As we collectively expand our understanding of public money and shift our nation’s focus away from an obsession with budget deficits, we can begin to build a better economy, one that works for all of our people… there is an element of truth in the conventional narrative that budget deficits can force interest rates higher. But we must be careful in telling that story. The threat to our common well-being isn’t the budget deficit. It’s excessive inflation.” — Stephanie Kelton in

The Deficit Myth

The federal budget 2026-27 is expected on June 10. Amid official claims of stabilisation and economic recovery, it will be yet another exercise in managing decline. As in the past, it is going to make promises of growth, documentation, reform and fiscal discipline. However, experts agree that the structural causes of Pakistan’s fiscal crisis will remain untouched.

In that respect, the recently released report, Decoding Pakistan’s Budget Dynamics [FY 10 to FY 25] by the Economic Policy and Business Development — a non-profit think tank — serves as an unintended commentary on the budget.

The report, dubbed as a white paper, documents how debt-servicing has become the dominant budgetary claim, development expenditure has steadily shrunk, public debt has expanded at alarming rates and tax collection has failed to keep pace with the needs of a fast-growing population. The budget for fiscal year 2026-27 will confirm rather than contradict these findings.

The report shows that the ratio between the current and development expenditures deteriorated from around 2.2:1 in 2010 to over 10:1 in 2025. Debt-servicing increased by more than 1,400 percent during the period and now consumes around 65 percent of federal resources. Development spending, once nearly a third of the budget, has fallen below ten percent. For the coming budget, the federal government has suggested a GDP growth target of 4.2 percent and a development programme exceeding Rs 4.3 trillion, with a federal share of Rs 1.1 trillion.

The findings of Decoding Pakistan’s Budget Dynamics are not new. The report correctly traces symptoms without identifying the political and constitutional structure producing them. It tells what happened to Pakistan’s budget. It does not sufficiently explain why the same fiscal pathologies survive changes of government, IMF programmes, countless tax measures and promises of reform.

Pakistan’s crisis is no longer one of revenue collection alone. It is a crisis of state priorities. Here’s a state that spends an overwhelming share of its resources servicing debt while allocating a shrinking proportion to human development. This reveals its actual priorities irrespective of official rhetoric. Budget documents, often presented as technical statements of revenues and expenditures, in reality, are annual declarations of political power and constitutional preference.

As dictated by the IMF, the budget will represent continuity rather than change. It will be designed primarily to satisfy creditors, preserve existing power structures and meet externally negotiated fiscal targets.

Development, productivity enhancement, educational transformation and social mobility will continue to occupy secondary positions. The EPBD report aptly documents this outcome. What remains missing is an explanation rooted in constitutional political economy. The report presents debt-servicing as the consequence of excessive borrowing. While factually correct, this explanation is incomplete.

Borrowing per se is not the disease. The disease lies in a governance model that finances consumption through debt while neglecting productive transformation. Successive governments have relied upon domestic and external borrowing to sustain expenditure patterns that generate limited economic returns. The result is a vicious cycle in which debt creates more debt, forcing each new budget to allocate larger sums for servicing liabilities accumulated by previous budgets.

This is not merely a fiscal imbalance. It is the emergence of debto-cracy — a political and economic order in which the principal function of the budget is servicing accumulated obligations rather than advancing public welfare.

Under such a system, education, healthcare, scientific advancement, environmental protection and social mobility become residual claims competing for whatever resources remain after creditors have been paid. The constitutional implications of this shift receive little attention by the EPBD.

The EPBD’s report mentions the impact of the 7th National Finance Commission Award and the increased provincial share in divisible-pool revenues. This interpretation requires closer scrutiny. Fiscal federalism did not create Pakistan’s fiscal crisis. The 7th NFC Award merely implemented constitutional federalism after decades of centralisation.

The more relevant question is why the Federation failed to restructure its expenditure after the Constitution (Eighteenth Amendment) Act, 2010, transferred significant responsibilities to provinces. Instead of rationalising ministries, departments and authorities, successive governments sought to preserve an oversized federal footprint while simultaneously complaining about reduced fiscal space. Blaming constitutional federalism for fiscal distress diverts attention from the real issue: the unwillingness of the central government to adapt to constitutional reality.

The report also highlights Pakistan’s persistently low tax-to-GDP ratio. Here again the analysis remains incomplete because it focuses on aggregate collection rather than the structure of taxation. Pakistan’s tax system increasingly depends on withholding taxes, petroleum levies, indirect taxation and inflation-driven revenues.

Productive sectors bear heavy tax burdens while large segments of wealth remain lightly taxed or altogether untaxed. Salaried individuals, consumers and compliant businesses contribute disproportionately, whereas substantial agricultural incomes, speculative gains, undocumented wealth and privileged sectors continue enjoying favourable treatment.

The problem is not simply insufficient taxation; it is extraction without transformation. Citizens pay more each year while public services continue deteriorating. Such a system weakens tax morale, encourages informality and ultimately undermines the legitimacy of the fiscal system itself.

While the report correctly notes growing dependence on domestic borrowing, particularly from commercial banks, it understates the economic consequences. When government securities become the safest and most profitable investment option, banks naturally prefer financing the state over financing productive enterprises. The result is erosion of private investment, weaker industrial expansion and reduced technological upgrading.

Pakistan’s economic structure increasingly reflects this distortion. Growth depends heavily on borrowing, remittances and consumption rather than productivity, innovation and exports.

A deeper weakness of the report is its treatment of expenditure as a largely technical matter. Budgets are never neutral. Every allocation reflects a political decision. Every reduction reflects a political choice.

Constitutional political economy teaches us that budgets reveal the actual hierarchy of power in a society more accurately than official speeches or policy documents. If debt-servicing continuously expands while development contracts, the budget is revealing which interests enjoy protection and which interests remain expendable.

This reality also explains why successive IMF programmes have failed to produce lasting solutions. Most programmes focus on fiscal arithmetic rather than structural transformation. Revenue targets are increased. Utility tariffs are raised. New taxes are imposed. Borrowing continues. The underlying political economy remains intact. Temporary stabilisation follows, but sustainable development remains elusive.

The most important omission in the EPBD report is the absence of a discussion regarding the quality of expenditure. Development spending is not inherently productive. Politically motivated projects, inefficient public enterprises and poorly designed subsidies can consume enormous resources without generating meaningful growth. The real distinction is not between current and development expenditure; it is between productive and unproductive expenditure.

The EPBD report succeeds in documenting fiscal decline. It does not identify its causes. Pakistan’s problem is not fundamentally a budgetary crisis. It is a crisis of constitutional priorities, political incentives and economic governance.

Debt-servicing dominates because ‘debtocracy’ dominates. Development shrinks because productive transformation remains absent. Tax collection disappoints because extraction substitutes reform. Fiscal stress persists because constitutional federalism is implemented selectively and centralised expenditure structures remain largely intact.

Budget 2026-27 will not show that Pakistan has escaped fiscal crisis. It will prove that Pakistan has normalised it. The EPBD report successfully measures this decline. A constitutional political economy perspective alone can explain why the decline continues.

The writers are lawyers, adjunct faculty at Lahore University of Management Sciences and members of the advisory board of Pakistan Institute of Development Economics