank (ADB) Website 1, World Bank Website and SBP Website 2, etc. The forecast of nominal GDP for a year is made by growing the size of GDP of the previous year by the sum of inflation and Real GDP Growth rate for the forecasted year. Accuracy of this forecast depends on the accuracy of the statistics used. Alternative estimates can be developed using the statistics available from different sources. TABLE 1 GDP ESTIMATION - METHOD 1 Estimate s Inflation rate (%) GDP Growth rate (%) GDP 31,862 35,144 39,291 44,005 44,286 Formula used in GDP calculation - = Size of Previous Year s GDP x (1+ Inflation Rate + GDP Growth Rate) 3. Average Year on Year (YoY) GDP Growth Rates: This method involves extrapolating GDP using average of GDP Year on Year growth rates for the last few years (5 Years). Size of GDP of the previous year by the sum of inflation and Real GDP Growth rate for the forecasted year. Accuracy of this forecast depends on the accuracy of the statistics used. Alternative estimates can be developed using the statistics available from different sources. 1 Economic forecasts for South Asian countries, can be accessed on < 2 Global Economic Prospects Forecasts, Annual GDP Growth %, can be accessed on < 3

10 TABLE 2 GDP ESTIMATION - METHOD 2 # Year Gross Dometic Product ,047 YoY Growth Rate , % , % , % , % , % Average 5 Years YoY Growth GDP Estimation Estimated GDP Estimated GDP Estimated GDP Estimated GDP 9.73% 34,963 38,366 42,101 46, RESULTS AND DECISIONS TABLE 3 RESULTS - GDP ESTIMATION Method Estimated GDP Estimated GDP Estimated GDP Estimated GDP Method 1 N/A N/A N/A N/A Method 2 35,144 39,291 44,005 49,286 Method 3 34,963 38,366 42,101 46,198 It is recommended to use Method 2 (Using real GDP growth rate and inflation), which has normally yielded in realistic forecasts. However, care needs to be exercised when selecting the inflation and GDP growth rates available from different sources to minimise the risk of wrong estimation of overall resource envelope and therefore the risk of planning for expenditures over and above the actual resources available to the government DATA AND INFORMATION REQUIRED FOR THE ESTIMATION OF FBR TAX COLLECTION 1. Size of GDP for the forecasted period; 2. Tax-to-GDP ratio for the forecasted period; 3. Trends of FBR Tax collection targets and actual collections; and 4. FBR Tax collections during the current fiscal year and month wise FBR Tax collections for the previous fiscal year ESTIMATING FBR TAX COLLECTIONS FBR Tax collections can be estimated using one of the following methods: 1. FBR Tax-to-GDP Ratio: In this method FBR Tax-to-GDP ratio available in the Federal Government budget documents i.e. MTBF, is multiplied by the GDP estimated in section Statistical Appendix, Pakistan Economic Survey , Can be accessed on <

11 TABLE 4 PROJECTION OF FBR TAX COLLECTION - METHOD 1 of FBR Tax Collections Estimate s GDP , , , , ,286 FBR Tax-to-GDP Ratio % 11.3% 11.7% 12.2% FBR Tax Collections 3,361 3,971 4,597 5,369 Formula to calculate FBR Tax - = GDP x FBR Tax to GDP ratio collections 12.2% 6, Annual Compound Growth Rates: This method employs projection based on CAGR of actual collections for the last fifteen of years or so and applies it to the last fiscal year actual tax collections by FBR. TABLE 5 PROJECTION OF FBR TAX COLLECTION - METHOD 2 of FBR Tax Collections # Year Tax Collection 5 CAGR , , , % 3,873 4,464 5,145 5, , , , , , , , Months and 6 Months s Based on Average Collections during the Second Half: This method uses the average %age collections during the first half of the last five years and projects 2nd half year collections using the formula = ( FBR collections 1st Half of the current Year/Average % collection in 1st half for last five years) ( collection for 1st half of the current year). s for the outer years (FY 20-21) may be calculated using the FBR Tax collections CAGR for the last 15 years calculated in Table 5 above. 4 FY : SBP Annual Report , chapter 4 Fiscal policy, available on arfy17/anul-index-eng-17.htm FY : Federal MTBF ( ), Performance indicators & targets table on Page 130, tax to GDP rate, available on < 5 FBR tax collection, available on < 5

