The Illusion of Stability: Why a Timid Budget Cannot Fix a Fractured Economy

As the dust settles on the initial reaction to the federal budget 2026–27, it is easier to call it what it is: insufficient, timid and incremental. Pakistan’s economic and governance models are broken, a reality both the IMF and the World Bank have acknowledged in recent reports. Four punishing years for Pakistanis, politically and economically, have made the case for change unmistakable. Yet this budget changes nothing and merely delays the reform process the country urgently needs. Here are six points of evidence with which I rest my case.

1. Where is the vision? Where is the plan?

The last four years have officially been the worst on record for Pakistan’s economy. I say officially because never before in the country’s 80-year history has Pakistan endured four consecutive years of sub-4 percent growth. Inflation touched 30 percent in 2023–24 and has again been pushed upward by the Middle East crisis. Poverty, even by the government’s own definition of less than Rs 8,400 per month, has risen from 18 percent to 29 percent of the population. That means 70 million Pakistanis now live below the official poverty line. By the international benchmark of $4 a day, or roughly Rs 33,600 a month, still below the minimum wage, the number rises to more than 130 million.

Unemployment is officially at a 21-year high, even before accounting for widespread underemployment. Investment has fallen to near-record lows of 14 percent of GDP. Foreign direct investment, which has averaged a modest $2 billion a year over the past 25 years, has dropped by nearly 30 percent this year. The tax net, stubbornly and persistently, resists half-hearted attempts at expansion. Ask any honest taxpayer, individual or corporate, who is already paying more than a fair share and feels the unjustness of paying for tax thieves. Meanwhile, the rupee’s value and purchasing power have roughly halved over this period.

That is the context in which this budget must be judged, and where it fails. Pakistan has neither the time nor the luxury to tinker around the edges of a broken governance system. Timidity, especially when the root causes of our malaise are well known, will not fix a fractured economy. Yet nothing the government has said, starting with the prime minister and the finance minister, points to a serious plan. How will Rs 15.3 trillion be collected? No one knows. How will the tax net be broadened? No one knows. How will Pakistan attract foreign investment and move towards export-led growth? How will 130 million people escape poverty, or health and education outcomes improve? The government appears not even to care. None of these featured in the finance minister’s speech or the subsequent press conference. In its fifth year, if this government still lacks a blueprint for bold change reflected in the budget, it will never have one. Sustainable growth and a workable economic model will have to wait yet another year even to begin.

2. The Smokescreen of Relief and Tax Reversals

Tax policy should be judged against two tests. The first is whether it broadens the tax net, the only credible way to raise Pakistan’s abysmal tax-to-GDP ratio of just around 10 percent. The second is fairness. Despite token relief, this budget fails both tests, while tax rates on existing taxpayers remain punishingly high. Most concessions are nominal and amount to partial reversals of the government’s own earlier policy mistakes. The now-withdrawn CVT on foreign assets has already had four years to permanently erode the confidence of Pakistanis seeking to declare assets abroad. The rollback of the super tax on companies and the surcharge on individuals is long overdue; these measures should never have been imposed in the first place. Even now, many changes deepen inequity. Some salaried individuals receive minor, highly publicized adjustments, but the self-employed, or non-salaried individuals, continue to face an unchanged top income tax rate of 45 percent. Two individuals earning the same amount can therefore face a ten-percentage-point gap in tax liability.

Despite the rupee’s sharp loss of value, there has been no attempt to adjust the income-tax threshold of Rs 600,000 a year. Likewise, lower-income taxpayers earning Rs 200,000 a month or less receive no relief at all. The contrast is particularly stark when duties and charges on international business-class travel are reversed and overseas credit-card spending at stores such as Harrods in London, Bloomingdale’s in New York or Bongénie in Geneva is made 4.5 percent cheaper.

The shift for exporters from an advance-tax regime to a non-adjustable minimum-tax regime may create a bigger problem than it solves. With high energy costs and an overvalued currency, it is difficult to see any meaningful export revival. And the budget’s sole attempt to expand the tax net is to bring the Rs 20 trillion untaxed retail economy into a scheme under which retailers may simply pay a minimum tax of Rs 25,000 with no questions asked. The rest of us can only wish for similar treatment.

3. An Unattainable Revenue Target Without a Plan

Amid the government’s claims of tax relief, the fine print matters. The FBR’s new tax-collection target of Rs 15.3 trillion is 18 percent higher than this year’s estimated collection of around Rs 13 trillion. To give perspective, the FBR struggled to grow revenues by 10 percent this year, even as the government admits that even this increase has brought the pressure on honest taxpayers close to breaking point.

So where will the extra money come from? No one in government seems to know, beyond vague claims that tougher enforcement and some faceless AI drive will bridge the gap. What is more likely is familiar. When the FBR inevitably falls short, the state will return to its standard playbook: mini-budgets, regressive indirect taxes and a higher Petroleum Levy, already budgeted to rise by 14.23 percent to an extraordinary Rs 1.677 trillion. We saw the effects in the year just ended, when the government compensated for its inability, and unwillingness, to broaden the tax net by raising petroleum taxes while the Middle East crisis was already pushing fuel prices beyond the reach of ordinary Pakistanis, at previously unthinkable levels of more than Rs 400 per litre. Those enjoying the crumbs of tax relief may want to temper their excitement; they are likely to pay it back, with interest, all the way from the petrol pump to the grocery store.

