* Pakistan finance minister makes annual budget speech
* Promises to raise revenue by improving taxation
* Vows to invest $2.08 billion in struggling power sector
By Mehreen Zahra-Malik
ISLAMABAD, June 3 Pakistan will earmark about $40 billion for its next fiscal year's budget, promising to revive sluggish growth by improving tax revenues and cutting subsidies, Finance Minister Ishaq Dar said in his annual budget speech in parliament.
Prime Minister Nawaz Sharif came to power last year on a wave of public anger at the previous government's failure to tackle graft and power cuts, and vowed to make economic revival and fixing government finances his policy centrepiece.
Dar said Pakistan would also invest at least 205 billion rupees ($2.08 billion) in power projects in the next fiscal year as part of a plan to reform the struggling sector.
"We inherited the hard challenge of a broken economy," Dar said. "Prime Minister Nawaz Sharif has taken very difficult decisions to put the economy back on track."
He said the economy had grown by 4.1 percent in the last fiscal year, short of the 4.4 percent target the government had set itself last year, reflecting the challenges lying ahead.
Next year, the government is looking to fund growth by cutting subsidies to 225 billion rupees from 110 billion, and collecting 3.9 trillion in taxes, he said.
Fewer than a million Pakistanis pay income taxes and a big chunk of government revenue is used subsidising a power sector that covers only just over half what is needed. In parts of Pakistan electricity cuts last up to 18 hours a day.
Armed with a solid parliamentary majority, Sharif is expected to have a better shot at fixing the economy than his predecessors, beset by internal strife and strained relations with the powerful military.
Economic turnaround is not just essential for Sharif but is also key to ensuring greater political stability in the nuclear-armed nation, a key U.S. ally in the fight against militancy.
Dar estimated next year's tax revenue at 3.94 trillion rupees. The tax to GDP ratio is projected to grow from 10.5 percent this year to 11.3 percent in the next fiscal year.
The government also estimated its budget deficit at about 4.9 percent of gross domestic product from 5.8 percent in the last fiscal year.
This month, the International Monetary Fund (IMF) said Pakistan has made progress in its reforms, and its board is likely to meet in late June to decide whether to clear the way for the latest installment of a $6.6 billion loan.
The IMF saved Pakistan from possible default by agreeing last September to lend it the cash over three years, making the loan conditional on economic reforms such as a longstanding promise to privatise loss-making state companies. ($1 = 98.5750 Pakistani rupees) (Editing by Maria Golovnina and Louise Ireland)