12 TABLE 6 PROJECTION OF FBR TAX COLLECTION - METHOD 3 # Year 7 (Whole Year) 7 (First Half) % Collection in First Half , % ,255 1, % ,590 1, % ,112 1, % ,361 1, % of FBR Tax Collections Average 5 Years - HY collection Formula for Estimating 2 nd half year FBR Tax collections Estimated FBR Collections 6 FBR collections (Jul to Dec) Estimated Collection (Jan to Jun) Total Estimated FBR Collection Estimated FBR Collection Estimated FBR Collection 45.0% 1,766 2,158 3,924 4,522 5,212 6,007 = ( FBR collections 1 st Half of the current Year / Average % collection in 1 st half for last five years) ( collection for 1st half of the current year) 4. 6 Months Collections and 6 Months s Based on Growth During the First Half of the Current Fiscal Year: This method uses the growth rate calculated by comparing 1st half of current FY with 1st half 8 of the last FY year and the growth rate so obtained used to project 2nd half year collections using the formula = ( FBR collections 2nd Half of the last FY x (1+ growth rate)). s for the outer years (FY 20-21) may be calculated using the FBR Tax collections CAGR for the last 15 years calculated in Table above. TABLE 7 PROJECTION OF FBR TAX COLLECTIONS - METHOD 4 of FBR Tax Collections Rs. in billion Months Jul-Dec 2016 Collections Jul-Dec 2017 Collections Gro wth Rate Jan-Jun 2017 Collections Jan-Jun 20 Estimated Collections Estimated Collections Estimated Collections Estimated Collections Estimated Collections Jul 158 Jan 224 Aug 207 Feb 225 Sep 262 Mar 347 Oct % Apr 250 Nov 216 1,766 May 331 Dec 388 Jun 511 Total Total 1,472 1,889 Formula for Estimating 2 nd half year FBR Tax collections 2,265 4,030 4,645 5,353 6,169 =( FBR collections 2nd Half of last FY x (1+growth rate)) 6 First half year (Jul-Dec 2017) actual FBR tax collections has been calculated using 5 months FBR actual collections and prorating it for 6 months using formula =( FBR collections 1st Half of the Year / 5) x 6. 7 FBR tax collection, available on < 8 SBP, FBR Tax Collections, available on 6

13 2.2.3 RESULTS AND DECISIONS TABLE 8 RESULTS - PROJECTION OF FBR TAX COLLECTION Method Estimated FBR Collections Estimated FBR Collections Estimated FBR Collections Estimated FBR Collections Method 1 3,971 4,597 5,369 6,013 Method 2 3,873 4,464 5,145 5,929 Method 3 3,924 4,522 5,212 6,007 Method 4 4,030 4,645 5,353 6,169 Whilst each of the above methods produce slightly different results, the most accurate ones are 3 and 4 as they make use of actual collections for the first half and estimates the latter half collections based on past trends. It is recommended that due diligence is exercised in selecting the most appropriate method i.e. one which forecasts realistic increase in revenue collections and not overly optimistic as to render the overall budgeting process ineffective DATA AND INFORMATION REQUIRED FOR COMPUTATION OF PUNJAB S SHARE IN FEDERAL DIVISIBLE POOL Decision on the estimated FBR tax collections (based on the results of section 2.2 above); Obtain %age shares of the following from the NFC award 9 : a. Non-Divisible Pool Items (Workers Welfare Fund, Fed. Income Tax, Excise Duty on Gas and Export Dev. Surcharge) Currently, 2.19% of the FBR Tax Collections. Percentage for non-divisible pool items should be calculated each year; b. Collection Charges Currently, 1% of the Divisible Pool Taxes; c. War on Terror share for KP Currently, 1% of the net proceeds of the Divisible Pool Taxes; d. Provincial share in the divisible pool Currently, 57.5% from the financial year onwards; and e. Percentage share of Punjab in the NFC Award Currently, 51.74% of the Provincial share in the Divisible Pool Taxes COMPUTATION OF SHARE IN FEDERAL DIVISIBLE POOL Enter the above data collected into Table 3.1 of the Excel Model (MTFF toolkit) and the model will calculate Punjab s share in Federal Divisible Pool automatically as given in Table 9 below. 9 NFC Report 2009 available on < 7

