Budget 2026-27: Fiscal turnaround or statistical illusion?

The recently issued Mid-Year Budget Review for fiscal year (FY) 2025-26 projects what at first glance appears to be a remarkable improvement in Pakistan’s fiscal position. 

The headline numbers show that during July-December 2025, the consolidated fiscal balance moved from a deficit of Rs1.538 trillion (1.3% of GDP) in the corresponding period of FY2024-25 to a surplus of Rs542 billion (0.4% of GDP). On paper, this represents an extraordinary turnaround of over Rs2 trillion within six months.

Yet, beneath the celebratory narrative lies a more troubling reality. A careful reading of the numbers confirms that the apparent fiscal stabilisation is not the outcome of structural reforms, productivity enhancement, broadening of the tax base, or prudent developmental planning. 

Rather, it is primarily the product of three temporary and deeply problematic factors: a sharp reduction in interest payments due to lower policy rates, aggressive extraction through the petroleum levy, and chronic under-spending on development.

The Review reveals that net federal receipts increased from Rs5.888 trillion to Rs6.392 trillion, posting a growth of 8.6%. Within this amount, Federal Board of Revenue (FBR) collections rose from Rs5.625 trillion to Rs6.161 trillion. 

However, a substantial part of this increase came not through documentation of the economy or expansion of productive sectors, but through an almost 50% rise in petroleum levy collections — from Rs549 billion to Rs823 billion. 

In simple terms, the government improved its fiscal position not by reforming governance structures or improving tax administration, but by squeezing consumers through higher indirect taxation on fuel.

...the government improved its fiscal position not by reforming governance structures or improving tax administration, but by squeezing consumers through higher indirect taxation on fuel.

This pattern is equally visible on the expenditure side. Federal expenditure declined by 14.3%, falling from Rs8.201 trillion to Rs7.030 trillion. 

The lion’s share of this reduction came from lower debt servicing costs, which fell by 30.7%, from Rs5.142 trillion to Rs3.564 trillion. This decline was largely linked to the reduction in policy rate by the State Bank of Pakistan (SBP) and early retirement of some expensive domestic debt.

Simultaneously, developmental spending remained severely restricted, with Public Sector Development Programme (PSDP) utilisation at merely Rs238 billion — just 23.8% of the annual allocation of Rs1 trillion. Therefore, while the fiscal turnaround is numerically real, it rests on fragile and regressive foundations rather than genuine economic restructuring.

This is not the first time Pakistan has witnessed what may be called “optical stabilisation.” Over the last two decades, successive governments have repeatedly relied on indirect taxation, suppressed development expenditure, blocked refunds and short-term fiscal engineering to create the impression of stabilisation while structural distortions deepened underneath. The so-called increase in revenues often masks stagnation in real terms once inflation is accounted for.

The FBR chairman himself recently conceded before the National Assembly Standing Committee on Finance that inflation-adjusted tax collection has remained virtually stagnant since 2008. This admission alone demolishes the official narrative that Pakistan’s fiscal crisis is being solved through improved tax administration.

The reality is that citizens are paying more taxes in nominal terms because inflation, utility prices and indirect levies have skyrocketed — not because the economy has expanded or tax compliance has improved.

....citizens are paying more taxes in nominal terms because inflation, utility prices and indirect levies have skyrocketed — not because the economy has expanded or tax compliance has improved.

The present fiscal “improvement” also exposes the dangerous overreliance on the petroleum levy. This levy, imposed outside the divisible pool, deprives provinces of their constitutional share under the Seventh National Finance Commission (NFC) Award.

It has become an instrument of fiscal extraction that shifts the burden onto ordinary citizens while bypassing the spirit of fiscal federalism embedded in Articles 160 and 161 of the Constitution. 

Earlier analyses have already demonstrated how successive governments have deliberately maintained zero-rating of sales tax on petroleum products to maximise collections through the petroleum levy.

The consequences are devastating. Every increase in petroleum levy raises transport costs, electricity tariffs, agricultural input prices and industrial production costs. Ultimately, inflation intensifies and purchasing power collapses. The burden falls disproportionately on salaried classes, labourers, small businesses and transport-dependent sectors of the economy.

Equally alarming is the continued neglect of development expenditure. A PSDP utilisation of only 23.8% midway through the fiscal year reflects not fiscal discipline but developmental paralysis. Governments in Pakistan routinely slash development spending to meet IMF-imposed primary surplus targets. The result is visible everywhere: collapsing infrastructure, declining public services, unemployment, poor educational outcomes and widening regional disparities.

This obsession with achieving accounting targets while sacrificing development has converted the state into a mechanism of extraction rather than welfare. The Constitution envisages a social state committed to equitable growth, reduction of inequality and provision of basic rights. Instead, fiscal policy is increasingly designed around satisfying external lenders and maintaining debt repayment capacity.

Pakistan’s debt trap itself remains the central issue. Debt servicing alone still consumes over Rs8 trillion annually, crowding out spending on education, health and productive investment. Although recent reductions in interest rates have temporarily eased the burden, the underlying debt stock continues to grow. This means the present relief may prove short-lived if external shocks, exchange rate pressures or renewed inflation force rates upward again.

The real tragedy is that despite unbearable taxation and repeated IMF programmes, Pakistan has failed to undertake fundamental structural reforms. The informal economy remains undocumented. Agricultural income taxation is negligible. Wealth taxation is absent. Massive tax expenditures and privileges enjoyed by powerful elites continue untouched. State-owned enterprises remain loss-making. Government expenditure remains extravagant and inefficient.

Meanwhile, the formal sector — especially salaried classes and documented businesses — continues to bear a disproportionate burden. 

The way forward cannot be endless extraction through indirect taxes and cosmetic fiscal adjustments. Pakistan urgently requires a new fiscal and economic framework rooted in constitutional political economy and inclusive growth.

The way forward cannot be endless extraction through indirect taxes and cosmetic fiscal adjustments. 

The focus must shift from taxation for debt servicing towards taxation for development. Lower, predictable and broad-based taxes are essential for investment and growth. Petroleum levy and pass-through withholding taxes should be rationalised. Development expenditure must be protected rather than sacrificed. Wasteful state expenditure should be drastically curtailed. Productive sectors, especially agriculture, small and medium enterprises (SMEs), exports and technology-driven industries, need incentives and affordable energy.

Most importantly, Pakistan requires institutional restructuring of its fragmented tax system through the establishment of a National Tax Agency and a harmonised taxation framework, as repeatedly proposed in earlier writings. Without integration of federal and provincial tax structures, simplification of laws, elimination of discretionary powers and expansion of the documented economy, fiscal stabilisation will remain illusory.

The present mid-year fiscal surplus may temporarily satisfy international lenders and financial markets, but it does not reflect genuine economic health. A country cannot achieve sustainable prosperity by suppressing development, burdening consumers and depending upon temporary interest-rate relief. Unless Pakistan undertakes bold structural reforms and reorients fiscal policy towards production, equity and constitutional federalism, these periodic “turnarounds” will continue to be statistical mirages masking a deepening economic and social crisis.

Abdul Rauf Shakoori is a corporate lawyer based in the US and an expert in ‘White Collar Crimes and Sanctions Compliance’. 

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.