Pakistan’s budget of managed expectations

Pakistan’s government delivered its budget last week with the now-familiar language of turning points. Growth would reach 4 percent. Revenue would surge by nearly 18 percent. Private investment would finally accelerate. The numbers have the look of a plan. They do not have the feel of one.

Start with the growth record. In FY2023, Pakistan’s GDP grew by just 0.3 percent. In FY2025, the economy grew 2.7 percent, a revision down from a 3.6 percent target. In the fiscal year just ended, GDP came in at 3.7 percent, falling short of the 4.2 percent target announced in the prior budget. The pattern is consistent: the government announces an ambitious number, the economy delivers something smaller. The FY2027 target of 4 percent is not a forecast derived from identifiable policy levers. It is a number that sounds attainable while requiring more than the economy has recently demonstrated.

What would it take to reach 4 percent? Investment, primarily. Pakistan’s investment-to-GDP ratio has stagnated at around 14 percent, far behind Bangladesh at 22 percent, and Vietnam at over 30 percent. But the level alone does not capture the full problem. Pakistan’s incremental capital-output ratio, the investment required to generate each unit of growth, has historically ranged between 4 and 6. At 14 percent investment and an ICOR of even 4, the arithmetic ceiling on sustainable growth is roughly 3 to 3.5 percent. With population growing at around 2 percent a year, that translates into per capita income gains of barely 1 percent, imperceptible to most households, and wiped out entirely in any year the economy underperforms its target. To break through that ceiling requires either a decisive rise in investment or a sharp improvement in how productively it is deployed. Governance friction, an uncompetitive industrial landscape, and low productivity in public capital spending keep the ICOR elevated.

Four percent growth with 14 percent investment, a crowded-out private sector and a revenue agency that cannot meet existing targets is not a plan. It is a hope dressed in the language of fiscal discipline.

- Javed Hassan

Private investment is projected to rise from 9.6 to 10.3 percent of GDP. No specific policy measures explain how. Government borrowing from commercial banks surged nearly fivefold in the first seven months of FY26 alone, according to State Bank data. One banking sector analysis found private-sector lending accounts for just 22 percent of total banking assets, with banks increasingly parking funds in government securities instead. The state is crowding out the very investment it claims to be encouraging.

Then there is the revenue question. The FBR has been handed a target of Rs15.3 trillion, a 17.6 percent increase over the previous year. During the first ten months of FY2026, it collected Rs10.25 trillion against a target of Rs10.9 trillion. The agency was missing its targets throughout the outgoing year and has now been assigned a larger one.

The stated mechanism for broadening the base is a new fixed-tax scheme for retailers, 1 percent of sales, with a minimum of Rs25,000 per year. Set aside the political history: the Tajir Dost initiative of 2024 was abandoned after trader resistance made collection impossible.

Consider only the arithmetic. A retailer with Rs5 million in annual turnover pays Rs50,000. Even full compliance across hundreds of thousands of small traders would produce a rounding error against a Rs15 trillion target.

The one measure with genuine base-broadening potential is the provincial agricultural income tax, introduced under IMF pressure and now formally on the books in all four provinces. Large landowners have for decades paid nothing on agricultural income while drawing on state infrastructure, subsidized inputs, and water rights. The new tax should, in principle, change that. It will not. The landlord class that populates provincial assemblies will not legislate its own expropriation. What will emerge, if history is a guide, is a tax that exists on paper, yields a fraction of its potential, and is quietly wound down once the IMF program ends. Meanwhile, salaried workers — whose taxes are withheld at source — paid over Rs605 billion in income tax in FY2025, a 55 percent year-on-year increase. Traders and landowners paid a fraction of that relative to their incomes. The budget offers the salaried class some relief. It leaves the underlying inversion intact.

When the revenue gaps materialize, the adjustment instruments are familiar: advance tax demands on compliant businesses, levies on fuel and utilities, withholding taxes that reach consumers before they reach the point of purchase. These fall hardest on those who appear nowhere in this budget’s relief provisions — the informal poor, the fixed-income household, the small manufacturer already paying more for electricity than his counterpart in Dhaka.

Pakistan’s economy has stabilized. The crisis of FY2023: inflation near 30 percent, foreign reserves near exhaustion — has been contained. That is a genuine achievement. But stabilization is not growth, and the conditions required to sustain growth above 4 percent — rising investment, productive public spending, a tax system that reaches those with capacity to pay — remain as distant as they were when this government took office.

Four percent growth with 14 percent investment, a crowded-out private sector and a revenue agency that cannot meet existing targets is not a plan. It is a hope dressed in the language of fiscal discipline. Pakistan’s people have been asked to wait for that hope to materialize for a very long time.

- Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He was Senior Visiting fellow at Fudan University, Shanghai.