14 TABLE 9 PUNJAB SHARE IN FEDERAL DIVISIBLE POOL Punjab Share In Federal Divisible Pool Transfers (Rs. in Billion) RE FBR Tax Revenues 3,924 4,522 5,212 6,007 Less: Non-Divisible Pool Items (Workers Welfare Fund, Fed. Income Tax, Excise Duty on Gas and Export Dev. Surcharge) Divisible Pool (Taxes) 3,838 4,423 5,098 5,875 Less:1% Collection Costs KP 1% WOT share Net Divisible Pool 3,762 4,335 4,996 5,758 Provincial Share (%) Provincial Share in Revenues 2,163 2,493 2,873 3,311 Punjab s share (%) Divisible Pool Transfers to Punjab 1,119 1,290 1,486 1,713 Straight Transfers comprise of the net proceeds of the Federal Excise duty on Natural Gas and Royalties on Crude Oil & Natural Gas. Whereas Federal Grants includes PSDP grants and one time grants by the Federal Government to assist in time of unforeseen calamities DATA AND INFORMATION REQUIRED FOR THE ESTIMATION OF STRAIGHT TRANSFER & FEDERAL GRANTS Budget and actual transfers data on straight transfers and grants for the last 10 years to assess the performance trends; Data related to production of crude oil and natural gas during current Financial year; Rates of surcharge on natural gas and royalty on crude oil; Information on any special grants decided by the Federal Government in favour of Punjab. 8

15 2.4.2 ESTIMATING STRAIGHT TRANSFERS AND FEDERAL GRANTS Straight Transfers: This should be based on actual production of natural gas & crude oil during the current financial year and shall be calculated at the rate of surcharge (per MMBTU) & royalties (per barrel) fixed by the Federal Government. Grants: This should be based on actual information collected from the resource wing. It is important to note that Federal grants includes one of special purpose grants and PSDP pass through items which shall be excluded while estimating the resource envelope. Forecast reasonable amounts for straight transfers and grants based on past performance using annual compound growth rates (CAGR) and ratios of actual transfers to the budgeted transfers (Table 10)and any additional information available on specific grants decided by the Federal Government in favour of Punjab. An analysis of trends in straight transfers & Federal grants has been given in Table 10 below: TABLE 10 TRENDS IN STRAIGHT TRANSFERS & FEDERAL GRANTS Trend in Straight Transfers and Federal Grants to Rs. in Billion CAGR CAGR CAGR Straight Transfers 10Y 8Y 5Y Budget % 0.3% -7.6% % 7.8% -4.0% / Budget (%) 0% 0% -20% 33% 33% 14% 29% -16% -48% 33% 5.9% 5.9% 2.4% Grants 10Y 8Y 5Y Budget % 10.8% 47.8% % 55.3% 55.6% / Budget (%) 0% -20% 0% 340% 212% 766% 506% 304% -23% 964% 305% 305% 504% Source: Annual Budget Statements and Civil Accounts available on Finance Department Website, < RESULTS AND DECISIONS TABLE 11 RESULTS - STRAIGHT TRANSFERS & FEDERAL GRANTS Punjab Share In Straight Transfers and Grants (Rs. in Billion) BE R.E Projected Straight Transfers Grants It should be dis seminated at the same time that the government presents the annual budget to the legislature so that the public is engaged in the discussion in time to have an impact on the legislature s deliberations on the budget. 9

