Pakistan’s 2024–25 Budget: An Analysis
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Ashish Shukla
Dr Ashish Shukla is Associate Fellow at MP-IDSA, New Delhi. Prior to joining MP-IDSA, Dr. Shukla was associated with Amity University, Noida where he taught courses in Defence & Strategic… Continue reading Pakistan’s 2024–25 Budget: An Analysis read more
Keywords: Pakistan
Pakistan’s Finance Minister Muhammad Aurangzeb presented an ambitious PKR 18.9 trillion finance bill1 in the National Assembly on 12 June 2024. This was passed after due deliberation and minor amendments on 28 July 2024.2 While acknowledging the challenges before the economy in terms of depleting foreign reserves, continuous depreciation of its currency, stagnant economic growth and soaring inflation, he also underlined the slightly improved economic outlook of late3 due to inflows of funds from outside.
The budget aims at a modest 3.6 per cent GDP growth for Fiscal Year 2024–2025 with a whopping tax collection target of PKR 13 trillion, 40 per cent higher than last year’s target, which requires additional revenue measures at least to the tune of PKR 2 trillion. Direct taxes are increased by 48 per cent, whereas indirect taxes have gone up by 35 per cent. Besides, the budget intends to generate PKR 3.5 trillion from non-tax revenue and PKR 30 billion from privatisation. Compared to last year, the total outlay, a sum total of expenditure and net lending, has increased by 30 per cent and now stands at PKR 18.877 trillion.
Source: Business Recorder
Debt servicing forms the single largest component of the expenditure and consumes more than half of the total budget outlay amounting to PKR 9,775 billion. This is distantly followed by expenditure on Defence4 excluding pensions amounting to PKR 2,122 billion, Grants and Transfers to Provinces PKR 1,777 billion, and Development Spending and Net Lending PKR 1674 billion. PKR 1363 billion is earmarked under the head of Subsidies, followed by PKR 1152 billion allotted to the running of civil government & emergency provision, whereas PKR 1014 billion is meant for Pensions.5
The claims about right-sizing the government falls flat in the absence of any tangible policy measures.6 The expenditures have actually gone up by 21 per cent. The attempt to ensure fiscal consolidation may have its utilities to deepen stability, sustainable economic recovery remains a dream as it continues to depend upon outside inflows. Zahid Hussain terms the entire exercise of the Finance Minister as “Budgetary Jugglery”7 whereas Najam Sethi feels that the new budget is going to adversely impact the take home money for the people which would lead to lesser demands in the market.8
Table 1 shows the major components of the Pakistani budget over the last five years. Debt servicing and spending on defence have been constantly growing. Interest payments increased to PKR 9,775 billion in 2024–25 from PKR 2,964 in 2020–21. Similarly, spending on Defence has gone up to PKR 2,122 billion in 2024–25 from PKR 1,289 in 2020–21. Net external receipts increased from PKR 810 billion in 2020–21 to PKR 2,724 billion in 2023–24, but decreased to PKR 666 billion in 2024–25. Spending on federal Public Sector Development Programme (PSDP) has increased from PKR 650 billion in 2020–21 to PKR 1,400 billion in 2024–25.
(All Figures are in PKR in billion)
Budget
Receipts
Expenditure
Total Outlay
Tax Revenue
Net External Receipts
Interest Payments
Defence
PSDP
2020-21
7,137
5,464
810
2,964
1,289
650
2021-22
8,487
5,829
1,246
3,060
1,370
900
2022-23
9,579
7,470
1,611
3,950
1,563
727
2023-24
14,484
9,415
2,724
7,303
1,804
950
2024-25
18,877
12,970
666
9,775
2,122
1,400
Source: Compiled from Pakistan’s Federal Budgets, Respective Years.
Key Economic Woes
Pakistan, at present, is in the firm grip of a multifaceted crisis that requires long-term systemic and structural reforms at various levels to address the existing lacunas. There exists a near consensus among Pakistan observers and analysts that the country needs systemic changes instead of short-term measures. This was acknowledged by Finance Minister Muhammad Aurangzeb himself during his budget presentation when he cautioned the House that progress could not be made overnight and one would have to have patience and make collective efforts to achieve required and sustainable economic growth and development. He went on to argue that government was looking to broaden the tax net in a way that does not burden the existing tax payers.
As the house debated the budgetary provisions, Aurangzeb termed the budget as growth budget and stated it is based on a well thought out homegrown strategy to boost economic growth.9 He further claimed that the budget was aimed to expand revenues, cut unnecessary expenditures and narrow the fiscal deficit.10 It is in this context one needs to situate the increased tax collection target for Federal Bureau Reserve (FBR) in the budget.
