Dr. Ikramul Haq
One may question what is the rationale behind the exclusion of expenditure charged upon the Consolidated Fund from the Parliamentary sanction in Pakistan? As pointed out earlier, under Articles 81 and 121 of the Constitution, all debt charges are part of the expenditure charged upon respective Consolidated Funds, but the Parliament and the respective provincial assemblies were divested of the power to vote upon….How Constitutions Flourish or Fail by Mian Ashiq Hussain
In just ended 2025, due to structural impediments, lack of infrastructure and trained human resource, incompetence, inefficiencies etc, the Federal Board of Revenue (FBR) and provincial tax agencies miserable failed to bridge the huge tax gap faced by the country. Making the things worse, the federal government could not reduce the burgeoning debt servicing and wasteful expenses. The fiscal mismanagement of federal and provincial governments since 2008 has been badly affecting the country’s economic landscape, highlighted in various articles.
One of the results of perpetual political instability since April 9, 2022, in the wake of first-ever successful vote of no confidence in the history of Pakistan, is the worst economic impasse in our 78-year of existence. On the one hand, the federal government is trapped in deadly debt enslavement, and on the other, provinces—heavily dependent on transfers under 7th National Finance Commission (NFC) Award—are getting less than budgeted amounts due to incompetence/failure of FBR to meet even downwardly revised targets.
Provinces have also miserably failed to mobilize their own resources by not collecting due agricultural income tax from the rich absentee landowners and failure in introducing progressive taxes assigned/devolved in the wake of Constitution (Eighteenth Amendment) Act 2010 [18 Amendment], became effective on April 19, 2010. Their inaction on this account for over 15 years now is highly lamentable.
In the existing scenario, the government, coming into power after maneuvered/subverted results of general elections, held on February 8, 2024, has been facing the most daunting challenge on the fiscal front—rebuilding of the ruined economy due to unabated political instability and imprudent policies.
Prudent economic policies in 2026 are inevitable. These can be successful, if formulated after professional input and public debate, eliciting support of all stakeholders. Foremost, Pakistan needs a right path for higher sustainable growth with fiscal equilibrium. 2026 must be made the year of accelerated and sustainable growth, leading to inclusive development—ultimately achieving the much-desired and long-awaited goal of self-reliance with prosperity for all. Unless it is done, Pakistan will never be able to come out of debt prison and subjugation at the hands of foreign lenders.
The materialization of dream of self-reliance and egalitarian state needs political consensus, above party lines, and concentrated efforts with right thinking and effective implementation. The present government successfully completed the US$3 billion standby arrangement with International Monetary Fund (IMF) with tough conditions, and thereafter negotiating yet another US$7 billion 37-month Extended Fund Facility (EFF) harsher programme, implementing it well so far.
As expected, the ongoing IMF programme is proving to be a very tough call. The incumbent government lacks thinking/ability to pay huge foreign liabilities by improving exports, and not by seeking further loans.
The test of economic team since March 2024 has been handling of burgeoning fiscal deficit, historic high prices and recurrent worrisome inflation, rising unemployment, huge circular debt in electricity and gas sectors, and continuous funding from taxpayers’ money of inefficient and loss-bearing state-owned enterprises (SOEs). In addition, most importantly, how to manage the mounting debt burden and meeting revenue (tax and non-tax) targets fixed for the current fiscal year.
According to the latest figures released by the SBP, gross public debt and liabilities as on September 30, 2025 were Rs. 79.14 trillion, out of which foreign debts and liabilities were Rs. 37.82 trillion.
The impact of reduced policy rate by the State Bank of Pakistan (SBP) from 22% to 11% and recently to 10.5% has showed positive results for reduction in government’s debt-related liabilities, but these are still posing a daunting challenge.
Over the last twelve months, Pakistan has recorded a substantial reduction in debt-servicing costs, even when the overall stock of public debt continues to rise. The federal government’s debt-servicing allocation for FY 2025-26 is Rs 8.206 trillion, reflecting a year-on-year decline of about Rs. 739 billion (over 8 percent) compared to the revised estimates for the outgoing fiscal year. This easing has been supported by proactive debt-management measures, including early retirement of around Rs. 2.6 trillion in high-cost domestic liabilities, which has generated substantial interest savings.
The above development underlines an important distinction often missed in public debate: while Pakistan’s total debt has increased, the immediate fiscal pressure from servicing that debt has moderated, creating limited but much-needed fiscal space for the government.
