Pakistan's upcoming federal budget is set to lay bare an economy trapped by prolonged stabilisation policies, chronically weak revenue generation, and deepening dependence on externally driven reforms, according to a recent economic analysis by Sakib Berjees. The report warns that without major structural recalibration, Pakistan risks settling into a low-growth equilibrium with little prospect of near-term reversal.

Stabilisation Over Transformation

The analysis argues that Pakistan's economic model has become almost entirely centred on managing constraints rather than engineering long-term growth. Annual budgets, it contends, have ceased to function as instruments of transformation and instead operate as exercises in damage limitation — a pattern that has persisted across multiple administrations and IMF programme cycles.

This comes amid Pakistan's ongoing engagement with the International Monetary Fund (IMF), which has conditioned successive tranches of support on fiscal consolidation measures. Critics argue that while stabilisation has kept a balance-of-payments crisis at bay, it has also suppressed domestic demand and delayed structural reform.

The Tax-to-GDP Problem

A central concern in the analysis is Pakistan's persistently low tax-to-GDP ratio, which hovers at around 10–11 per cent — among the weakest for comparable emerging economies. The report argues this structural shortfall has forced the government to lean disproportionately on salaried individuals and formal-sector businesses for revenue, placing an outsized burden on documented, productive segments of the economy while leaving broader pools of wealth effectively under-taxed.

The erosion of middle-class purchasing power compounds the problem. According to the analysis, a monthly income of around Rs 100,000 — considered solidly middle class in 2017 when the Pakistani rupee traded near Rs 100 to the US dollar — now buys significantly less, with the currency close to Rs 300 per dollar and living costs sharply higher. Despite this shift, tax exemption thresholds have not kept pace with inflation, resulting in what the report describes as structural over-taxation of fixed-income earners.

The analysis recommends revising the annual tax exemption threshold to approximately Rs 1.2 million to better reflect current economic realities. Notably, it argues such an adjustment need not reduce overall revenues if the government simultaneously redistributes the tax burden through calibrated indirect taxation in sectors capable of generating compensatory revenues without disproportionately hurting households.

Petroleum Levy and Fiscal Federalism

The petroleum levy — which has risen to approximately Rs 117 per litre, well above earlier IMF-associated benchmarks — emerges as another flashpoint. Because the levy falls outside the National Finance Commission's (NFC) divisible pool, it creates a parallel stream of federal revenue that bypasses provincial revenue-sharing arrangements.

The analysis argues this structure raises serious questions about fiscal transparency and the integrity of Pakistan's federal compact. Increasing reliance on such centrally retained levies, it warns, weakens the constitutional relationship between taxation and representation. The report calls for greater parliamentary scrutiny and the integration of such levies into a more transparent federal revenue-sharing framework.

What the Budget Must Address

Taken together, the analysis paints a picture of a fiscal architecture that is increasingly misaligned with economic realities on the ground. The upcoming budget, according to the report, faces a narrow path: it must manage IMF conditionalities, prevent further erosion of middle-class incomes, broaden the tax base, and restore credibility to federal revenue-sharing — all simultaneously.

Whether Islamabad's policymakers can thread that needle will determine whether Pakistan's next budget marks a genuine inflection point or another round of managed decline.