Fiscal consolidation has two sides: how the state raises resources, and how it spends them. In an earlier discussion in these pages (‘Rethinking Pakistan’s Fiscal Model’, June 1), the focus was on the architecture of taxation, incentives, documentation and the broader quality of revenue mobilisation. But durable fiscal adjustment cannot come from taxation alone. The expenditure side of the state’s balance sheet is equally important.
Pakistan’s Budget FY27 debate on expenditure should therefore begin with a series of fundamental questions before turning to specific reform proposals.
Is the expenditure model aligned with post-18th Amendment realities and with clearly defined federal responsibilities? Is the PSDP creating productive national assets or fragmented, politically driven projects with limited economic impact? Are pension obligations fiscally sustainable without structural reform? Are subsidies genuinely protecting vulnerable households, or are they increasingly fiscalising inefficiency through tariff-differential subsidies and circular debt?
Equally important are questions such as: should federally financed poverty alleviation and income support programmes gradually move towards greater provincial co-financing after the 18th Amendment? Is recurrent expenditure steadily crowding out investment in infrastructure, technology, and human capital? Does public spending rationalise the state’s footprint and focus government on core functions? And are state-owned enterprises (SOEs) creating public value or continuously absorbing scarce fiscal resources? These questions matter because Pakistan’s fiscal challenge is increasingly a question of expenditure quality, prioritisation, institutional efficiency and the long-term composition of public spending.
Addressing these weaknesses requires more than periodic austerity measures. Pakistan needs an institutionalised expenditure review framework to assess whether public spending aligns with economic priorities, constitutional responsibilities, and measurable outcomes.
Public expenditure should not merely finance consumption, losses, and institutional inefficiency. It should build productivity, competitiveness, human capability and long-term economic resilience. Much of Pakistan’s expenditure structure still struggles to meet these tests.
For years, fiscal adjustment has relied on across-the-board compression rather than deeper structural reform. Development expenditure is frequently fragmented across hundreds of schemes with weak economic returns. Large throw-forward liabilities within the PSDP increasingly dilute development effectiveness, delay completion timelines, and fragment already limited fiscal resources. Subsidies continue to absorb substantial fiscal resources without always achieving clear social or productivity outcomes. Meanwhile, rising pension obligations, interest costs and recurrent administrative expenditure steadily reduce fiscal space for investment-oriented spending.
At the same time, rising debt-servicing obligations continue to compress fiscal space. The scale of this constraint is evident from the fact that interest payments absorbed more than 100 per cent of net federal revenue receipts in FY20 and FY24 and almost 94 per cent in FY25. Even in FY26, after significant fiscal adjustment, debt servicing is projected to consume roughly 75 per cent of net revenue receipts. Such ratios leave limited fiscal space for infrastructure, human capital, social protection and growth-enhancing investment.
The PSDP requires a shift away from the proliferation of fragmented projects toward a disciplined framework grounded in national priorities, economic returns and implementation capacity. Consistent with the spirit of the 18th Amendment, the federal PSDP should increasingly focus on projects of clear national significance, such as infrastructure, water, energy, logistics, export competitiveness and climate resilience, while provincial and local schemes are financed and managed by provincial governments.
Greater emphasis must also be placed on timely completion, rigorous project selection, and reducing large throw-forward liabilities. The challenge is not the volume of development spending, but its strategic allocation and effectiveness.
The same concern applies to subsidies. Targeted social protection remains essential in a country with high poverty and economic vulnerability. But there is an important distinction between protecting vulnerable households and repeatedly fiscalising inefficiencies within the energy system. Large tariff-differential subsidies and recurring support linked to circular debt often delay structural reform rather than resolve underlying weaknesses.
Pakistan’s pension structure also presents a growing long-term fiscal challenge. Pension expenditure has risen from approximately Rs236 billion in FY16 to over Rs1.05 trillion in FY26 – an increase of more than four times in just a decade. The government has initiated important reform measures, including contributory arrangements for new entrants and efforts to improve long-term sustainability. These initiatives are a step in the right direction, but will need to be broadened and implemented consistently if pension liabilities are to be placed on a sustainable trajectory. Without continued reform, pension obligations risk consuming an ever-larger share of fiscal resources.
At the same time, the post-18th Amendment fiscal framework requires a more serious debate on expenditure responsibilities between the federation and provinces. As provinces increasingly benefit from decentralisation, questions regarding the co-financing of certain federally funded social expenditures and duplication of functions will inevitably become more important over time. The post-18th Amendment framework also requires a more disciplined reassessment of federal functions, with expenditure increasingly aligned to clearly defined constitutional responsibilities.
SOEs remain another major source of fiscal strain. Their persistent losses continue to generate large quasi-fiscal pressures that repeatedly absorb scarce public resources. Many continue to rely on repeated bailouts and guarantees yet deliver weak outcomes. Sustainable fiscal reform will ultimately require clearer governance frameworks, restructuring, privatisation where appropriate and stronger accountability for performance.
The broader challenge is that many difficult reforms continue to remain politically deferred. National debt reprofiling, despite its potential to ease medium-term fiscal pressures, still appears more an aspiration than an active reform agenda. Such a limited appetite for reform cannot define Pakistan’s fiscal future.
Similarly, rationalising the perks, privileges and non-transparent benefits embedded within sections of the executive deserves greater attention. Greater monetisation, transparency and standardisation of compensation structures can reduce leakages, improve accountability and help rationalise recurrent expenditure over time.
Expenditure reform is not simply about spending less. It is about improving the composition, efficiency, and economic return of public expenditure.
This is particularly important as Pakistan seeks a credible post-IMF transition. Durable stabilisation cannot rely indefinitely on compression, exceptional financing measures, or repeated taxation of already documented sectors. Over time, sustainable fiscal adjustment requires both stronger revenue systems and higher-quality expenditure management.
Fiscal policy is not merely an exercise in balancing accounts. At its best, it shapes the economy’s long-term capacity, resilience, and direction.
There is a persistent perception that public expenditure is largely inflexible and that meaningful fiscal adjustment can come only from higher taxation. Clearly, reform opportunities exist across development spending, subsidies, pensions, SOEs, federal-provincial responsibilities, public-sector compensation, and debt management. In many cases, the issue is not the quantity of spending but its composition and effectiveness.
The gains from such reform extend far beyond budgetary savings. Better expenditure choices in Budget FY27 can strengthen productivity, improve service delivery, create fiscal space for infrastructure and human capital, support private investment and enhance long-term economic resilience. Fiscal consolidation, therefore, is not merely about reducing deficits. It is about improving the quality of the state’s economic decisions.
Because in the end, strong public finances are not built solely by collecting more revenue. They are built by ensuring that every rupee spent contributes meaningfully to the economy’s future productive capacity.
The writer is a former adviser, Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at: [email protected]