16 2.5.1 DATA AND INFORMATION REQUIRED FOR THE ESTIMATION OF PROVINCIAL OWN SOURCE-TAX REVENUE i. Provincial tax collection data for the last five years; ii. Provincial tax collection data for the half year (Jul-Dec) for the last and current fiscal years;and iii. Information on changes to the existing tax laws or rates that have significant impact on future revenue collections ESTIMATION OF PROVINCIAL TAX REVENUE The estimation of Provincial Tax Revenue can be done using one of the following: 1. Annual Compound Growth Rates: This method uses Annual Compound Growth Rate (CAGR) in actual tax collections during the last five fiscal years and apply it to the actual tax collections of the last fiscal year to project current year tax collections. The model continues to project tax collections for the outer years by applying the CAGR to last fiscal year projections. TABLE 12 PROJECTION OF PROVINCIAL OWN TAX REVENUE - METHOD 1 of Provincial Own Tax Revenues CAGR Yrs 5 Yrs RE s Board of Revenue *Adjuste d Agricultural Income-Tax % 2.3% Land Revenue % 4.9% Stamps % 23.2% Registration % 5.0% Capital Value Tax % 26.4% Excise & Taxation Provincial Excise % 15.9% Receipts under M.V. Acts % 7.2% Property Tax Collection % 19.3% Tax on Professions % 7.3% Other Taxes % 5.0% Finance Deptt. (PRA) GST on Services % 22.6% Punjab Infra Dev Cess % 5.0% Transport Deptt % 5.0% Electricity (Energy Deptt.) % 30.0% Total Tax Receipts *Note: CAGR has been adjusted to fix the value of growth at 5% where the actual CAGR is less than 0 and 30% where it exceeds 30% ceiling. 10

17 2. 6 Months Collections and 6 Months s Based on Growth During the First Half of the Current Fiscal Year: This model uses projection using the actual 6 months (July to December) collections and estimation of the remainder 6 months based on actual growth witnessed during the first half of the current fiscal year compared to the same period last year and applying it to the actual collections during second half (Jan-Dec) of the last fiscal year. TABLE 13 PROJECTION OF PROVINCIAL OWN TAX REVENUE - METHOD 2 Category Jul- Dec 2016 FY ** Jul-Dec 2017 *Growth Rate - 6 months of Provincial Own Tax Revenues Jan- Jun 2017 Projected Jan-Jun 20 RE *Adjusted CAGR 5 Yrs s Board of Revenue Agricultural Income-Tax % % Land Revenue % % Stamps % % Registration % % Capital Value Tax % % Excise & Taxation Provincial Excise % % Receipts under M.V. Acts % % Property Tax Collection % % Tax on Professions % % Other Taxes of Excise % % Finance Dept & PRA GST on Services % % Infrastructure Dev. Cess % % Transport Deptt % % Electricity (Energy Deptt.) % % Total Tax Receipts *These growth rates has been adjusted to fix the value of growth at 5% where the actual growth is less than 0 and 30% where it exceeds 30% ceiling. ** These include July to November figures and need to be updated when the half year figures till December are available Months and 6 Months s Based on average %age Collections During the Second Half: This method uses the %age collections during the first half of the last FY and projects current FY 2nd half collections using the formula = ( collections 1st Half of the current Year / % collection in 1st half of current FY) ( collection for 1st half of the current year). s for the outer years may be calculated using the adjusted CAGR for the last five fiscal years. 11

18 TABLE 14 PROJECTION OF PROVINCIAL OWN TAX REVENUE - METHOD 3 of Provincial Own Tax Revenues Category Jul-Dec 2016 FY % Colle ction FHY ** Jul-Dec 2017 Projected Jan-Jun 20 BE RE *Adjus ted CAGR 5 Yrs s Board of Revenue Agricultural Income-Tax % % Land Revenue % % Stamps % % Registration % % Capital Value Tax % % Excise & Taxation Provincial Excise % % Receipts under M.V. Acts % % Property Tax Collection % % Tax on Professions % % Other Taxes of Excise % % Finance Dept & PRA GST on Services % % Infrastructure Dev. Cess % % Transport Deptt % % Electricity (Energy Deptt.) % % Total Tax Receipts *These growth rates have been adjusted to fix the value of growth at 5% where the actual growth is less than 0 and 30% where it exceeds 30% ceiling. ** These include July to November figures and need to be updated when the half year figures till December are available RESULTS AND DECISIONS TABLE 15 RESULTS - PROJECTION OF PROVINCIAL OWN TAX REVENUE Method RE s Method Method Method Whilst each of the above methods produce slightly different results, the most accurate ones are method 2 and 3 as they make use of actual collections for the first half and estimates the latter half collections based on past trends. 12

