Economic freedom begins with constitutional governance 

The recently published PRIME Plus report, An Assessment of the FY2026–27 Federal Budget Through the Lens of Economic Freedom, deserves appreciation for shifting the debate beyond conventional budget arithmetic. Rather than asking merely whether taxes have increased or decreased, it examines whether the budget enlarges or restricts the freedom of individuals and businesses to produce, invest, trade and innovate. That alone makes it a valuable contribution to Pakistan’s policy discourse.

The report of Policy Research Institute of Market Economy (PRIME) correctly observes that Pakistan’s formal economy bears a disproportionate tax burden while much of the informal sector remains outside the effective tax net. It questions tax expenditures exceeding Rs 2.35 trillion, highlights the crowding out of private investment by government borrowing, welcomes tariff rationalisation and criticises regulatory uncertainty. These issues deserve much wider public attention.

PRIME’s analysis also points towards a deeper weakness in Pakistan’s reform discourse: we discuss economic freedom without first securing constitutional governance. The distinction is fundamental.

International indices commonly measure economic freedom through taxation, trade openness, government spending, financial markets and regulatory efficiency. These indicators matter. Lower barriers to enterprise can promote investment, innovation and competition. They answer only part of the question.

Why do countries with similar tax rates produce very different economic outcomes? Why do investors accept higher taxation in some jurisdictions while avoiding countries with lighter tax burdens? Why do some economies flourish with relatively large governments while others stagnate despite repeated concessions? The answer lies primarily in institutions.

James Buchanan argued that public finance cannot be analysed independently of the constitutional rules under which governments operate. Douglass North demonstrated that long-term development depends upon institutions that reduce uncertainty, enforce contracts and create predictable incentives.

Centuries earlier, Ibn Khaldun linked prosperity with justice, moderation in taxation and restraint upon arbitrary power. Excessive intervention, unpredictable fiscal demands and rent-seeking, he observed, ultimately weaken both economic activity and state revenues. These intellectual traditions converge on one central proposition: economic freedom is not created simply by lowering tax rates. It emerges from constitutional governance.

Pakistan’s experience illustrates this clearly. Successive governments have offered tax holidays, created special economic zones, reduced customs duties and announced investment facilitation mechanisms. Investment nevertheless remains subdued.

Investors do not merely compare tax rates; they compare legal systems. They ask whether contracts will be enforced within a reasonable time, whether regulations will survive political transitions, whether tax liabilities can be altered retrospectively and whether executive discretion outweighs parliamentary certainty. These are questions of constitutional governance rather than fiscal engineering.

The same principle applies to taxation. Pakistan’s problem is frequently described as one of high taxation. That diagnosis is incomplete. The deeper problem is unequal taxation.

The salaried class in formal sector is fully documented, its tax is deducted before income reaches employees, and its compliance burden continues to rise. Large segments of commerce, services and agriculture operate under very different fiscal realities. The issue is not merely how much tax is collected, but whether equal citizens are governed by equal fiscal rules.

A system built around withholding taxes, presumptive taxes, minimum taxes and sector-specific exemptions creates unequal citizenship before the law. It also encourages informality. Businesses do not remain undocumented only because rates are high. Formal participation imposes greater compliance costs while offering few institutional benefits. Documentation without trust becomes compulsion rather than reform.

The PRIME report also notes that government borrowing crowds out private investment because banks prefer sovereign lending over commercial risk. This is not simply a banking failure. When governments repeatedly finance deficits through domestic borrowing, banks act rationally by purchasing government securities. Financial markets are responding to distorted fiscal incentives created by public policy.

Interest payments and defence together consume nearly 94 percent of net federal revenue, leaving little fiscal space for education, healthcare, scientific research, digital infrastructure, justice administration and productive public investment. The challenge is not merely that government spends too much; it is that public priorities have become distorted.

Expenditure that strengthens courts, education, digital infrastructure, research, public health and efficient regulation expands future economic freedom because it reduces uncertainty and lowers transaction costs. Spending absorbed by debt servicing and institutional inefficiency does not. Constitutional Political Economy therefore distinguishes between the size of government and the quality of government.

Fiscal federalism is another neglected dimension. The Constitution (Eighteenth Amendment) Act, 2010 reshaped the distribution of fiscal powers. Provincial sales taxes, fragmented administrations and overlapping jurisdictions now influence business decisions daily. Economic freedom cannot be assessed through the federal budget alone. The constitutional structure governing taxation matters as much as the annual Finance Act itself.

Pakistan’s economic challenge is consequently larger than budget reform. Markets flourish where laws are predictable, taxation is neutral, contracts are enforceable, property rights are secure and governments remain subject to constitutional restraints. These conditions cannot be created through a single Finance Act. They require a durable commitment to constitutional governance.

The value of the PRIME report lies in encouraging this broader conversation. The next step is to recognise that economic freedom rests upon a stronger constitutional foundation. Where constitutional governance is weak, economic reforms remain temporary. Where it is strong, markets can generate prosperity without constant discretionary intervention.

Pakistan’s recurring fiscal crises are symptoms rather than the disease. The underlying ailment is institutional. Budgets can redistribute resources, but only constitutional governance can establish equality before law, predictable taxation, secure property rights and meaningful limits on arbitrary state power.

Economic freedom, therefore, is neither the starting point of development nor a concession to be distributed through annual Finance Acts. It is the outcome of a constitutional order in which taxation rests on representation, public borrowing is subject to accountability, contracts and property are protected, and executive power remains bounded by law.

In a rent-distributing state, freedom is rationed through exemptions, influence and discretion; in a constitutional state, it is secured for all through equal rules. Unless Pakistan reforms the institutions that determine who is taxed, how public money is spent, who bears the cost of debt and how state power is restrained, every budget will continue to rearrange the symptoms of crisis while leaving its causes untouched. The real measure of reform is not another incentive, levy or revenue target. It is whether the State itself is finally made answerable to the Constitution.

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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 an 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.