Pakistan’s economic debate with the release of Economic Survey 2025-26 and federal budget for 2026-27 has again been reduced to a familiar quarrel: more taxes, more loans, more austerity, more conditions by the International Monetary Fund (IMF).
Missing from this noise is a simple principle understood by every prudent household, farmer, trader and industrialist: in hardship, first reduce waste, live within means, stop borrowing for consumption, and then work hard to repay what is owed.
Borrowing is not immoral or uneconomic in itself. Borrowing to create productive capacity can be wise. Borrowing to pay interest on earlier expensive loans is slow suicide. This distinction has disappeared from Pakistan’s fiscal policy.
A country may legitimately borrow for dams, railways, ports, universities, hospitals, technology, irrigation, climate resilience and reliable energy. Long-term low-rate loans for such purposes create assets. These assets raise productivity, expand incomes, improve social indicators and generate future tax capacity. Debt then becomes a bridge to development.
Pakistan’s tragedy is different. Much of its borrowing now finances debt servicing, current expenditure, losses of state-owned enterprises, circular debt, subsidies, administrative sprawl and survival of an elite rentier order. New debt does not sufficiently create new productive capacity. It merely keeps yesterday’s liabilities alive until tomorrow’s loan arrives.
Official fiscal operations of the Ministry of Finance tell this story year after year. Interest payments have become the largest federal expenditure. Development spending is treated as residual.
The Public Sector Development Programme (PSDP) remains compressed while mark-up payments grow. The federal government celebrates primary surpluses, but the overall fiscal deficit survives because debt servicing eats the budget before development begins.
This is not an accident. It is the result of a wrong economic model.
Pakistan’s rulers have followed the economics of postponement. When revenue falls short, borrow. When debt servicing rises, borrow more. When creditors demand adjustment, tax the already taxed. When development is squeezed, cut PSDP.
When provinces need resources for education, health and local services, create federal levies outside the divisible pool. When rentier sectors resist taxation, protect them. When loss-making state enterprises bleed, refinance them. When the next crisis arrives, call it unavoidable.
Even no household can survive this way. No business can survive this way. No state can survive this way indefinitely.
The first rule of fiscal recovery is discipline during
hardship. It does not mean blind austerity. It means distinguishing between expenditure that sustains life and capacity, and expenditure that sustains privilege. Schools, hospitals, water, sanitation, climate resilience, agriculture productivity, digital infrastructure and justice delivery are not waste.
Multiple ministries doing devolved provincial functions, subsidies for inefficiency, guaranteed returns to favoured sectors, tax exemptions for powerful lobbies and debt-funded current consumption are waste. Pakistan must therefore replace IMF-driven austerity with nationally owned prudence.
The second rule is that borrowing must be tied to productive assets. Every rupee borrowed should answer three questions. What asset will be created? How will it raise productivity or improve social welfare? How will it contribute to repayment capacity? Loans that fail this test should not be contracted.
This is especially important for external borrowing, where repayment requires foreign exchange. Projects financed by external debt must either earn foreign exchange, save foreign exchange, or create broad productivity gains strong enough to support future repayment.
The third rule is to stop confusing taxation with extraction. Pakistan does not lack taxable capacity. It lacks the courage to tax rent. Salaried persons, compliant businesses, bank account holders, electricity consumers, mobile phone users, exporters, contractors and professionals are repeatedly squeezed through withholding and indirect taxes. Meanwhile, large agricultural rents, speculative real estate gains, wholesale and retail margins and politically protected concessions remain inadequately taxed.
A state that taxes work more heavily than rent destroys productive incentives. It punishes documentation and rewards informality. It converts tax policy into a weapon against enterprise.
The fourth rule is to recover the hidden budget of the elite. The official Tax Expenditure Report 2026 has placed tax concessions at Rs. 2.353 trillion. This is not a footnote. It exceeds development allocations. A country pleading fiscal emergency cannot justify such a large hidden budget for selected beneficiaries while imposing new burdens on citizens already paying through withholding, utility bills, petroleum prices and inflation.
The fifth rule is to restore fiscal federalism. The growing reliance on petroleum levy instead of general sales tax (GST) on petroleum products has allowed the federation to retain revenues that would otherwise form part of the divisible pool. This may help Islamabad show better numbers. It weakens provinces and, indirectly, social services.
After the Constitution (Eighteenth Amendment) of Act 2010, education, health, agriculture, water supply and local development are largely provincial responsibilities. Extracting resources through non-divisible levies while demanding provincial cash surpluses undermines the constitutional design. This is how a fiscal crisis becomes a social crisis.
The sixth rule is to end the rentier state. A rentier state survives not by expanding production but by distributing privileges: plots, exemptions, guaranteed profits, protected markets, cheap public assets, regulatory favours and access to state contracts.
Such a state creates clients, not citizens; monopolies, not markets; and dependence, not productivity. Pakistan’s repeated bankruptcies are symptoms of this deeper disease.
The seventh rule is hard work after stabilisation. Once waste is reduced and borrowing is redirected toward productive use, the economy must move from consumption-led survival to production-led recovery.
Agriculture must be modernised. Small and medium enterprises must be formalised through low-rate, simple and predictable taxes.
Exports must be freed from policy uncertainty. Energy pricing must reward efficiency rather than theft and circular debt.
Cities must be empowered to finance local infrastructure through property-based revenues. Human capital must be treated as investment, not charity.
Debt repayment cannot come from slogans. It comes from higher productivity, higher exports, higher savings, better governance and fairer taxation.
Pakistan does not need another ritual of temporary stabilisation. It needs a fiscal covenant based on prudence: live within means during hardship, borrow only for capacity creation, tax rent rather than work, remove unjustified concessions, reduce waste, and repay debt through growth generated by real production.
The present model has made Pakistan dependent, indebted and externally supervised. The new model must make it self-respecting, productive and fiscally sovereign. The choice is no longer between austerity and growth. The real choice is between debt-funded rentier survival and disciplined productive reconstruction.
Copyright Business Recorder, 2026
The writer, an Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws
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