19 2.6 ESTIMATING PROVINCIAL OWN SOURCE NON TAX REVENUE DATA AND INFORMATION REQUIRED FOR ESTIMATION OF PROVINCIAL OWN SOURCE NON-TAX REVENUE i. ii. Provincial non-tax collection data for the last five years; Provincial non-tax collection data for the half year (Jul-Dec) for the last and current fiscal years; iii. Information on changes in existing rates of user fee/user charges that have significant impact on future revenue collections. iv. electricity produced by the province and per unit production rate fixed by the Federal Government ESTIMATION OF PROVINCIAL NON-TAX REVENUE The estimation of Provincial Non-Tax Revenue is made using one of the following three methodologies: 1. Annual Compound Growth Rates: This method uses Annual Compound Growth Rate (CAGR) in actual non-tax receipts during the last five fiscal years and apply it to the actual receipts of the last fiscal year to project current year non-tax receipts. Continue to project receipts for the outer years by applying the CAGR to last fiscal year projections. TABLE 16 PROJECTION OF PROVINCIAL OWN NON-TAX REVENUE - METHOD 1 of Provincial Own Non-Tax Revenues Yrs CAGR Actua l 5 Yrs CAGR *Adjuste d RE s Net Hydel Profit % 30.0% Irrigation Charges % 5.0% Agriculture % 7.2% Police % 4.3% Mines and Minerals % 30.0% Communication % 30.0% Others % 14.5% Total Provincial Non-Tax Receipts *Note: CAGR has been adjusted to fix the value of growth at 5% where the actual CAGR is less than 0 and 30% where it exceeds 30% ceiling

20 2. 6 Months Receipts and 6 Months s Based on Growth During the First Half of the Current Fiscal Year : This method makes the projections using the actual 6 months (July to December) receipts and estimation of the remainder 6 months based on actual growth witnessed during the first half of the current fiscal year compared to the same period last year and applying it to the actual receipts during second half (Jan-Dec) of the last fiscal year. Continue to project receipts for the outer years by applying the CAGR to last fiscal year projections. TABLE 17 PROJECTION OF PROVINCIAL OWN NON-TAX REVENUE - METHOD 2 of Provincial Own Non-Tax Revenues Category Jul- Dec 2016 FY * Jul - Dec 2017 **Growth Rate - 6 months Jan- Jun 2017 Projected Jan - Jun 20 RE Adjusted CAGR 5 Yrs s Net Hydel Profit % % Irrigation Charges % % Agriculture % % Police % % Mines and Minerals % % Communication % % Others % % Total Provincial Non- Tax Receipts * These include July to November figures and need to be updated when the half year figures till December is available. **Note: Growth figures have been adjusted to fix the value of growth at 5% where the actual growth is less than 0 and 30% where it exceeds 30% ceiling. ***Note: CAGR has been adjusted to fix the value of growth at 5% where the actual CAGR is less than 0 and 10% where it exceeds 10% ceiling Months and 6 Months s Based on %age Receipts During the Second Half: This method uses the %age collections during the first half of the last FY and projects current FY 2nd half collections using the formula = ( collections 1st Half of the current Year / % collection in 1st half of current FY) ( collection for 1st half of the current year). s for the outer years may be calculated using the adjusted CAGR for the last five fiscal years. 14

21 TABLE PROJECTION OF PROVINCIAL OWN NON-TAX REVENUE - METHOD 3 of Provincial Own Non-Tax Revenues Category Jul-Dec 2016 FY % Receipts FHY ** Jul-Dec 2017 Projected Jan-Jun 20 RE *Adjusted CAGR 5 Yrs s Net Hydel Profit % % Irrigation Charges % % Agriculture % % Police % % Mines and Minerals % % Communication % % Others % % Total Provincial Non-Tax Receipts *These growth rates has been adjusted to fix the value of growth at 5% where the actual growth is less than 0 and 30% where it exceeds 30% ceiling. ** These include July to October figures and need to be updated when the half year figures till December are available RESULTS AND DECISIONS: TABLE 19 RESULTS 1 - PROJECTION OF PROVINCIAL OWN NON-TAX REVENUE Method RE s Method Method Method Though all the above methods can be used for projecting provincial non-tax receipts, a single forecasting method however, may not be relevant and produce reliable results for each stream of non-tax revenue as such it is advisable to forecast each stream of non-tax revenue using the most appropriate method of forecasting as follows: Non-Tax Revenue Stream Net Hydel Profit Method of Forecasting Based on actual production of electricity in the province Irrigation Charges Agriculture Police Using 6 months actual and 6 months projections based on %age collections during the second half of last fiscal year. Mines and Minerals Communication Others 15

