Zafar Iqbal
The accepted wisdom in Pakistan’s economic policymaking circles has treated fiscal distress as a tax collection problem. This is wrong. A fresh analysis cited by former caretaker commerce minister Gohar Ejaz reveals what economists have long known: ballooning government expenditure has repeatedly outpaced revenue gains, reducing higher taxes to a stopgap while debt continues to mount. Pakistan faces an expenditure crisis. Runaway state spending, not taxpayer failure, is pushing public debt to unsustainable levels and exposing the limits of the government’s current economic playbook.
Recently released data by the Economic Policy and Business Development think tank that Ejaz chairs decisively dismantles the notion that fiscal troubles stem from inadequate taxation. Between fiscal year 2015 and fiscal year 2025, tax revenue expanded by an extraordinary 302 percent, from Rs 2.91 trillion to Rs 11.7 trillion. This outcome was driven by successive tax hikes, the withdrawal of exemptions and a regressive tax regime that repeatedly targets the same narrow, documented segments of the economy while leaving large swathes undertaxed. Yet even allowing for persistent under-taxation and the dominance of undocumented economic activity, problems that unquestionably require urgent correction, the public debt trajectory over the same decade makes it clear that our fiscal crisis has been fueled far more by the scale and structure of government spending. Public debt rose by a staggering 365 percent from Rs 17.3 trillion to Rs 80.5 trillion, inflating debt servicing costs and decisively outpacing revenue growth.
These figures expose a disturbing distortion at the heart of Pakistan’s public finances. Each extra rupee extracted in taxes is matched by Rs 7.2 in new borrowing. In absolute terms, this amounts to tax receipts rising by Rs 8.79 trillion while total debt soared by Rs 63.2 trillion. This imbalance has only hardened in recent times. Over the past three years, domestic debt servicing has emerged as the single largest source of expenditure growth, steadily squeezing development spending and choking off productive investment. This is precisely the kind of spending needed to arrest the debt spiral.
Debt accumulation need not be destabilizing if deployed strategically. Borrowing used to finance growth-enhancing infrastructure, build human capital or expand the economy’s productive capacity in ways that generate future returns can strengthen a nation. In Pakistan, however, an increasing share of borrowing is consumed simply to service past liabilities. What little room remains is further devoured by other non-development expenditures. Government departments routinely overshoot their budgets. An entrenched reluctance to rein in lavish state spending persists. The pensions bill continues to expand. A governance framework structurally encourages higher spending.
Civil administration remains overstaffed and poorly streamlined. Ministries that should have been devolved to the provinces under the 18th Amendment continue to function at the federal level, entrenching inefficiency and inflating government spending. Austerity drives are announced with much fanfare but rarely have they been matched by the political will required to cut wasteful spending or enforce meaningful fiscal discipline. Adjustment remains cosmetic while the underlying fiscal rot deepens.
The government announces belt-tightening measures. The government promises reform. The government claims progress. Yet the expenditure continues unchecked. The borrowing accelerates. The debt compounds. This pattern repeats year after year, administration after administration, budget after budget. The rhetoric changes but the reality remains constant: Pakistan spends far more than it earns and bridges the gap through borrowing that enriches creditors while impoverishing citizens.
Consider what this means for ordinary Pakistanis. Higher taxes extract more from the formal economy. The informal economy remains untaxed. The documented sectors bear increasing burdens. Meanwhile government departments expand their budgets, civil servants enjoy lavish perks, federal ministries refuse devolution and pensions consume growing shares of revenue. The taxpayer funds this profligacy through higher rates while the state borrows to cover the remainder. The cycle is vicious and accelerating.
Continued reliance on higher taxes without reining in public spending will only further shrink the formal sector, weaken export competitiveness and deter both domestic and foreign investment. Businesses facing mounting tax burdens will either relocate, shut down or join the informal economy. Foreign investors will avoid a country where tax rates rise perpetually while infrastructure crumbles and governance deteriorates. Domestic capital will flee to safer havens. The formal economy will contract precisely when Pakistan needs expansion.
The reality is clear: sustainable economic recovery depends on sharply reducing borrowing and dismantling the entrenched culture of profligacy within government. Breaking the seemingly endless cycle of borrowing, debt servicing and revenue shortfalls is essential to restore long-term fiscal stability. The government must realize that meaningful austerity that enforces genuine spending discipline and reforms inefficiencies is the only viable path forward.
This requires political courage the current leadership has not demonstrated. Cutting wasteful spending means confronting powerful bureaucratic interests. Devolving federal ministries means reducing central government control. Streamlining civil administration means eliminating positions and privileges. Reforming the pension system means challenging entrenched expectations. These reforms will generate resistance from those who benefit from the current system. But without such reforms, Pakistan’s debt burden will continue growing until the entire edifice collapses.
The expenditure crisis is not a secret. The data is public. The analysis is sound. What remains absent is the political will to act on what everyone already knows. Pakistan must cut spending or face economic catastrophe. There is no middle path. There is no gradual adjustment. There is only the choice between difficult reforms now or complete collapse later.
