A new fiscal compact

PAKISTAN’S forthcoming budget confronts a difficult reality. The formal economy is overtaxed, investment remains weak, exports struggle to compete regionally, and salaried individuals face rising tax burdens even as inflation erodes purchasing power. Yet meaningful tax relief appears fiscally difficult at a time when economic growth is slowing, debt servicing costs remain elevated and IMF discipline continues to constrain policy choices. This dilemma has triggered an important national debate. If Pakistan wishes to reduce the burden on documented businesses and taxpayers, how can it compensate for the resulting loss in revenue? The answer lies in recognising that Pakistan’s fiscal challenge is no longer simply one of raising taxes. It is increasingly about how all parts of the state can share responsibility for reviving industry, employment and economic growth. This responsibility includes the provinces in which employment is potentially created. If the government were to fully align Pakistan’s tax regime with more competitive regional structures in a single year — reducing corporate tax from 29 per cent to 25pc, withdrawing super tax, eliminating capital value tax and restoring exporters to a lower presumptive regime — the estimated fiscal cost could exceed Rs1.3 trillion annually. Pakistan’s finances cannot absorb such a shock immediately. Borrowing is not a realistic solution. Interest rates are likely to remain elevated amid renewed inflationary pressures following the Iran conflict and energy market disruptions. Debt servicing already consumes a dangerously large share of federal revenues. Public sector development expenditure has already been repeatedly compressed, leaving little room for further cuts without undermining infrastructure and long-term productivity. Pakistan’s fiscal challenge is no longer simply one of raising taxes. Compounding matters further is the likelihood of slower economic activity in FY26/27, which could weaken tax collection even befor