22 Based on the above recommendations the provincial own non-tax revenue has been calculated below: TABLE 20 RESULTS 2 - PROJECTION OF PROVINCIAL OWN NON-TAX REVENUE of Provincial Own Non-Tax Revenues Category Jul- Dec 2016 FY % Receipts FHY ** Jul-Dec 2017 Projected Jan - Jun 20 BE RE *Adjusted CAGR 5 Yrs s Net Hydel Profit Irrigation Charges % % % % Agriculture % % Police Mines and Minerals % % % % Communication % % Others % % Total Provincial Non-Tax Receipts *These growth rates have been adjusted to fix the value of growth at 5% where the actual growth is less than 0 and 30% where it exceeds 30% ceiling. ** These include July to November figures and need to be updated when the half year figures till December are available. 16

23 3. ESTIMATION OF PROVINCIAL CURRENT EXPENDITURES 3.1 DATA AND INFORMATION REQUIRED FOR THE ESTIMATION OF PROVINCIAL CURRENT EXPENDITURES 1. Budget estimates for FY & its breakup into major components; 2. Major components wise actual expenditure for FY and for six months (Jul to Dec) period; 3. Major components wise actual expenditure for the first six months (Jul to Dec) period of FY 2017-; 4. Total number of employee s data by basic scale; 5. SNEs detail for the current year; 6. Details of new Pensioners added to the pension roll during the current year; and 7. % share of provincial allocable as per PFC award A01 SALARY Salary can be estimated using one of the following two methods: a. Zero Based Estimation Technique: This method projects the overall salary bill by using the actual pay and allowances by pay scale of the total number of regular posts and SNE s approved during the current year, plus effect of the annual increment. Project outer year s expenditure using CAGR of 5 years actual salary expenditure. TABLE 21 PROJECTION OF PROVINCIAL CURRENT EXP - SALARY BILL METHOD 1 Current Budget Head BE *Pay & Allowances - Regular Posts (a) of Provincial Current expenditure - Salary Bill *Effect of SNEs (b) *Effect of Annual Increment (c) (a+b+c) A01 - Salary & Allowances *Note: The figures are hypothetical and needs to be replaced by actual amounts b. 17

24 Medium Term Fiscal Framework I 2017 (MTFF) Toolkit TABLE 22 PROJECTION OF PROVINCIAL CURRENT EXP - SALARY BILL METHOD 2 Current Budget Head Salary & Allowances of Provincial Current expenditure - Salary Bill BE Increment based on 5 years CAGR- s c. Half year actual & half year projected expenditure: Project the revised estimate using the actual 6 months (July to December) expenditure and estimation of the remainder 6 months based on actual growth witnessed during the first half of the current fiscal year compared to the same period last year. Project outer year s expenditure using CAGR of 5 years actual salary expenditure. TABLE 23 PROJECTION OF PROVINCIAL CURRENT EXP - SALARY BILL METHOD 3 Current Budget Head Jul-Dec 2016 Jan- Jun 2017 FY of Provincial Current expenditure - Salary Bill BE FY * Jul-Dec 2017 Exp Growth Rate 1 st Half Jan-Jun 20 RE Salary & Allowances % *Note: Based on Jul to Nov figures from Civil Accounts A04 PENSION Pension can be estimated in either of the following ways: a. Zero Based Estimation Technique: This method projects the current year revised estimate using the regular pension and commutation paid during last fiscal year supplemented by the effect of addition to the pension roll during current year, effect of annual increment and court orders if any, on the overall pension bill. Outer year s projections uses 10% annual increment over last year s estimate.

