In the context of Pakistan, conduct of macroeconomic policy rests on two broad pillars: an increasingly independent monetary policy and a persistently constrained fiscal policy.

Over the past two decades, the SBP has gradually acquired operational and legal autonomy, helping it to steer monetary policy with a degree of institutional discipline.

By contrast, fiscal policy remains hostage to entrenched political bargains, rigid structural arrangements, and an ever-expanding government footprint that now threatens to push the upper taxation and public debt limits of what the economy — and its citizens — can bear.

At the heart of this dilemma is Pakistan’s mounting dependence on predatory taxation and borrowings for federal deficit financing. Limited access to external capital markets — largely due to weak external credit ratings and recurrent balance of payments crises — has forced successive governments to lean heavily on domestic borrowing. But with local banks already saturated with government paper, the room for even higher domestic borrowings has shrunk dramatically.

The result is an endless cycle of fiscal consolidation — tightening budgets year after year, squeezing the after-tax profitability of businesses and disposable income of households, that ultimately results in suppression of investments and growth recovery. The FY26 federal budget, shaped under the latest IMF-supported EFF arrangement, starkly illustrates how deeply this pattern is now entrenched.

Headline numbers may suggest progress: the government pledges to shrink the overall deficit from 5.6 percent to 3.9 percent of GDP, while nudging the primary surplus up slightly to 2.4 percent. Yet beneath these surface figures lies a troubling reality: nearly all the adjustment burden falls on over-ambitious revenue targets and suppressed primary spending, not on a genuine structural rebalancing of fiscal architecture.

The revenue side alone tells the story. Tax collections are budgeted to grow by nearly 19 percent in FY26, which is on the back of 29 percent growth in actual tax collection in FY25. If history is any guide, continued mobilization of additional predatory taxation will........

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