The last number of federal budgets, especially since 2022, have been pro-cyclical in nature – in general, reducing public investment, and expenditure, and increasing tax rates. The underlying purpose being breaking, and reining in aggregate demand to not only narrow twin deficits, but to also create surpluses.
The last federal budget, for instance, reflected push as per International Monetary Fund’s (IMF’s) extended fund facility (EFF) programme’s binding conditionality with regard to achieving primary surplus.
Moreover, under the neoliberal influence of domestic policy in general, and more so under the EFF programme, public sector development programmes, especially in terms of medium-to-long-term projects reflected in the capital budget part, have all remain limited.
While the above approach made some sense during the short term to fend off fears rising from heightened debt distress, that is during the period of IMF’s standby arrangement (SBA) taken prior to the ongoing EFF programme, and during the initial months of this programme, yet rather prolonged application of neoliberal, and austerity policies has diminished the prospects of achieving sustainability with regard to some macroeconomic stability achieved thus far.
More than that growth has not only just kept pace with the population growth rate over these years. The worrying part is that the prospects of achieving higher growth trajectory remain elusive. In the meantime, unemployment, poverty, and income inequality have increased.
In addition, the other programme negotiated with IMF to build resilience against climate change crisis – as Pakistan being one of the ten-most climate change vulnerable countries globally – in the shape of resilience and sustainability facility (RSF) is also likely to remain weakly implemented. This is because building resilience requires greater role of government in shaping markets, and economic exchange towards greener economic solutions.
That requires greater public expenditure, and investment to create a basis for greater public-private partnership on one hand, and in expanding the capacity of government to provide needed governance, and incentive structures towards reaching suitable level of productive- and allocative efficiencies on the other. This is needed to protect the economy from climate change related shocks by creating production buffers against damages caused by climate catastrophes.
This also means supporting private consumption in taking initiative to invest in renewable energy for instance, to having means to continue education remotely through virtual leaning, in case of climate change, and possible ‘Pandemicene’ related emergencies. Resilience also means safeguarding consumption, and production against over-profiteering done through price gouging for instance, during such shocks, by installing governance structures in markets in the shape of implementing price controls.
The Federal Budget needs to signal that while the size of the public sector will be rationalized, the role will be enhanced to cater to the growing needs to increasing economic growth, and building resilience.
Such signals include increasing the capital budget, and overall size of the PSDP, for which rather than pursuing austerity, greater ambition needs to be emphasized in the upcoming federal budget, which in turn, should set the tone for provincial budgets in this direction.
Moreover, it would mean having an appropriate counter-cyclical, and non-neoliberal. Hence, the expenditure plan allows much greater public investment, achieving increased expenditure efficiency, while the domestic resource mobilization, or revenue plan, needs to considerably enhance tax base, in addition to both lowering tax rates, and shifting from consumption (for instance, transitioning away from GST), to income, and wealth tax.
That would also mean that direct subsidies, for instance, in energy sector are not sharply reduced, but transitioned as governance structures improve to efficiently provide targeted subsidies to overall protect and boost private consumption, and overall economic growth.
It would mean ‘decoupling’ the impact of aggregate demand curtailing EFF programme to manage twin deficits from the aggregate demand enhancing RSF programme to create investment for enhancing sustainability, and resilience.
This would require providing a smart Federal Budget – a rational compromise between these two opposite influences in a purpose-drive and mission-oriented way. For long the march of economic policy has been in the direction of austerity, and neoliberal policies.
This needs to be reversed, and quite significantly given the almost half of the population now lives under poverty, and there is no sustainable basis for managing debt, inflation, and unemployment, not to mention that a lot of economic growth sacrifice has already been given.
Also, very importantly, globally the era of industrialisation has once again dawned, especially in the wake of internalizing the misgivings of the global financial crisis 2007-08, and overall policy driven under outlandish neoclassical assumptions ruining global economic strengths in the shape of economic predictability, and economic resilience to shocks as found seriously lacking in the wake of fast-unfolding nature of climate change catastrophes, and the Covid-19 pandemic. The upcoming Federal Budget should lay a strong foundation by re-launching a potent industrial policy that is led by government in a mission-oriented way.
This would mean, once again, giving strong signal that the government and the State Bank of Pakistan are working collaboratively towards this goal, and would also mean actively reducing the cost of business, and making the shift in this regard in a green way.
Copyright Business Recorder, 2026
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7