Predatory state & low-growth trap  

Dr. Ikramul Haq

Pakistan’s perpetual economic dilemma is not merely insufficient tax collection or excessive debt burden, but a prolonged low-growth trap due to the unchallenged imprudent policies of incompetent predatory and parasitic ruling elites and role of an extractive state that has hollowed out fiscal capacity and magnified every imbalance.

An elitist economy growing at around 2.6–2.8 percent in fiscal year (FY) 2024-25, with an average population growth of about 2.5 percent, cannot sustainably service debt, finance development, or meet social needs of citizens—no matter how aggressive the revenue efforts.

Debt distress is thus a symptom, not the disease. If Pakistan were to double its GDP over a reasonable horizon through sustained, productivity-led growth, the debt-to-GDP ratio would decline automatically, fiscal space would expand, and revenue mobilization would follow organically. Without escaping the low-growth equilibrium through strategic investment, however, higher taxes and repeated borrowing merely redistribute stress rather than resolve it.

Pakistan’s persistently low economic growth is no longer a cyclical aberration; it has hardened into a structural condition. Over the past decade and a half, average real GDP growth has hovered around 3–4 percent, barely enough to keep pace with population growth, let alone generate meaningful employment or reduce inequality.

In recent years, growth has fallen even lower, exposing an economy that expands briefly under favourable conditions and contracts sharply once those conditions fade. This pattern is not explained by a single shock or external disruption. It reflects a deeper governance failure: the repeated substitution of assertion for substance, of policy labels for structural reform, and of short-term extraction for long-term productivity.

Structural diagnosis of low growth

The first and most visible constraint is weak productivity growth. Pakistan has failed to undergo sustained structural transformation. Labour remains trapped in low-productivity sectors, industrial upgrading is sporadic, and value-added exports remain limited. Investment rates remain persistently low, reflecting uncertainty, policy volatility, and weak institutional credibility. Without productivity gains, growth cannot be inclusive or durable.

Second, fiscal stress crowds out development. Provisional fiscal operations data for FY 2024-25 show that total revenue reached about 15.7 percent of GDP, of which tax revenue was around 11.1 percent and non-tax revenue about 4.6 percent. In contrast, total expenditure stood at roughly 21.1 percent of GDP, resulting in an overall fiscal deficit of about 5.4 percent of GDP, even after aggressive consolidation.

More critically, current expenditure absorbed nearly 18.8 percent of GDP, while development spending was compressed to around 2.6 percent of GDP. Within current expenditure, interest payments alone accounted for approximately 7.7 percent of GDP, severely constraining fiscal space for growth-enhancing investment in infrastructure, education, and health.

Even when revenue targets are met, they are often achieved through measures that suppress economic activity rather than expand it. Even in years of nominal surplus, this dependence did not translate into durable fiscal autonomy. Third—and critically—the tax system itself has become a major impediment to growth.

Table: Provincial Fiscal Dependence in Pakistan (FY2008-09 to FY2024-25)

(PKR in billion)

Table above (data extracted from annual fiscal operations statements by Ministry of Finance) establishes beyond rhetoric that provincial fiscal dependence is structural, persistent, and invariant across political cycles, notwithstanding IMF’s programmes, and post-18th Constitutional Amendment arrangements.

Seventeen consecutive fiscal years of civilian era (2008 to 2025), federal transfers account for roughly three-quarters to nearly eight-tenths of provincial revenues, while provincial own-tax effort remains largely confined to single digits or the low teens as a share of total resources.

The implication is unavoidable. Provinces are expected to deliver education, health, social protection, and basic services, yet their fiscal architecture is built not on autonomous revenue mobilization but on redistribution from a small and slowly growing national income. This is why inter-governmental disputes over shares recur, why social spending remains chronically underfunded, and why fiscal consolidation repeatedly collides with political economy realities.

The problem, therefore, is not that provinces completely lack tax buoyancy, nor that the federation “withholds resources”, but that the national cake itself is too small. Without sustained, productivity-led economic growth that expands GDP, both federal and provincial finances will remain trapped in a zero-sum contest over scarcity. Growth is not a policy preference here; it is an arithmetic necessity.

