In the past 15 years, tax collections and government spending have been majorly increased in Pakistan. In 2008, tax collections stood at Rs. 1.7 trillion, which escalated to Rs. 7,169 billion by 2023. During the same period, government spending was approximately around Rs 3.9 trillion. Despite this increase in tax collection, the fiscal imbalance has grown, which suggests that higher taxes have not kept up with the rapid rise in government spending.
A sizeable amount of government expenditure has gone toward industries suffering substantial losses. The power sector, for instance, has accumulated losses of roughly Rs 281 billion in the fiscal year 2023-2024. Many power distribution companies, such as LESCO (Lahore Electric Supply Company) and PESCO (Peshawar Electric Supply Company), failed to meet their targets for reducing transmission and distribution losses. This lapse contributed considerably to the overall financial strain. Additionally, none of the distribution companies achieved 100 percent of their recovery targets for their revenues. State-owned companies such as PIA and Pakistan Steel have accrued liabilities of Rs 180.6 billion and Rs 40.3 billion. In the current fiscal year alone, grants have amounted to around Rs 1.69 trillion, and subsidies have reached approximately Rs 1.29 trillion.
These figures highlight a dangerous trend, that is, while tax revenues have increased, government expenditures have also escalated at a much faster rate, leading to a growing fiscal deficit. We can dissect this in simpler words by saying that the government is collecting more money through taxes, but it is spending at a much faster pace. This simply means that the government is spending more than it’s earning.
This situation can also help us understand the difference between government spending and revenue, which is known as a ‘fiscal deficit.’. A growing fiscal deficit denotes that the government is borrowing more money to cover its expenses. The current situation is simply unsustainable and poses serious risks to the economy. Overspending by the government can do nothing but harm the economy in numerous ways.
Argentina is a notable example of a country that faced severe economic consequences due to excessive government overspending. Over the years, the Argentinian government continuously spent more than it earned– heavily subsidizing energy, transport, and other sectors while expanding its workforce. This unsustainable setup led to a dramatic increase in inflation, currency depreciation, and mounting debt. The situation came to a head during the early 2000s and again in the late 2010s, when the country faced multiple crises.
Despite increased tax revenues, the fiscal deficit widened as government spending grew unchecked. In order to stabilize the economy, the government responded by enacting austerity measures, such as reducing public spending and subsidies, privatizing state-owned businesses, and laying off employees.
While increasing tax revenues is essential, it is not a panacea for Pakistan’s fiscal challenges. The main culprit in all of this is unchecked government spending, which, if left unhandled, may bring more economic uncertainty in the country. To maintain long-term economic health and keep Pakistan from becoming a case study of fiscal mismanagement, a comprehensive strategy that prioritizes efficiency, fiscal responsibility, and expenditure control is needed.
Moreover, research indicates that increased public spending has a negative impact on business profitability, which can reduce private investment and slow economic growth.
According to a National Bureau of Economic Research (NBER) study, budgetary increases may cause the economy to decline. The study also reveals that corporate earnings can be lowered by increases in public spending, especially in areas like government transfers and public pay. Economic growth is hampered by this decline in earnings since it deters private investment.
Similarly, a study that was published in the Review of Finance examined the impact of government spending on corporate investment. The results showed that by negatively impacting businesses’ investment opportunity sets, positive government expenditure lowers corporate investment. This implies that by reducing the resources and opportunities accessible to private companies, higher public spending may dissuade private investment.
To address these challenges, Pakistan must prioritize fiscal discipline by curbing wasteful spending and implementing structural reforms. The government should establish a sovereign wealth fund to manage state-owned enterprises. State-owned enterprises could be transferred under this sovereign wealth fund. Appoint qualified professional boards, and it would be their responsibility for the profitability. Malaysia’s Khazanah Nasional Berhad is a perfect example, as it transformed underperforming state-owned enterprises into profitable ventures. Moreover, a transparent privatization roadmap should be developed prioritizing loss-making, non-strategic state-owned enterprises. Proceeds must be used to pay off state-owned enterprise-related debts.
With regards to the subsidies and grants, the national socioeconomic registry should be used to provide subsidies only to the poorest households. Subsidy schemes like food and energy should leverage digital wallets or direct cash transfers (for example, the Ehsaas programme). It should also be made sure that the provincial and the national government programmes that provide people the money should be approved by the parliament.
Additionally, instead of the government choosing who sells the electricity, we should have companies bid for the right to sell it. The government should also let local areas or businesses run the companies that deliver electricity to homes and businesses. This could help reduce the amount of electricity that’s wasted, like in Turkey, where they let private companies handle electricity delivery. So what the government could do is gradually introduce new, smart electricity meters across the country. The smart thing to do would be to allocate funds under the Annual Development Plan to make sure that these smart meters can be used across the whole country.
Furthermore, the government must also introduce laws making sure everybody pays their fair share of taxes, and in order to do so, a simplified tax regime for small and informal businesses must be created. Brazil made it easier for small businesses to start and succeed by creating a simple tax system called ‘Simples Nacional’.
The government should strengthen existing fiscal rules to cap non-developmental spending and limit debt-to-GDP ratios. Also, to keep things transparent, the government should publish quarterly expenditure reports for public scrutiny. In order to achieve all this, give the power to the Auditor General of Pakistan to audit large public projects and publish relevant reports. For instance, India’s Fiscal Responsibility and Budget Management (FRBM) Act enforces fiscal discipline.
Moreover, private sector participation must be encouraged to evolve public-private partnership. Private sector involvement in infrastructure, healthcare, and education is essential for economic growth and development. This will also provide tax incentives for private investments. A case in point is Bangladesh’s private sector public-private partnership framework, which helped improve infrastructure investment by leveraging private sector expertise. In addition to this, the government should formulate a long-term debt management strategy, including limits on external borrowing and prioritizing concessional loans over market-based debt. A sturdy local bond market can be developed by introducing Sharia-compliant and long-term savings bonds to attract domestic investors. Ghana adopted a debt sustainability framework with IMF guidance, prioritizing concessional financing.
Legislation to reduce redundant public sector roles and link salary increments to performance evaluations should also be introduced. This legislation should also ask for providing voluntary retirement packages for excess staff. Additionally, legal frameworks to encourage trade with regional partners (for example, Central Asia, China, India) should be established. Vietnam signed regional trade agreements, majorly boosting its export sector.
While increasing tax revenues is essential, it is not a panacea for Pakistan’s fiscal challenges. The main culprit in all of this is unchecked government spending, which, if left unhandled, may bring more economic uncertainty in the country. To maintain long-term economic health and keep Pakistan from becoming a case study of fiscal mismanagement, a comprehensive strategy that prioritizes efficiency, fiscal responsibility, and expenditure control is needed.