25 TABLE 24 PROJECTION OF PROVINCIAL CURRENT EXP PENSION METHOD 1 Current Budget Head BE As per original pension roll (a) of Provincial Current expenditure Pension *Effect of addition to the pension roll during current year (b) *Effect of annual increme nt (c ) *Effect of court orders if any (d) RE (a+b+c+ d) Regular Pension Commu tation 0 0 N/A N/A N/A *Note: Based on Jul to Nov figures from Civil Accounts b. Incremental Estimation Technique: This method projects pension budget through indexing previous year s budget estimate by 10% to adjust for annual increment and SNE s. TABLE 25 PROJECTION OF PROVINCIAL CURRENT EXP PENSION METHOD 2 Current Budget Head of Provincial Current expenditure Pension BE % increment of previous Year (BE) RE Pension Commutation N/A c. Half year actual & half year projected expenditure: Project the revised estimate using the actual 6 months (July to December) expenditure and estimation of the remainder 6 months based on actual growth witnessed during the first half of the current fiscal year compared to the same period last year. TABLE 26 PROJECTION OF PROVINCIAL CURRENT EXP PENSION METHOD 3 Current Budget Head Jul-Dec 2016 Jan-Jun 2017 FY of Provincial Current expenditure - Pension BE FY * Jul-Dec 2017 Exp Growt h Rate - 1st Half Projec tion Jan- Jun 20 RE Projectio n Projectio n Projectio n Pension % Commutation *Note: Based on Jul to Nov figures from Civil Accounts 19

26 Major Object Code A NON-SALARY Whilst it is difficult to estimate Non-Salary using zero based budgeting technique it can be estimated using the following methods a. Non-Salary as a %age of Salary Budget: This method though useful from service delivery perspective however, it presents a difficulty as to the realistic distribution of the budget amongst major object codes and is as such not advisable. b. Incremental Estimation Technique: This method uses the following guidelines to project future periods expenditure budget under each major object code. Object Description Basis of A03 Operating Expenses Previous year budget estimate indexed at the inflation rate or maximum 10% A05 Grants, Subsidies & Write Offs Previous year budget estimate indexed at the inflation rate or maximum 10% A06 Transfers Previous year budget estimate indexed at the inflation rate or maximum 10% A07 Interest Payments On actual basis based on information from DMU A09 Physical Assets Based on approved SNE s A13 Repairs & Maintenance Inflation + 5% of the previous year budget estimate Based on the above guidelines the non-salary expenditure is estimated as follows: TABLE 27 PROJECTION OF PROVINCIAL CURRENT EXP NON SALARY EXPENDITURE Major Object Code Object Description of Provincial Current expenditure - Non salary Expenditure BE RE Basis of A03 Previous year budget estimate Operating indexed at the inflation rate or Expenses maximum 10% A05 Previous year budget Grants, estimate indexed at the Subsidies & inflation rate or maximum Write Offs 10% A06 Transfers Previous year budget estimate indexed at the inflation rate or maximum 10% A07 Interest On actual basis based on Payments information from DMU A09 Physical Assets Based on approved SNE s A13 Repairs & Inflation + 5% of the previous Maintenance year budget estimate Total *Note: Inflation rate is assumed as 6% in the above calculations 20

27 c. Half year actual & half year projected expenditure: Project the revised estimate using the actual 6 months (July to December) expenditure and estimation of the remainder 6 months based on actual growth witnessed during the first half of the current fiscal year compared to the same period last year. TABLE 28 PROJECTION OF PROVINCIAL CURRENT EXP NON SALARY EXPENDITURE Major Object Code A03 A05 Object Description Operating Expenses Grants, Subsidies & Write Offs Jul-Dec 2016 of Provincial Current expenditure - Non salary Expenditure Jan-Jun 2017 FY BE * Jul- Dec 2017 Exp Growth Rate - 1st Half Jan-Jun % % A06 Transfers % 5.75 A07 Interest Payments % A09 Physical Assets % 3.16 A13 Repairs & Maintenance % Total RE on growth rate or BE whichever is lower RE on growth rate or BE whichever is lower RE on growth rate or BE whichever is lower RE on growth rate or BE whichever is lower RE on growth rate or BE whichever is lower RE on growth rate or BE whichever is lower Major Object Code Object Description RE A03 Operating Expenses A05 Grants, Subsidies & Write Offs A06 Transfers A07 Interest Payments A09 Physical Assets A13 Repairs & Maintenance Basis of RE indexed at the inflation rate or maximum 10% RE indexed at the inflation rate or maximum 10% RE indexed at the inflation rate or maximum 10% On actual basis based on information from DMU Based on approved SNE s Inflation + 5% of RE Total

