Deficit gains mask a weakening economy

Pakistan’s progress in reducing its twin deficit may be hiding a deeper weakness. The article argues that the deficit is an indicator of structural economic fragility, not the cause of it.

At a recent Asian Development Bank dialogue on fiscal sustainability, experts and policymakers discussed the country’s macroeconomic trajectory. Pakistan’s twin deficit has fallen from 12.2% of GDP to 2.6% over the past decade, suggesting fiscal consolidation. Yet that stabilization has not translated into sustained economic prosperity or higher industrial productivity.

The article says demand-contraction measures have repeatedly pushed the real economy into recession after modest gains in the tax-to-GDP ratio. Federal Board of Revenue collections have risen above 10% of GDP, from 8.3% two years ago. But the pursuit of ambitious revenue targets has taken priority over growth and productivity, leaving businesses increasingly reluctant to expand.

The ratio could exceed 11% if the petroleum development levy is counted as a tax, although the article notes that it is not constitutionally classified as one. Including non-tax government revenue and provincial tax collection could put overall public revenue near 15% of GDP. Higher ratios, however, do not automatically improve social services or reduce reliance on handouts.

The proposed alternative is tax rationalization based on broad coverage and low rates, with predictable and market-neutral rules. The article points to property taxation as a major area for reform: property tax revenue stands at 0.3% of GDP, compared with international benchmarks of 0.6% and a potential 1.0%. Reaching that potential would require transparent valuation reforms and greater fiscal autonomy for local governments.