As Pakistan enters another budget cycle, all eyes are on the current finance leadership and the Sharif administration. The challenge is clear: transitioning from economic stabilisation to long-term, inclusive growth. While the first year under the new International Monetary Fund (IMF) programme has generally met expectations, the real litmus test begins now—with the next two to three years proving crucial.
Despite notable geopolitical gains and improved national security amidst regional unrest, Pakistan’s core challenge remains economic. The margin for error is razor-thin. Structural economic reforms—especially improving the tax-to-GDP ratio, which currently stands at just 10.6%—are critical to the country’s financial future. The government has set a target of 11%, but without transformative policies, this goal will remain elusive.
Tax Reform: Toward Fairer Burden Sharing
Thus far, the tax system has heavily penalised already compliant sectors while ignoring the vast informal economy. Expanding the tax net is no longer optional—it’s imperative. Greater fiscal inclusion means bringing untaxed retail and informal sector players into the fold.
Among the hardest-hit groups is the salaried class, which has endured what can only be described as a quadruple shock:
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Currency depreciation has reduced the real value of income.
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Income taxes have risen despite falling real earnings.
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Economic stagnation has resulted in fewer job opportunities.
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Indirect taxes and higher utility costs have slashed disposable income.
This burden has made daily life increasingly unaffordable for millions of lower and middle-class citizens.
Empowering the Middle Class: A Path to Growth
With over 40% of Pakistan’s population now living below the poverty line, the middle and lower classes together represent more than 200 million people. In developed economies, this segment fuels both productivity and consumer demand. Pakistan must follow suit.
Offering targeted tax relief to the salaried class isn’t just a policy of compassion—it’s smart economics. Individuals in this segment have a higher marginal propensity to consume, meaning they spend a larger portion of their income. Tax relief would boost consumption, stimulate demand, and generate a positive feedback loop of growth and tax revenue. Moreover, with increased savings, the cost of borrowing could fall for both public and private investment.
Incentivising formal employment through a lower effective tax burden also encourages entrepreneurship and job creation, especially in small and medium enterprises (SMEs).
Rewriting the Political Economy of Reform
Pakistan’s current tax rates—both corporate and salaried—rank among the highest in the region, stifling competitiveness and business confidence. A bold, reform-oriented vision is urgently needed.
While the IMF may be skeptical of Laffer Curve-inspired claims that lower taxes could increase revenues, Pakistan can still make a compelling case for change—if backed by credibility and action. A robust reform package should include:
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Swift privatisation of state-owned enterprises like PIA
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Broadening the tax base, especially targeting the retail sector
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Introducing higher capital gains taxes for real estate speculation
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Delegating agricultural tax collection to provinces to ensure that landowning elites contribute fairly
Absent these reforms, Pakistan risks perpetuating a model where military strength outpaces economic capability. In the 21st century, true sovereignty isn’t just about strategic power—it’s about sustainable economic independence.