28 3.2.4 PFC SHARE a. i. Calculate Net Provincial Consolidated Fund by deducting; common expenditures 10, Expected shortfalls in receipts, UIPT less 15% collection charges, capital receipts of state trading, project loans and 2.5% share of Federal Sales tax collection from the Provincial Consolidated Fund 11 ; and ii. Apply %age of provincial allocable amount 12 as notified in the PFC award to the NPCF to arrive at the PFC share. TABLE 29 RESULTS - PROJECTION OF PROVINCIAL CURRENT EXPENDITURE - PFC of Provincial Current Expenditure PFC Description BE Total Provincial Consolidated Fund (Revenue + Capital) 1, , , , Less: Common Expenditure Expected shortfalls in receipts Transfer payments of UIPT (UIPT Less 15% collection charges) Capital receipts of state trading Projects loans % General Sales Tax Net Provincial Consolidated Fund , , , % share of PFC 37.50% 37.50% 37.50% 37.50% PFC Share "Common Expenditure" includes expenditure incurred by the Provincial Government on account of pension, debt servicing, charged expenditure, subsidy and capitalization of Pension Fund and General Provident Fund 11 "Provincial Consolidated Fund" is the fund referred to in Article 1 of the Constitution of the Islamic Republic of Pakistan % as notified Expenditures in the Interim PFC by Award functional dated January and economic 12, 2017 classification and listing of actual revenues collected under different categories 22

29 3.3 RESULTS AND DECISIONS: TABLE 30 RESULTS - PROJECTION OF PROVINCIAL CURRENT EXPENDITURE Head Method BE RE Salary 6 Months and 6 Months Forecasts Pension 6 Months and 6 Months Forecasts Non-Salary 6 Months and 6 Months Forecasts PFC Formula Based Estimation Total 1, , , , ,350.7 While estimating current expenditure budget, salary and pension can be estimated using multiple methods as discussed above we recommend that zero based estimation technique or 6 months actual and 6 months forecasts are used to get accurate estimates with least reliance on the incremental estimation technique. 23

30 4. ESTIMATION OF FINANCES AVAILABLE FOR DEVELOPMENT Financing available for development is comprised of a) Net Revenue Receipts, b) Net Capital Receipts and c) Foreign Assistance and Programme Grants and is calculated as follows: 24

31 4.2.1 CALCULATION OF NET REVENUE RECEIPTS This is calculated by subtracting Current Expenditure (Calculated in Chapter 3) from Total Revenue Receipts (Calculated in Chapter 2). TABLE 31 NET REVENUE RECEIPTS Net Revenue Receipts (Rs in Billion) # Description BE RE Federal Resource Transfer 1, , , , ,722.3 a Divisible Pool Transfer 1, , , , ,713.1 Refer Section 2.3 b Straight Transfers Refer Section 2.4 c Federal Grants Refer Section Provincial Resources a Provincial Tax Revenues Refer Section 2.5 b Non-Tax Revenues Refer Section Total Revenue Receipts (1+2) 1, , , , ,7.7 4 Current Expenditure 1, , , , ,350.7 Refer Section Revenue Surplus (3-4) CALCULATION OF NET CAPITAL ACCOUNT This is calculated by subtracting Current Capital Expenditures comprising of; a) Investments, b) Principal repayment of foreign and domestic loans and c) loans to non-financial institutions from Current Capital Receipts comprising of; a) loans and advances/ recoveries of loans and advances, b) foreign program loans and domestic borrowings. As far as the estimation of the figures under Current Capital Receipts and Expenditures is concerned it is advised that least reliance is placed on incremental estimation technique and instead actual data is collected in close coordination with the concerned quarter including; DMU, Foreign Aid Section of the P&D, Punjab Pension Fund and resource section of the FD. 25