Austerity in times of crisis

Fiscal discipline is more essential in times of geopolitical uncertainty and economic uncertainty. Pakistan is at that stage of its development when fiscal discipline is not a mere policy choice, but an economic necessity.

The government’s growing emphasis on expenditure-based austerity is as an important strategy to stabilize the economy while limiting damage to growth.

Austerity has long been a controversial policy tool. During the global financial crisis, it was widely used with stressing fiscal adjustments, including public spending cuts and tax increases. According to critics, such policies decrease economic growth, employment and welfare.

However, the economic research suggests that the effect of austerity is also highly dependent on the instrument that is utilized to achieve the fiscal adjustment. In particular, there is a clear difference between tax-based austerity and expenditure-based austerity.

According to PIDE research, increase in taxes has a higher negative effect on economic performance compared to government expenditure. The estimates of fiscal multiplier place government spending multipliers between 0 to 2.5, indicating that control in the spending by the government may have a moderate effect on growth.

In contrast, tax multipliers range from –0.5 to –5.5, indicating that higher taxes are more likely to slow economic activity.

Evidence further shows that reducing the fiscal deficit by one percent of GDP through spending cuts can reduce GDP growth by an average of 0.5 percentage points and the recovery process will usually take a few years.

Achieving the same adjustment through tax increases can reduce growth by 2–3 percent and prolong economic slowdown. That is why expenditure-based fiscal consolidation is preferred by many economists during the cases when austerity has to be introduced.

These insights have special significance to Pakistan. The country has experienced decades of fiscal deficits and increasing levels of public debt that has been forcing it to enter repeated stabilisation programmes.

In the past, most of these programmes were based on massive tax increases rather than reforming government spending. Although these actions helped to generate short term revenues, they usually caused distortions in the economy, discouraged investment and increased the cost of doing business.

Since the Iran war had intensified and the subsequent rise in international oil prices, the government of Pakistan has implemented a set of austerity measures to conserve energy and maintain fiscal restraint. These include a decrease in fuel allocation for government vehicles by half, with approximately 60 percent of government vehicles temporarily off the roads to reduce fuel consumption, a 20 percent reduction in non-salary spending across federal departments, restrictions on foreign visits by ministers and officials, and limitations on official events and government-sponsored gatherings.

Moreover, cabinet members have agreed to forgo their salaries for two months, while parliamentarians’ salaries have also been slashed, reflecting political readiness to be conservative on spending.

Administrative measures such as a four-day workweek in government offices, expanded work-from-home arrangements, and temporary school closures with universities moving online have been introduced to limit commuting and energy use. These steps indicate a gradual shift toward expenditure rationalisation.

Policymakers are no longer depending mainly on new taxation, but are rather working on cutting government spending and enhancing efficiency. These reforms aim to control fiscal deficits without placing additional burdens on households and businesses already struggling with inflation and economic uncertainty.

When governments exercise fiscal discipline by undertaking spending reforms rather than arbitrary tax increases it sends a powerful message of policy credibility. This credibility is able to enhance the environment of investment, and motivate the participation of the private sector in the economy. This will encourage businesses to take up production, new investment, and employment creation when they are certain of the future stability of the fiscal policies and the reduction of taxation measures. In the absence of such measures, excessive deficits will cause inflation, an unstable exchange rate, and a lack of investment.

However, the execution of expenditure reforms is not an easy task. The process of reducing government expenditure requires strong political will and reforms. Inefficiencies in the public sector, losses in state-owned enterprises, and inefficient subsidies have been a structural problem in the fiscal system of Pakistan for a long time. It requires transparency and reforms to address these problems.

At a time when economic and geopolitical pressures are escalating, fiscal discipline becomes essential for maintaining stability. If managed properly, expenditure-based austerity can assist Pakistan in managing current challenges while providing the foundation for more sustainable and resilient economic growth in the future.

Copyright Business Recorder, 2026