4. The Elephant in the Room – Cost!

If there is one area in which this budget fails spectacularly, and in a way that exposes the government’s lack of appetite for reform, it is cost reduction. Pakistan’s fiscal deficit cannot be closed by squeezing more taxes from a stagnant economy. Real reform requires a meaningful contraction in the state’s administrative footprint, yet this budget shows no appetite for genuine austerity. Civil government costs have risen by Rs 100 billion, while federal pensions are up by Rs 114 billion. Once the provinces mirror these increases, the total rise in the cost of government across Pakistan will exceed Rs 1 trillion.

There could scarcely be a stronger case for trimming the fat within government than the economic pain of the past four years. Yet this government does not even want to utter the word “cost”. More than 4 million permanent civilian employees work across the federal and provincial governments, at an annual cost approaching Rs 5 trillion. From secretaries, special secretaries, additional secretaries, joint secretaries, deputy secretaries and section officers; to clerks, drivers, lift operators, teaboys, orderlies and other 19th century support staff job descriptions, departments across the country are bloated with tens of thousands of employees, with perhaps less than a quarter working productively. Public employment has become a patronage system for politicians and bureaucrats by another name, but the 250 million Pakistanis who don’t have government employment seem to exist to finance the 5 million who do. The federal government still runs more than a dozen departments in areas already devolved to the provinces, yet after fifteen years there is no articulated plan to close them. The same is true, of course, at the provincial level.

Pakistan also remains among the few countries still relying heavily on an unfunded, taxpayer-subsidized defined-benefit pension model that every other country in the world has moved away from. The reform we introduced in KP in 2022, shifting all new employees to a contributory pension scheme, should by now have been extended across the country and to all serving employees as well. Even a country as resourceful as China has done this. Instead, the government has not even managed to extend such arrangements to new recruits in the defence forces, even though this is simply a matter of creating a contributory pension programme that benefits both the employee and the state – a win-win.

The government also sits on vast quantities of underutilized state land in prime urban areas without any serious effort to monetize it. If the cash-rich Indian Union government can cancel the lease of Delhi Gymkhana, why is there no similar appetite here, from Lahore Gymkhana to properties in GOR and Mayo Gardens, to residential quarters for senior civil servants in F-6 and G-6 in Islamabad, and comparable land holdings in every major city? These assets could yield trillions. The federal and provincial governments also maintain a fleet of more than 100,000 official vehicles. Rather than monetizing them in a way that also benefits civil servants, the state continues to tolerate abuse and misuse while billions are wasted each year on fuel and maintenance.

It is only if we cut cost where it shouldn’t be incurred that we can spend more on schools and universities, on hospitals, on police and rescue services, on road maintenance and infrastructure that works, on upgrading the national grid. Clearly, as this budget shows for the fifth time running, there is no appetite to do so.

5. Bankrupting the Provinces to Hide Federal Failure

The most alarming cop-out in this budget is the unprecedented shifting of the federal deficit onto the provinces. The federal government plans to draw a staggering Rs 3 trillion from provincial balances: Rs 1.8 trillion through forced provincial surpluses and Rs 1.2 trillion by freezing the provincial divisible pool at this year’s collection level of Rs 13 trillion. This accounting trick is what keeps the federal deficit looking manageable.

But this artificial deficit reduction comes at a heavy price. It will force a cut of more than Rs 1 trillion in provincial development spending, shave up to 0.5 percentage points off national GDP growth, weaken frontline health and education delivery, and stall regional progress. Conflict-affected regions such as Khyber Pakhtunkhwa are already being denied their fair share, and this new financial stranglehold is one the country will come to regret. Ironically, even after such an extraordinary step, borrowing in the budget still rises from Rs 6.5 trillion to Rs 7 trillion.

6. The handbrake on development

At the same time, the Public Sector Development Programme (PSDP) has been left flat at Rs 1 trillion. Adjusted for inflation, that amounts to a sharp contraction. It freezes vital long-term infrastructure, undermines regional job creation, and makes any meaningful increase in education, health or poverty-reduction spending impossible. Combined with the resource squeeze on the provinces, nationwide development spending will fall by more than Rs 1 trillion.

Conclusion: The Cost of Timidity

Ultimately, this budget fails because it is far too timid. In trying to fulfil the IMF’s demands on fiscal discipline in the most unimaginative manner possible, the government has taken the easiest route, viewing the budget through an accountant’s lens and squeezing the provinces dry, rather than to drive the bold reforms needed to generate the resources the federation desperately requires.

This timidity, however, is not accidental. It reflects a deeper political reality: economic reform cannot be separated from the political landscape. Without political normalcy, the government will continue to lack the capital needed to dismantle elite privilege, tax powerful interest groups and carry out meaningful structural change. Until real power and democratic representation are aligned, Pakistan will remain trapped in this cycle, budgeting for poverty while calling it stability.