Federal budget 2026 estimates debt servicing alone at Rs 8.2 trillion (Rs 7.2 trillion domestic and Rs 1 trillion foreign), while the defence at Rs 2.56 trillion and pension at Rs. 1055 billion (military Rs. 742 billion and civil Rs. 243 billion). The net income of the federation, after transfer of shares to provinces of Rs. 8206 billion, is projected at Rs. 11072 billion. It means after meeting the above three expenses, all estimated expenditure (current and capital) of Rs 23.84 trillion will attract further expansive borrowing.
In the above scenario, it hardly matters even if FBR, through regressive, high rate oppressive taxes, unfair means of recoveries, blocking of refunds, and after obtaining huge undue advances from large taxpayers, manages to meet the original tax target of Rs. 14.131 trillion , out of which share of provinces is 57.5 percent as per 7th NFC award.
The inadequacy of federal receipts to meet burgeoning expenses is a recurrent, rather a permanent phenomenon, due to structural issues—for example the retaining of ministries transferred to provinces under 18th Amendment, monstrous size of government, reckless borrowing for useless projects under so-called Public Sector Development Projects (PSDPs) restraints under Article 160(3A) of the 1973 Constitution and denial to provinces of their legitimate right to impose indirect taxes on goods produced and consumed in their territories.
The above figures prove beyond any doubt that Pakistan’s real fiscal problem is reckless borrowing and ruthless spending, pushing the country deeper and deeper into the deadly debt trap. The budgets for last many years show grossly understated expenditures and exaggerated income/inflows, deliberately or otherwise, confirming incompetence and/or fraudulent behaviour.
Pakistan, like many other developing economies, suffering from chronic misgovernance and rampant corruption, weak institutions, and lack of rule of law, has been facing a formidable challenge in establishing an efficient and fair tax policy framework.
Till to this day, we have failed to devise a rational tax policy by establishing an independent/autonomous Board (establishing Tax Policy Office in Ministry of Finance is yet another useless exercise for lack of independence, transparency and public accountability), lowering tax rates, bringing the broadest possible base into tax net through simplification of procedures and incentivizing documentation of the monstrous informal economy.
The successive governments—civil and military alike—have failed to introduce an effective and just tax system to cater for the country’s needs, which has led to a vicious debt trap, where fresh borrowings are to pay old liabilities and meet even day to day expenditure, compromising ability of the state to spend on the welfare of its citizens. It also hampers providing of basic facilities like health, education and infrastructure. This is exactly the dilemma of Pakistan since inception, especially after first military coup of October 7, 1958.
In their inability to broaden the tax base, tax policy design by FBR has been relying mainly to transactional changes like higher tax rates or further extortion from the existing taxpayers, increasing rates of withholding taxes, resorting to confiscatory taxation by levying super tax and introduction of unconstitutional deemed income under section 7E of the Income Tax Ordinance, 2001.
Another impeding factor is the nexus between legislature and powerful elite of the country that has stunted the country’s ability to grow. Taxing the State Oligarchy and facilitating lower/fixed income earners or greenfield industries is always resisted by the powerful elites—militro-judicial-civil complex and unscrupulous traders—as it would eventually increase their tax burdens.
The performance of provinces in collecting taxes from the rich and mighty e.g. agricultural income tax from the affluent absentee landowners is extremely appalling. This is a common issue both at federal and provincial levels arising from absence of political will to collect income tax from the rich—the meagre collection of agricultural income tax—less than Rs. 5 billion by all provinces and federal government in fiscal year 2024-25 is lamentable.
Under the given situation, it is imperative that Unified Sales Tax on Goods and Services Act, 2026, imposing 10% tax, is passed with collection through National Tax Council, till the time fully federalised National Tax Agency is established. It is also important to assign the exclusive right to collect tax on income, including agricultural income, to the Centre through dialogue in a democratic way and after consensus in terms of Article 144 of the Constitution, which says:
Power of Majlis-e-Shoora (Parliament) to legislate for one or more Provinces by consent
- (1) If one or more Provincial Assemblies pass resolutions to the effect that Majlis-e-Shoora (Parliament) may by law regulate any matter not enumerated in the Federal Legislative List in the Fourth Schedule, it shall be lawful for Majlis-e-Shoora (Parliament) to pass an Act for regulating that matter accordingly, but any act so passed may, as respects any Province to which it applies, be amended or repealed by Act of the Assembly of that Province”.
In case the above two measures are agreed to under 11th NFC, there will be no need to amend the Constitution or downward revision of the shares of provinces as explained in Pakistan’s Fiscal Crisis: NFC, Federal Overreach And The Betrayal Of Devolution, Friday Times, December 20, 2025.
In the second part of this series, concerte measures and their implementation startegy will be presented, constituting a roadmap for prosperity in 2026 for all citizens of Pakistan, no matter where they are residing.
[To be concluded]
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Dr. Ikramul Haq, 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. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.