Beyond budget arithmetic

EVERY June, Pakistan’s budget season follows a familiar pattern: business groups repeat their proposals for relief, the government defends its targets, and taxpayers prepare for additional burdens. Yet a more fundamental question is rarely asked — what is the budget ultimately meant to achieve, and does it reflect a clear long-term national purpose?

In principle, the budget is the state’s main inst­r­u­­ment for promoting growth, improving public services, reducing poverty and raising living stan­dards. In Pakistan, however, it has increasingly come to resemble an accounting exercise: mobilise sufficient revenue to finance a growing state and meet fiscal benchmarks agreed with the IMF.

The result is a lopsided process that remains focused on extracting more from those already within the tax net, while paying insufficient attention to the quality of public spending, the need to broaden the base, or the incentives required for investment, employment and productivity. The Tax Policy Office was expected to introduce a longer-term perspective to this debate, but that wider vision is still not evident.

The burden continues to fall, predictably, on the formal economy. Corporations, salaried employees, entrepreneurs, exporters, documented businesses and investors remain the most visible and therefore the most easily taxed. What receives much less scrutiny is whether public spending is yielding meaningful improvements in citizens’ lives, particularly in a country where a large share of the population remains below the poverty line.

Pakistan has absorbed much of the fiscal cost of devolution without fully realising its potential efficiency gains.

This distortion has become more pronounced since the 18th Constitutional Amendment altered Pakistan’s fiscal structure. Health, education, labour welfare and other social services were devolved to the provinces, which now receive a substantial share of national revenues through the National Finance Commission Award. The logic was straightforward: provinces, being closer to citizens, would deliver services more effectively, while the federal government would gradually withdraw from devolved functions and reduce its own size and cost.

That second part of the arrangement, however, remains largely unfulfilled. More than a decade later, successive governments have shown limited willingness to undertake the constitutional, adm­i­nistrative and institutional reforms required to ri­­g­­ht-size the federation. Pakistan has, therefore, ab­­sorbed much of the fiscal cost of devolution without fully realising its potential efficiency gains.

The results are plain: weak learning, poor heal­t­hcare access, child malnutrition, low productivity, millions of children out of school, under-equ­ip­ped hospitals, inadequate skills training and persistently low female labour-force participation.

Yet, even against this backdrop, the provinces are expected to post a combined budget surplus of roughly Rs1.6 trillion. This surplus forms part of the consolidated fiscal framework that enables Pakistan to meet primary surplus targets under the IMF programme.

Fiscal discipline is necessary; Pakistan’s record on deficits and debt leaves little room for complacency. But every rupee retained as surplus is also a rupee not directed towards schools, hospitals, technical training and local services. The balance appears to have shifted too far towards meeting accounting targets and too little towards building human capital.

The irony is that while existing taxpayers are repeatedly told there is little room for relief, substantial untapped capacity exists elsewhere. Agriculture contributes nearly a quarter of GDP but remains lightly taxed, while property taxation is among the weakest in the region. Large agricultural and urban wealth holdings generate limited recurring revenue because assessment remains weak, enforcement uneven and valuations often disconnected from market reality.

Since provinces have constitutional authority over agricultural income and property taxes, meaningful reform in these areas could broaden the base, improve fairness and reduce the state’s dependence on taxing the same formal businesses and individuals year after year. It would also help strengthen the sense that the fiscal burden is being shared more equitably.

The next budget should therefore reset fiscal priorities. Rather than treating compliant taxpayers as an inexhaustible source of revenue, policymakers should present a credible path towards relief for documented economic activity: lower excessive tax rates on salaried employees, entrepreneurs and businesses, phase out the Super Tax, remove distortionary levies, reduce cascading taxation and bring greater predictability to policy. Better incentives would support investment, exports, formalisation and job creation — the key objectives of fiscal policy.

But relief must be matched by credible efforts to broaden the tax base, improve spending efficiency and mobilise provincial revenues from ag­­riculture and property. Fiscal sustainability cannot rest indefinitely on squeezing a shrinking pool of compliant taxpayers. Provinces, meanwhile, should be judged less by the size of their surpluses than by measurable gains in education, healthcare, skills, productivity and poverty reduction.

Pakistan’s fiscal debate remains confined to the narrow question of how to raise more revenue. The more important issue is how public finances can create opportunity, improve living standards and support durable growth. A budget should be more than a balancing exercise between revenue and expenditure; it should also reflect a willingness to reform the structure of the state itself. Unless Pakistan completes the unfinished agenda of devolution, broadens the tax base and channels provincial resources towards human development, it may strive to meet fiscal targets without delivering the broader prosperity its citizens are entitled to expect.

The writer is a former CEO of Unilever Pakistan and of the Pakistan Business Council

Published in Dawn, June 5th, 2026