High and morbid taxation as a growth inhibitor

Pakistan’s tax dilemma is frequently misdiagnosed. While the tax-to-GDP ratio remains low by international comparison, the effective tax burden on the documented economy is excessive, unpredictable, and punitive. This contradiction lies at the heart of what many fairly describe as morbid taxation.

Fiscal data for FY 2024-25 reveal the structural nature of the problem. Of total tax revenue (about 11.1 percent of GDP), direct taxes contribute only around 5 percent of GDP, while indirect taxes dominate, disproportionately burdening consumption and productive activity. A narrow tax base forces the state to impose high rates, minimum taxes, presumptive levies, and coercive enforcement on a small segment of compliant taxpayers.

Instead of broadening the base, policy repeatedly squeezes the same sectors—formal businesses, salaried individuals, and documented transactions—while large segments of the economy remain lightly taxed or altogether outside the net.

This approach produces three harmful outcomes. First, investment is discouraged. High effective taxation without a clear nexus to income, profitability, or capacity weakens incentives to expand, formalize, or reinvest. Second, consumption demand is suppressed. Heavy reliance on indirect taxes raises prices, erodes purchasing power, and disproportionately burdens lower- and middle-income households. Third, trust in the fiscal system erodes. When taxation appears arbitrary and detached from real economic outcomes, compliance becomes adversarial rather than civic.

The problem is not taxation itself; it is taxation divorced from economic reality, imposed through nomenclature and deeming rather than grounded in income, time, person, and productive activity. Such a system neither mobilizes adequate resources nor supports growth. It merely redistributes stress.  A recurring error in economic policy is the belief that declaring growth targets, announcing reforms, or re-labelling levies can generate real expansion. This is a fundamental category mistake. Growth does not emerge from words; it emerges from foundations.

The deeper wisdom—embedded in our constitutional and intellectual tradition—is that returns follow structure. Where institutions are strong, incentives aligned, and investments productive, growth occurs even under modest external conditions. Where foundations are weak, even abundant inflows fail to produce lasting prosperity. Pakistan’s experience confirms this. Periods of high inflows—whether aid, remittances, or borrowing—have not translated into sustained development because the underlying economic terrain remained fragile. When external support receded, growth faltered.

Inclusion is not residual; it is structural

Inclusive growth is often treated as a distributive exercise to be addressed after growth has occurred. This sequencing is flawed. Inclusion is not an outcome of growth; it is a precondition for it. An economy that excludes large segments of its population—women, youth, small enterprises, and peripheral regions—cannot sustain expansion. Human-capital deficits, unequal access to credit, and regional disparities are not social side-issues; they are core economic constraints.

A credible growth model must therefore integrate inclusion at the design stage. Education must align with labour-market needs. Small and medium enterprises must be enabled rather than regulated into informality. Fiscal policy must distinguish between productive activity and rent extraction.

The role of the state is not to fabricate outcomes through excessive intervention, delegated discretion, or fiscal coercion. It is to cultivate conditions under which productive activity can flourish. This requires regulatory certainty, predictable taxation, and institutional competence. Frequent policy reversals, retrospective measures, and over-reliance on presumptive regimes undermine confidence and flatten the economic landscape. When law departs from economic reality, informality expands and growth recedes.

Public finance must also be honest. Borrowing cannot substitute for reform, and taxation cannot compensate for inefficiency. Growth financed through extraction rather than productivity is neither inclusive nor sustainable.

Measuring resilience, not illusion

Pakistan must also rethink how it measures success. Headline GDP growth alone is insufficient. More relevant questions are whether growth generates employment, whether it persists under constraint, and whether it broadens participation. An economy that performs only when conditions are ideal is fragile. An economy built on sound foundations continues to produce even when conditions are modest.

The path out of Pakistan’s economic impasse is clear, though politically demanding. Inclusive prosperity cannot be declared, presumed, or extracted. It must be built—through disciplined investment in people, institutions, and productive capacity; through taxation that respects economic nexus and fairness and through governance that aligns law with reality. When economic policy is grounded in structure rather than illusion, growth becomes resilient and inclusive. Without that discipline, all claims of reform remain precisely what they are: statements without substance.

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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.