Problem of Taxation
Tax to GDP ratio is an important parameter to assess the capacity of a state to mobilise resources to fuel growth and development. The Pakistan Economic Survey 2021–22 notes that the Tax to GDP ratio is the real index to measure tax compliance, capacity and efficiency in the tax system.11 A higher Tax to GDP Ratio allows the government to tap domestic resources to meet developmental expenditures and decreases its reliance on external sources. As per the World Bank, Tax to GDP Ratio above 15 per cent is ‘an important tipping point to make a state viable and put it on a path to growth’.12
In Pakistan, the Tax to GDP ratio has historically been abysmally low. In the last six years, the Federal Bureau of Reserve’s (FBR) Tax to GDP ratio hovered between 8.4 to 9.8 per cent.13 The situation is not improving much despite the fact that Pakistan remains the most heavily taxed country in the entire region.14 Unlike in industrialised and other developed countries with higher Tax to GDP Ratios, Pakistan heavily relies on indirect taxes compared to direct taxes that form a meagre share of the overall revenue.
The taxation system also has a range of exemptions that costs the economy dearly. In 2022, the tax exemptions were recorded at PKR 1.757 trillion which increased to PKR 3.9 trillion in 2023. Notwithstanding, the affluent class, super rich, landed elites and other powerful sections find ways to exploit loopholes to evade taxes. Pakistan has a poor Tax to GDP ratio due to a number of reasons including “a narrow tax base, massive evasion and avoidance, lack of effective enforcement, poor documentation, exemptions/concessions, and fragmentation across provinces”.15
Contrary to claims made by the Finance Minister, the budget fails to introduce major reforms to broaden the tax base. Instead of widening the tax net, the budget burdens the existing tax payers, especially the salaried class. About five million out of a total 240 million Pakistanis pay direct taxes which on one hand reflects administrative inefficiency and on the other epitomizes a systemic crisis.16 Heavy reliance on indirect taxes makes the fiscal system regressive and places the burdens uniformly on all consumers irrespective of their economic status in the society.
The average annual growth in taxes during last five years had been recorded at around 20 per cent. However, as per the new budget, it has gone up to 30 per cent this time. Although, the government has set a high target for tax collection, many in Pakistan doubt FBR’s capacity to achieve the “tax miracle”.17 Instead of resorting to structural reforms, the government is going to squeeze those already in the tax bracket. The budget aims to address certain concerns of IMF so that it could secure a new programme of US$ 6–8 billion to avoid economic default in near term. Key among those concerns related to increasing FBR tax collection and reducing consolidated budget deficit. The IMF appears to be somewhat satisfied with the budget as it has reached a staff level agreement on 12 July 2024 for an Extended Fund Facility (EFF) amounting US$ 7 billion for a period of 37 months.18
Unchecked Inflation
Inflation is another area that needs proper attention by those framing economic policies in the country. Pakistani people have been suffering from the longest and the most intense form of inflation. Ever since May 2022, the inflation rates surged above 20 per cent. By May 2023, the inflation had reached a record high of 38 per cent. After that, a slowdown was recorded and it took almost a year when inflation came down to 20 per cent. At present, it stands at 12.6 per cent which is higher than the last month’s recorded data at 11.8 per cent.
Source: Business Recorder
Situations like these, if got unchecked, could potentially lead to unforeseen consequences including civil unrest. Khurram Hussain in his recent Op-ed in Dawn English daily argued that:
The inflation engulfing the country is no longer just an economic problem. It is a danger to the social order. It is not clear when a tipping point will be reached, nor what it will trigger if and when it does arrive.19
Instead of widening the tax net, the budget burdens the existing tax payers, especially the salaried class. About five million out of a total 240 million Pakistanis pay direct taxes which on the one hand reflects the administrative inefficiency and on the other epitomizes a systemic crisis. Heavy reliance on indirect taxes makes the fiscal system regressive and places the burdens uniformly on all consumers irrespective of their economic status in the society. The average annual growth in taxes during last five years had been recorded at around 20 per cent. However, as per the new budget it has gone up to 30 per cent this time. Although, the government has set a high target for tax collection, many in Pakistan doubt FBR’s capacity to achieve the “tax miracle”.
Conclusion
The budget lacks major reforms to address the root cause of Pakistan’s economic mess. At a time when everyone was hoping for certain structural reforms to broaden the tax net and downsizing exemptions to the bare minimum to put the economy back on track and provide relief to the people suffering from intense bouts of inflation, Pakistan resorted to a window-dressing approach. Finance Minister Muhammad Aurangzeb seems to have pieced together the ingredients of the same old recipe in hope of serving a new dish altogether. This was probably done to address certain concerns raised by IMF in recent past. While this has helped Pakistan reach an agreement with the IMF for US$ 7 billion EFF for a period of 37 months, it will not change the economic situation on the ground.
Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.