Bankruptcy of ideas—I Borrowing against future

Pakistan is not bankrupt because it borrowed for schools, hospitals, railways, water, technology or industrial transformation. It is bankrupt because successive governments borrowed to finance deficits, service past debt, protect rentier privileges and postpone reform.

The Economic Survey 2025-26 [‘The Survey’] contains a statistic that should alarm every policymaker in Pakistan. Public debt stood at Rs 83.3 trillion by the end of March 2026. Twenty years ago, in 2006, it was about Rs 4.4 trillion.

The increase, though monstrously high, yet itself does not explain Pakistan’s predicament. Nations can carry debt and still prosper. Japan, South Korea, Singapore, China and many European countries borrowed heavily during critical phases of development. Debt did not weaken them because it financed productive capacity.

The real question is not how much Pakistan borrowed. The real question is what Pakistan received in return. After two decades of mounting debt, does the country possess world-class schools? Does it have universal healthcare? Has it built an integrated transport network? Does it enjoy reliable water systems, modern cities, high-productivity agriculture or globally competitive industries? The answer is painfully obvious.

Pakistan accumulated debt without creating sufficient productive capacity to service it. That is why the country repeatedly returns to the International Monetary Fund (IMF) despite decades of borrowing.

The Survey reveals that debt servicing continues to dominate public finances. During July-March fiscal year (FY) 2026, interest payments amounted to nearly Rs. 5 trillion. The budgeted mark-up expenditure for the year exceeds Rs 8.2 trillion. Even more revealing is the fact that the federal government generated a primary surplus of about Rs 2.45 trillion during the same period. This distinction is crucial.

A primary surplus means government revenues exceeded expenditures excluding interest payments. In other words, the state was able to finance its ordinary operations. Yet the overall fiscal position remained constrained because debt accumulated in previous years now demands ever-growing interest payments.

Pakistan has reached the point where yesterday’s borrowing increasingly determines today’s policy choices. This is the essence of what may be called debtocracy: governance dominated by the demands of accumulated debt. The consequences are visible everywhere.

Development expenditure remains compressed. Public infrastructure ages faster than it is replaced. Social indicators improve slowly despite repeated promises.

Provinces are asked to generate cash surpluses while simultaneously financing education, health, agriculture, local government and social protection.

The state finds itself trapped between creditors demanding fiscal consolidation and citizens demanding public services. This trap did not emerge overnight. For decades, governments of all political persuasions followed the economics of postponement. Structural reforms were delayed. Loss-making enterprises were retained. Economic rents remained undertaxed. Tax concessions multiplied. Consumption expanded faster than production. Borrowing became easier than reform.

Each government hoped the bill would arrive during the tenure of its successor. Eventually the bill arrived for everyone. The most revealing aspect of Pakistan’s fiscal crisis is that it cannot be explained by development spending. Contrary to popular belief, the country did not become indebted because it spent excessively on education, healthcare, scientific research or infrastructure. In fact, many of these sectors remained persistently underfunded.

The Public Sector Development Programme has stagnated for years in nominal terms. Once inflation is taken into account, real development expenditure has declined substantially. Human development indicators continue to lag behind regional competitors. Public investment remains inadequate for a country of more than 240 million people.

Pakistan therefore presents a peculiar case. It borrowed heavily without investing sufficiently in the future. The result is a state increasingly dependent on taxation of the documented sector, petroleum levies, withholding taxes and external support. This dependence has encouraged another distortion. Instead of expanding the productive base of the economy, policymakers increasingly focus on extracting more resources from already compliant sectors.

The documented economy is treated as a fiscal reservoir rather than a partner in growth. Such a strategy may temporarily satisfy revenue targets. It cannot create prosperity. A productive economy generates surpluses through investment, innovation, exports and rising productivity. A rentier economy generates revenues through privileges, monopolies, concessions and extraction. Over time, Pakistan drifted from the former toward the latter.

The Survey unintentionally documents this transition. Growth remains modest. Investment remains insufficient. Debt continues to rise. Interest payments absorb fiscal space. Development spending struggles to keep pace with national needs. Yet the public debate remains trapped in annual arguments over tax rates and budget allocations.

The deeper issue is rarely addressed. Pakistan’s crisis is fundamentally a crisis of fiscal philosophy. No household can indefinitely consume beyond its means. No enterprise can borrow perpetually to pay interest on previous loans. No nation can build prosperity by financing current obligations through ever-increasing debt. Economic recovery begins with recognising this simple principle.

Borrowing should finance productive assets. Deficits should be temporary and purposeful. Taxation should target economic rents before productive effort. Public expenditure should prioritise capacity creation rather than privilege preservation.

Measured against these principles, Pakistan’s fiscal model requires fundamental restructuring. The challenge is not merely reducing debt. The challenge is transforming the economy from a rentier order sustained by borrowing into a productive system capable of generating sustainable surpluses.

The Survey provides the latest evidence of the problem. The remaining question is whether policymakers possess the courage to confront its causes. The next article in this series examines those causes, beginning with a paradox at the heart of Pakistan’s fiscal crisis: a country claiming perpetual shortage of resources while simultaneously granting trillions of rupees in tax expenditures and preferential treatment to powerful interests.

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.