Pakistan has once again moved towards austerity. But before tightening the tap, we must ask a more fundamental question: where is the state leaking resources?
RESOURCE MANAGEMENT
Pakistan has once again moved towards austerity. But before tightening the tap, we must ask a more fundamental question: where is the state leaking resources?
A growing body of evidence suggests that Pakistan’s fiscal problem is not mainly about having too little revenue or too much spending. It is about how public resources are managed, allocated, and governed. Research at PIDE and elsewhere shows that inefficiencies, fragmentation and weak fiscal institutions, rather than simple scarcity, are at the core of the crisis. This distinction matters. Austerity without reform does not fix the problem; it slows growth and allows structural leakages to continue.
Consider Pakistan’s history of fiscal adjustment. When deficits widen, governments tend to cut development spending. This approach is convenient but economically flawed. Evidence from PSDP reform studies shows that the real problem is not excessive development spending but weak project selection, poor appraisal and the lack of completion and evaluation systems. Cutting PSDP without addressing these institutional failures reduces growth potential while maintaining inefficiencies. It is not consolidation; it is contraction.
The same pattern occurs in public financial management. Pakistan continues to borrow at high costs while leaving government balances idle across fragmented accounts. Research on Treasury Single Account (TSA) reforms shows that this is a coordination failure within the government, not a resource shortage. Countries that have adopted TSA systems, such as Indonesia and Nigeria, have significantly lowered borrowing costs by improving cash management. Pakistan’s own experience points in the same direction: fiscal space can be created through management reforms, without cutting spending or raising taxes.
Then there is the pension system, a silent but rapidly growing liability. Pakistan’s unfunded, pay-as-you-go pension structure is expanding without actuarial discipline. Studies published in PIDE warn that pension expenditures are on an unsustainable trajectory and will increasingly crowd out development spending. International experience shows that parametric reforms and hybrid contributory systems can restore sustainability. Without such reforms, austerity will merely postpone a deeper fiscal crisis.
Equally important are tax expenditures, the exemptions, concessions and preferential treatments embedded within the tax system. These are effectively hidden subsidies. Evidence confirms that they narrow the tax base, distort incentives and disproportionately benefit well-connected sectors. Rationalising these expenditures offers a non-distortionary path to revenue mobilisation. Yet policy continues to rely on raising tax rates on already compliant sectors, further discouraging formalisation.
At the core of these issues lies governance. Pakistan’s fiscal problem is institutional, not incidental. Weak transparency, limited accountability and the absence of performance-based incentives undermine the effectiveness of public spending. Work on fiscal federalism highlights that intergovernmental transfers lack enforcement mechanisms and performance linkages. This is consistent with global evidence: countries that strengthen fiscal institutions, through rules, transparency and accountability, achieve more durable consolidation.
Pakistan’s fiscal challenge is real, but it is also solvable. The solution does not lie in tightening the tap alone. It lies in fixing the leaks, quiet, persistent and deeply embedded in the system.Until that is done, austerity will remain a blunt instrument
Beyond the budget, quasi-fiscal losses continue to drain resources. Circular debt in the energy sector has exceeded Rs1.69 trillion, reflecting pricing distortions and governance failures. State-owned enterprises (SOEs) impose annual losses and contingent liabilities estimated at over 1–2 per cent of the GDP. Commodity operations, particularly in wheat and sugar, create recurring fiscal burdens. These are not unavoidable expenditures; they are policy choices. Reforming these areas can significantly reduce fiscal pressure without imposing additional burdens on citizens.
Tax reform, too, requires a strategic shift. The objective should not be to increase rates, but to expand the base and reduce distortions. Large segments of the economy, such as agriculture, real estate, retail and the informal sector, remain undertaxed. Property tax reform alone could yield up to 1 per cent of GDP, while effective taxation of agricultural income could generate an additional 1–1.5 per cent. These are substantial gains, achievable through political will rather than economic sacrifice.
When these elements are combined, better expenditure management, improved cash coordination, pension reform, rationalised tax expenditures, governance strengthening and base-expanding tax reform, the picture changes fundamentally. Fiscal space begins to emerge from within the system itself. Empirical evidence suggests that such reforms can generate both immediate savings and long-term sustainability.
The implication is clear. Pakistan does not face a simple choice between austerity and crisis. There is a third path: reform-led consolidation. This approach prioritises fixing structural weaknesses before imposing broad-based cuts. It recognises that fiscal discipline is not just about numbers but about institutions.
Austerity, when applied prematurely, can be counterproductive. It reduces aggregate demand, slows growth and undermines development outcomes, especially in a low-growth, high-poverty context. Evidence from past IMF programmes shows that expenditure compression without structural reform often leads to short-lived gains and repeated adjustment cycles.
This is why sequencing matters. Reform first, austerity later, if needed. By addressing inefficiencies, Pakistan can create fiscal space without sacrificing growth. By strengthening institutions, it can ensure that public resources are used effectively. And by broadening the tax base, it can enhance both revenue and equity.
The debate, therefore, should not be about whether austerity is necessary. It should be about whether the state is willing to confront its own inefficiencies. Cutting spending is politically easier than reforming systems. Raising taxes is simpler than broadening the base. But easy choices rarely produce lasting solutions.
Pakistan’s fiscal challenge is real, but it is also solvable. The solution does not lie in tightening the tap alone. It lies in fixing the leaks, quiet, persistent and deeply embedded in the system. Until that is done, austerity will remain a blunt instrument, addressing symptoms rather than causes. Fiscal reform is not an alternative to austerity. It is a prerequisite.
The writer is a professor of economics at the Pakistan Institute of Development of Economics (PIDE). He can be reached at: [email protected]
