In an April 2025 released report by World Bank Group (WBG) titled ‘South Asia Development Update: Taxing Times’, some of the main aspects of the taxation situation in Pakistan, among a number of other countries, have been discussed primarily, while other macroeconomic-, and economic growth-related indicators have also been highlighted.
The Report points out in this regard ‘Only Pakistan’s tax buoyancy falls in the bottom quartile of EMDEs [Emerging Market and Developing Economies], suggesting a reliance on taxation of slow-growing economic activities. … In all South Asian countries other than Bhutan and Pakistan, 1greater shares of tax revenues are generated by consumption taxes – such as sales tax, excise taxes, and VAT– and trade taxes than in the average EMDE, with smaller shares derived from income taxes… is relatively high dependence on trade and consumption tax revenues limits the region’s revenue potential, undermines the equity of the tax system because of the regressive nature of consumption taxes, and creates disincentives to trade.
Pakistan, Sri Lanka, and Bangladesh– the three South Asian countries with the lowest overall revenue-to-GDP ratios– also have much lower tax revenue-to-GDP ratios compared with other EMDEs with similar tax rates in all categories of taxes.’
While the Report highlights important aspects of the tax situation in the country, it does not highlight the impact of over-board austerity policies as one of the main reasons for lower tax collection, which significantly impact economic growth, and taxation in a negative way.
This is because, over-board application of both monetary, and fiscal, austerity policies disproportionately impact economic growth in a negative way, given it reduces inflationary pressures by over-squeezing aggregate demand, while little focus is given on removing bottlenecks that hamper aggregate supply, which is at least equal determinant of inflation, especially in developing countries like Pakistan that neither have deep financial sector, nor is per capita income so high that people can purchase otherwise expensive imported products.
Hence, lack of emphasis on curtailing the cost-push, and imported inflationary channels in turn, leading to need for all the more growth sacrifice to at most short-term reduction in inflation, given economic institutional determinants on the supply side are not improved, that neither allow much-needed increase in import substitution, nor lead to meaningful enhancement of exports, which overall means that as soon as austerity policies are curtailed, the economy starts to heat up, resulting in enhancement of the twin deficit. This ultimately, over a long period now has kept the country in a frequent boom-bust cycle.
Therefore, economic growth for most of the last many years has been stuck in a low growth equilibrium; hovering around the population growth rate of around 3 percent. The recent over-board austerity policies have meant that economic growth is hardly going to make any significant comeback over the next two years.
Resultantly, people have little money left after consumption to either save, or invest, which are in turn important determinants of not only economic growth, but increase in economic growth from enhancement in import substitution industry, or from overall increase in the aggregate supply of the country. Hence, this lopsided taxation produces in general hardship for the people, while consumption-based taxation increases the price of intermediaries, which not only negatively impact in terms of cost-push inflation for consumers, but also increase cost of doing business that hurts production process, and in turn, economic growth.
Hence, the Report highlights in this regard ‘In Pakistan, GDP [Gross Domestic Product, or simply, national income] grew by 2.5 percent in FY23/24, after a small contraction in FY22/23. …Economic growth is projected to continue gradually gathering strength, rising to 2.7 percent in FY24/25 and 3.1 percent in FY25/26.’ Similar projections for real GDP have been given by the International Monetary Fund in its May 9 press release, whereby for the current-, and next fiscal years it stood at 2.6 percent, and 3.6 percent, respectively.
Lower economic growth, in turn, negatively impacts tax collection, for both sides of income-, and consumption taxes. At the same time, the Report rightly highlights the country’s commitment with the IMF, in the current Extended Fund Facility (EFF) programme that it is going to significantly increase tax as a percentage of GDP over the course of the 37-month EFF programme, which began in the last week of September 2024. The Report points out the programme commitment as ‘In Pakistan, the government has committed to raising tax revenues by the equivalent of 4–5 percentage points of GDP…’
Given the expected slow pace of increase in economic growth this seems to be a very difficult task, because there has already been a lot of austerity thrust – for instance, policy rate is still 11 percent, while inflation is less than 1 percent, and as per the IMF, average consumer prices over the current fiscal year is likely to 5.1 percent, not to mention that around a little over a month is left for the fiscal year to end – and without significant application of counter-cyclical policies, along with drastic economic reforms on reducing supply-side bottlenecks like, for instance, very high energy costs, it is hard to see any fast-paced increase in economic growth over the next few years, and in turn, there will be little impetus to enhancement in taxation from high level of economic growth.
Another important issue is the very composition of taxation, in terms of being highly regressive, whereby most taxes are placed on consumption, while incomes are either not taxed, or the tax rate is too little, for some important sectors of the economy like retail, and real estate, which otherwise have a lot of contribution to national income. Instead, the salaried class is taxed a lot, which means that people have lower purchasing power, and real incomes strongly appear to have been falling for a number of years now overall.
Resultantly, people have little money left after consumption to either save, or invest, which are in turn important determinants of not only economic growth, but increase in economic growth from enhancement in import substitution industry, or from overall increase in the aggregate supply of the country. Hence, this lopsided taxation produces in general hardship for the people, while consumption-based taxation increases the price of intermediaries, which not only negatively impact in terms of cost-push inflation for consumers, but also increase cost of doing business that hurts production process, and in turn, economic growth.
