Another budget of stabilisation without growth

There is little hope among industrialists, banks, the salaried class, and the broader public that the upcoming budget will deliver any positive surprises. More of the same is expected, along with additional pressure to meet taxation targets.

Fiscal planning is in an IMF straitjacket, yet the Fund remains dissatisfied. There is a rift between the provinces and the federal government over the so-called voluntary surrender of Rs1.7 trillion. No one is likely to cheer for the upcoming budget.

It is effectively the fifth budget by the same policymakers. No one can claim surprise or ask for more time to adjust. There has been continuity in thinking, but that thinking has not moved beyond stabilization. The focus remains on complying with IMF targets. In fact, the Fund’s country report may offer a better preview of the budget than the budget speech itself. The broader fiscal blueprint has already been written; Islamabad’s job is largely to fill in the blanks.

The bigger challenge is the FY27 taxation target of Rs15.3 trillion, according to IMF documents, roughly 18 percent higher than the likely collection in FY26. Unlike the outgoing year, next year’s FBR targets are not merely indicative; they are quantitative performance targets. If they are not met, the government will have to seek a waiver. It will not be able to simply cut development spending or increase the petroleum levy to compensate for the shortfall. And if a gap emerges, a mini budget is likely.

The retail tax scheme is more farce than reform. The IMF is unhappy with it because it effectively exonerates retailers through the payment of a nominal amount. Even so, its passage remains uncertain. In any case, significant revenue collection is not expected from the scheme.

Thus, no one is expecting meaningful relief. Throughout the year, the government and the IMF continued to signal to the corporate sector that better days were ahead and that tax rates would eventually be lowered. Today, however, most businesses are bracing for another difficult year.

Despite the government’s repeated emphasis on tough policies to satisfy IMF requirements, Fund staff remain dissatisfied because there have been no meaningful efforts to broaden the tax base. There is little commitment to austerity and limited progress on structural reforms.

The petroleum levy remains elevated and may increase further. Even at current international prices, the government is charging a levy equivalent to nearly half of the petrol price, while the rate on high-speed diesel stands at 14 percent. If the levy was meant to replace GST to avoid sharing revenues with provinces, it should not exceed 18 percent. But that debate appears to have been settled in practice.

The best outcome the public can hope for is that the levy is not increased further, GST is not raised to 19 percent, and no major new taxes are imposed. No one expects substantial relief, though the government may offer a token reduction in taxes on salaried income.

There may be limited relief for goods exporters through the removal of the additional one percent advance income tax on revenues, which is charged on top of the existing one percent tax. Such a move would improve cash flows. Meanwhile, the services-exporting sector, particularly IT companies, is lobbying for a higher tax on freelance income. If that demand is accepted, policymakers should also revisit the preferential treatment currently enjoyed by IT exports.

The provinces, meanwhile, are focused on increasing expenditures. It has become a public-relations exercise from Khyber to Karachi. Punjab is not alone; every province appears to be following the same path. The emphasis is increasingly on spending and visibility. The Planning Commission continues to talk primarily about expanding the traditional PSDP approach. Yet fiscal space is limited. That is why the real dispute centers on the proposed Rs1.7 trillion in provincial savings that the federal government wants to use to meet its own financing needs. Whether this arrangement is one-time or recurring remains unclear. What is clear is that coalition partners are not pleased.

The bottom line is that the government has little room to provide meaningful relief. The investment climate is therefore likely to remain unchanged and subdued. The FBR’s primary focus will continue to be enforcement. Expansion of the tax base appears unlikely because the political will is missing, even though the relevant data already exists. The result will be greater pressure on the same small, compliant segment of taxpayers.

Pakistan cannot tax its way to prosperity. As long as the state continues to rely on extracting more from the same narrow pool of compliant taxpayers, while avoiding deeper reforms that broaden the tax base and improve productivity, stabilization will remain an end in itself rather than a bridge to growth.

Copyright Business Recorder, 2026