Bankruptcy of ideas—VI The Fiscal Illusion

The previous articles in this series examined how Pakistan accumulated debt, surrendered policy autonomy to creditors, transformed taxation into an instrument of extraction and evolved into a rentier state that rewards privilege more than productivity. A natural question follows. If taxes have increased, debt has increased and citizens are repeatedly told that the country faces a severe revenue crisis, why do fiscal deficits persist? The conventional answer is that Pakistan does not collect enough taxes. The evidence suggests a different explanation.

Pakistan’s fiscal crisis is not merely a revenue problem. It is also a problem of unrealistic budgeting, persistent forecasting failures and deliberate policy choices that simultaneously demand more taxes while foregoing substantial revenues through exemptions and concessions. This may be called the fiscal illusion.

Every year the federal budget presents ambitious revenue targets. These targets are portrayed as evidence of fiscal discipline and administrative determination. Yet a review of recent history reveals a recurring pattern.

Table 1: FBR Revenue Performance

*Actual/revised estimates
**Budgeted and subsequently revised targets

Source: FBR Year Books, Budget Documents, Economic Surveys and Fiscal Operations Statements.

The pattern is unmistakable except for fiscal year (FY) 2021-22. Sadly, the government was removed through maneuvered vote of no-confidence. Successive governments routinely announce ambitious targets that are subsequently revised downward or missed altogether. Revenue forecasting increasingly resembles an exercise in optimism rather than a realistic assessment of economic conditions and administrative capacity.

This matters because fiscal planning begins with these assumptions. When revenue projections prove unrealistic, governments resort to supplementary taxation, additional borrowing, expenditure compression or accounting adjustments. The fiscal deficit then appears as a technical problem when it is often rooted in unrealistic assumptions.

The second component of the fiscal illusion is less visible but equally important. While governments frequently claim insufficient resources for development, they simultaneously forgo substantial revenues through tax expenditures.

In public finance, tax expenditures include exemptions, concessions, reduced rates, credits and preferential treatments that reduce revenue otherwise collectable under normal tax rules.

Economically, a tax concession is indistinguishable from a subsidy. One is paid through expenditure. The other is granted through the tax system. Both transfer public resources to selected beneficiaries.

Table 2: Tax Expenditures versus FBR Collections

Source: Tax Expenditure Reports, FBR Year Books.

These figures reveal a reality rarely discussed in budget speeches. In FY2025 alone, the state voluntarily forewent approximately Rs2.435 trillion in revenue, excluding GST on POL products. This amount represented more than one-fifth of total FBR collections. For every Rs. 100 collected by FBR, approximately Rs. 21 were simultaneously relinquished through exemptions, concessions and preferential treatments.

The issue is not whether every tax expenditure is unjustified. Some incentives may encourage exports, industrialisation, technological development or investment. The issue is accountability. How many concessions are regularly evaluated? How many are linked to measurable outcomes? How many continue because they serve powerful interests rather than public objectives? These questions rarely receive satisfactory answers. The contradiction becomes even more striking when tax expenditures are compared with development spending.

Table 3: Competing Fiscal Priorities

Source: Economic Survey 2025-26, Budget Documents and Tax Expenditure Report.

The hidden budget of privilege exceeds federal development spending by more than two times. This fact fundamentally alters the nature of the fiscal debate. For years, Pakistan has been told that there are insufficient resources for quality education, healthcare, water supply, sanitation, local government, scientific research and technological transformation. Yet official figures demonstrate that revenues foregone through tax expenditures exceed annual federal development allocations.

The issue certainly is not merely one of revenue generation. It is one of allocation and priorities. Every rupee deliberately forgone must be financed elsewhere.

Governments generally rely upon three methods. First, they increase taxation on already documented citizens and businesses. Second, they impose indirect levies that spread costs across consumers. Third, they borrow. Pakistan has repeatedly employed all three approaches. The result is a paradoxical fiscal system.

Citizens are told that the country faces a revenue emergency. Businesses are subjected to increasing compliance burdens. Salaried individuals face expanding withholding regimes. Petroleum levies continue rising. Borrowing persists. At the same time, a substantial hidden budget remains embedded within the fiscal structure.

This is not merely a financial issue. It is a developmental issue. Every concession lacking economic justification represents schools not built, hospitals not equipped, water systems not modernised and infrastructure projects not completed. The consequences are ultimately borne by society as a whole.

The debt trap examined in earlier articles did not emerge solely because governments spent excessively. It also emerged because governments repeatedly postponed difficult choices. Instead of reviewing privileges, they expanded borrowing. Instead of broadening taxation through rational reform, they intensified extraction from already documented sectors. Instead of confronting structural weaknesses, they relied on optimistic projections and temporary fixes. The result is a fiscal system that increasingly measures success by targets announced rather than outcomes achieved.

A sustainable fiscal framework requires a different approach. Revenue targets must be realistic. Tax expenditures must be transparent and periodically reviewed. Privileges must be justified through measurable economic benefits. Development spending must be treated as investment rather than residual expenditure.

Most importantly, fiscal policy must abandon the illusion that a nation can indefinitely compensate for structural weaknesses through higher taxes, larger levies and additional borrowing. The numbers tell a different story. Pakistan’s crisis is not simply a shortage of revenue. It is a crisis of fiscal design.

The next article examines how this design produced a peculiar phenomenon: a tax state without taxpayers, where the overwhelming share of revenue is collected through withholding and advance taxes while genuine voluntary compliance remains remarkably limited.

[To be continued]

____________________________________________________________________

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.