It makes sense for the government to take lesson from a Japanese saying: ‘If you get on the wrong train, get off at the nearest station, the longer it takes you to get off, the more expensive the return trip will be.’
While following the neoliberal, and austerity policy, successive governments over the decades have missed many ‘stations.’ Hence, the budget needs to take a bigger, more pro-active, and outcomes-based, mission-oriented approach, by adopting a non-austerity, counter-cyclical approach. Policy prioritization through budget – federal and those of federating units – should meaningfully reflect this policy direction.
In terms of the budget, this would mean preparing revenue, and expenditure policies that reflect this revised philosophical underpinning.
READ MORE: Policy philosophy correction budget needed–I
Overall, the budget revision should aim for a relatively balanced policy emphasis across both the demand and supply sides. To achieve this, it will be necessary to adjust the policy approach primarily within the IMF’s Extended Fund Facility (EFF) program, while also pushing for greater ambition on the Resilience and Sustainability Facility (RSF) side. Here, it needs to be pointed out that bringing this revision in policy is likely to be the only way to come out of a virtually endless cycle of IMF programmes over the last four decades or so.
On the revenue side, the principle of equitability in terms of tax burden, that is there should be progressivity of tax, keeping base of tax high and rates on lower side. Here, ability to pay tax should mean transitioning in a purpose-oriented way away from regressive, indirect, or consumption tax, to direct income tax to follow the principle of ability to pay, which, in turn, comes from income, and wealth. Moreover, the principle of the Laffer Curve should be kept in mind, whereby after a certain threshold, higher tax rates yield less revenue. This happens because people are disincentivized to work, only aspiring to earn the bare minimum since excessive taxes take such a large portion of their income. That, in turn, negatively impacts volume of taxable income, saving, investment – including investment in green transition – growth, and resilience, while likely enhancing overall poverty levels.
In addition, tax cuts should be used as an incentive to direct investment to reach higher levels of productive and allocative efficiencies. Here, Given the exceptional situation of the Middle East crisis, governments need greater fiscal space to reduce the tax burden on vulnerable sectors and consumers hardest hit by soaring input prices—such as oil and fertilizer. This requires creative taxation policies, such as implementing meaningful wealth taxes and taxing the windfall profits of energy companies.
All the above will result from non-neoliberal mindset with a much more proactive, symbiotic role of public sector with regard to private sector, and markets, while lowering transaction costs.
Here, in terms of giving tax breaks, government should make better contracts with private sector so that profits earned through such breaks are not invested in financial sector – for instance, in terms of share buy-backs – for the sake of enhancing profits, but are not invested in the real economy for positive impact on growth, employment, and poverty; all economic aspects, which are in very difficult situation. To augment this better reorientation of profits, deeper, and wider income taxes should be placed in the financial sector to disincentivize such investments.
Infrastructure spending, especially in terms of enhancing water resource management, for example, in terms of building more dams or for enhancing energy security, and transforming it in a mission-oriented way to move towards green sources of energy should mean tax incentives on important inputs involved – imported, and domestic – that are important to enhance infrastructural investment by both public, and private sectors. Such infrastructural investment, when employed in a non-neoliberal with greater economic direction provided by government towards reaching high level of productive and allocative efficiencies (China is a case in point) result in counter-cyclical policy emphasis, and that too in a highly meaningful way for bringing sustainability to the economy in general.
Overall, better rationalized revenue, and expenditure policies, should mean, for instance, removing the burden of indirect taxation in electricity bills to meet capacity charges needs being generated from the fossil-fuel based electricity grid, which should also mean removal of taxation on green sources of energy to retain traffic on the grid. The grid should be managed by involving greater targeted investments to utilize that energy with a special focus on industrial policy – and employing the budget in that direction – which would generate capacity to utilize excess electricity capacity while rolling back the grid as contracts of independent power producers (IPPs) expire, replacing them with green energy developed in a mission-oriented way during this time. Over the years, if fiscal resources can be generated, it is better not to wait for expiry of IPP-related contracts, and their expenditure is met through off-budget secondary market sources, and innovative ‘debt for development’ swaps. This approach addresses expenses in a way that helps build green energy base, and accelerate shift to greener sources at the earliest possible, reducing price distortions by adjusting how taxes reflect capacity charges in electricity bills.
Hence, revenue side of the budget, in the spirit of taking counter-cyclical policy approach to reach much-needed gains on stability, inclusivity, growth, and resilience aspects requires incentivizing agricultural productivity, and industrialization in a proactive, non-neoliberal way, which means giving targeted tax breaks and, on the expenditure side, giving subsidies and making higher level of development expenditure. To deter banks from lending to the government, it is important to increase taxes on interest earned from public sector lending while maintaining a much lower tax rate on loans to the private sector. This shift will incentivize banks to lower interest rates and increase the supply of loanable funds.
On the expenditure side, in addition to expenditure-related matters discussed above, development spending should be enhanced with greater footprint of public sector under the non-neoliberal policy approach to create much-needed policy space for private investment. This will also allow government to better direct investment in areas that enhance inclusivity, resilience, and growth. For that reason, it is important to move away from targeting primary surplus to reducing fiscal deficit, which would mean primarily putting pressure on government to enhance tax base and increase growth to reduce borrowing needs and, in turn, reduce interest payments-related expenditure, which is a huge ticket-item on the expenditure side. Here, taking a non-monetary austerity approach to rein in inflation through a much more balanced aggregate demand- and supply-side policies, would in turn mean much less interest payment related expenditure, and greater fiscal envelope to increase development spending.
Last but not the least, fiscal federalism needs to be restructured to better align the responsibilities shifted to the federating units under the 18th Constitutional Amendment with the expenditure requirements incurred from transferred resources under the National Finance Commission (NFC) award.
That would better rationalize expenditure side and revenue raising needs of the Centre and federating units.
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