Pakistan's Budgetary System and Fiscal Governance Challenges

The budgetary system and fiscal governance in Pakistan are critical components of the nation’s economic framework. Established under the 1973 Constitution, the budget process is further guided by laws such as the Public Financial Management Act (PFMA) of 2019 and detailed manuals like the Budget Manual 2020. However, despite this structured framework, the budgetary mechanism is plagued by various inefficiencies that threaten fiscal sustainability.

One of the primary issues is that the current budget process is largely reactive. Instead of taking a strategic top-down approach, it relies heavily on a bottom-up methodology. This means that budget submissions are often based on past figures rather than forward-looking assessments. As a result, the budget does not adequately account for economic fluctuations or emerging fiscal pressures, leading to misaligned fiscal priorities.

The International Monetary Fund (IMF) highlighted a significant weakness in its "Technical Assistance Report Pakistan—Improving Budget Practices" published in August 2024. The report pointed out the disconnect between budget preparation and the timely dissemination of macro-fiscal data. For instance, the Mid-term Budget Strategy Paper, which contains essential projections and fiscal policies, is released three months after the budget formulation begins. This delay creates a misalignment with current economic conditions, compromising the accuracy of budget allocations and hindering informed decision-making by the federal government.

Moreover, coordination issues between the Budget Wing and the Macro-Fiscal Policy Unit (MFPU) limit the integration of real-time data, which is crucial for effective economic forecasting. The lack of efficient collaboration among ministries further complicates the situation, as they often operate in silos rather than working towards cohesive fiscal objectives. This disjointed approach weakens budget execution and raises concerns about the ambitious revenue targets set by both federal and provincial governments.

Historically, Pakistan has relied on multilateral and bilateral financial assistance to address its fiscal deficit, particularly at the federal level. This reliance reflects a persistent vulnerability in public finances. Following the autonomy granted to provinces under the Eighteenth Amendment Act of 2010, a significant share of national revenue is allocated to provincial governments. However, this allocation often leaves the federal government with insufficient resources to meet essential expenditures, including defense.

In the fiscal year 2023-24, the provinces collectively received Rs 5264 billion from the federal government under the 7th National Finance Commission (NFC) Award. In contrast, their own revenue collection was a mere Rs 997 billion, with tax revenue amounting to only Rs 774 billion. Alarmingly, the collection of agricultural income tax by all provinces constituted a mere 0.3 percent of the total tax collection in the country for FY 2024.

Over the past decade, provincial governments have struggled to streamline their tax collection processes, which do not align with their economic potential. While they have been eager to launch projects for political gains, mismanagement of taxpayer money has led to the discontinuation of many initiatives and significant cost overruns. Consequently, citizens have suffered due to the lack of worthwhile social welfare programs and the neglect of local government empowerment as envisioned in Article 140A of the Constitution.

In Punjab, tax collection increased from Rs 98,054 million in 2014-15 to Rs 326,282 million in FY 2023-24, primarily through a regressive sales tax on services. However, property tax collection declined significantly during the same period. In Sindh, total tax collection grew from Rs 93,807 million to Rs 363,733 million, with a notable rise in sales tax on services. Meanwhile, Khyber Pakhtunkhwa and Balochistan also saw increases in tax collection, but these figures still fall short of their economic potential.

The reliance on a narrow range of taxes, particularly sales tax, underscores the inefficiencies in the tax system across the provinces. This situation calls for a comprehensive review and reform of the budgetary process and fiscal governance in Pakistan. A more balanced and sustainable revenue-sharing framework is essential to ensure that both federal and provincial governments can meet their financial obligations and serve the needs of their citizens effectively.

Addressing the inefficiencies in Pakistan's budgetary system is not just a matter of improving fiscal governance; it is crucial for the overall economic health of the nation. By adopting a more strategic approach to budgeting and enhancing inter-ministerial collaboration, Pakistan can pave the way for a more sustainable and equitable economic future.