Section 1: The Country Is Not Going Broke—Its Social Contract IsPakistan is frequently portrayed as a country perpetually on the brink of bankruptcy. Every budget season, citizens are told that the government has exhausted its options, that more taxes are unavoidable, subsidies must be withdrawn, utility prices must rise, and another round of austerity is essential to stabilize the economy. International lenders reinforce the message, while successive governments insist there is simply no alternative.

The central question is therefore not whether Pakistan needs fiscal correction. It does. The harder question is whether correction can remain legitimate when adjustment falls mainly on consumers while the institutions, privileges and policy choices that created the crisis remain insufficiently reformed. Yet this narrative conceals a more uncomfortable reality. Pakistan is not suffering only from a shortage of revenue. It is also suffering from decades of political choices that have steadily shifted the cost of governing onto ordinary citizens while shielding powerful interests—both public and private—from meaningful reform.

This distinction matters. Countries become poor not merely because they collect insufficient taxes, but because they spend public resources inefficiently, reward rent-seeking instead of productivity, and allow institutions to serve vested interests rather than the broader public. Pakistan has gradually drifted into precisely this equilibrium.

The burden is evident in everyday life. Inflation has become embedded, electricity and gas tariffs continue to rise, transport costs climb with every increase in fuel levies, and almost every consumer purchase carries layers of indirect taxation. Families whose incomes have barely kept pace with prices now finance an ever-larger share of the state’s expenditures simply by buying food, paying electricity bills, purchasing school supplies, or filling a motorcycle’s fuel tank.

For many households, taxation is no longer something deducted from income alone. It has become an unavoidable feature of daily survival. Ironically, many of those contributing the largest proportion of their disposable income to the exchequer are people who never file an income tax return because they earn too little to qualify. Through sales taxes, petroleum levies, customs duties, withholding taxes, electricity surcharges and numerous embedded charges, even Pakistan’s poorest households contribute to financing the state. Consumption has become the country’s most dependable tax base.

Meanwhile, structural reform remains painfully slow. Successive governments have promised to modernise state-owned enterprises, rationalise public expenditure, reform pensions, improve tax administration, broaden the direct tax base, and reduce waste. Those promises have been repeated so often that they now resemble ritual rather than policy. The result is a profound erosion of trust: citizens are repeatedly asked to sacrifice, yet they rarely see comparable restraint from the institutions demanding those sacrifices.

Citizens are repeatedly asked to sacrifice, yet they rarely see comparable restraint from the institutions demanding those sacrifices. Ministries continue to expand. Administrative layers multiply. Public enterprises accumulate losses that are ultimately transferred to taxpayers. Circular debt continues to grow despite repeated interventions. Expensive guarantees, subsidies, and policy distortions remain embedded in the system long after their original justification has disappeared. This imbalance is not merely an accounting problem; it is fundamentally a political one. The state increasingly asks whether citizens can afford another tax. It seldom asks whether government itself can afford its own inefficiencies.

That question is equally relevant to parts of the private sector. Businesses understandably seek stability, predictable regulation and competitive taxation. These are legitimate objectives in any economy. But over time, some industries have also become accustomed to seeking permanent protection from competition, preferential taxation, subsidised finance, guaranteed returns or administrative barriers against new entrants. Temporary support intended to nurture emerging industries has too often evolved into permanent privilege.

Consumers ultimately finance these arrangements through higher prices, reduced choice and lower productivity growth. Pakistan’s automobile sector illustrates the problem. For decades, consumers have paid prices comparable to international markets for vehicles that frequently lag behind global standards in technology, safety features and model updates. Long waiting periods, “own money” premiums and limited competition have persisted despite decades of tariff protection. Industrial policy can legitimately provide temporary support to develop domestic manufacturing. It becomes far more difficult to justify when protection continues indefinitely without delivering internationally competitive prices, exports or innovation.

The same pattern can be observed elsewhere across the economy. Whether through guaranteed returns, regulatory protection, preferential access to public resources or restrictions on competition, too many sectors have learned to compete for policy favours rather than market success. This combination—a state reluctant to reform itself and interest groups reluctant to compete without protection—creates a dangerous political economy. The costs are dispersed across millions of consumers, while the benefits accrue to relatively small groups with strong incentives to preserve the status quo.

The consequences extend well beyond fiscal balances. Pakistan’s income inequality has widened, poverty has become increasingly entrenched, and social mobility has weakened. Although the Gini coefficient provides one measure of inequality, it understates the lived reality experienced by millions of households whose purchasing power has steadily eroded under inflation and indirect taxation. The gap between those able to influence policy and those required simply to absorb its consequences has become increasingly apparent.

Perhaps the greatest casualty has been the social contract itself. Citizens are generally willing to contribute more when they believe everyone is sharing the burden fairly. They accept difficult reforms when they see governments reducing waste, broadening the tax base, confronting vested interests and applying the same rules across society. What they find far harder to accept is a system in which sacrifice appears consistently asymmetric—where ordinary households face rising taxes and declining public services while inefficiency, privilege and political patronage remain largely untouched.

Pakistan’s fiscal debate therefore needs to begin with a different question. Rather than asking how much more citizens can afford to pay, policymakers should first ask whether the state has earned the right to ask for more. Until government demonstrates that it is willing to reform itself with the same determination that it demands from taxpayers, every new tax increase will deepen public cynicism rather than strengthen fiscal sustainability. The country’s challenge is not simply to balance its books. It is to rebuild confidence that the burden of adjustment is being shared fairly. That is where any serious discussion of Pakistan’s economic future must begin.

Citizens are generally willing to contribute more when they believe everyone is sharing the burden fairly. What they find far harder to accept is a system in which sacrifice appears consistently asymmetric where ordinary households face rising taxes and declining public services while inefficiency, privilege and political patronage remain largely untouched.

Citizens are generally willing to contribute more when they believe everyone is sharing the burden fairly. What they find far harder to accept is a system in which sacrifice appears consistently asymmetric where ordinary households face rising taxes and declining public services while inefficiency, privilege and political patronage remain largely untouched.

Section 2: The Hidden Tax StateIf there is one defining feature of Pakistan’s fiscal system today, it is that the burden of financing the state has quietly shifted from income to consumption. While governments continue to speak of progressive taxation and broadening the tax base, the reality experienced by ordinary Pakistanis is very different. The modern Pakistani state increasingly relies on taxes that are largely invisible, unavoidable and deeply regressive.

Every visit to a grocery store, every electricity bill, every litre of petrol, every mobile phone recharge and virtually every consumer purchase now carries multiple layers of taxation. These levies are seldom presented as income taxes, yet for millions of households they consume a far larger share of disposable income than formal income taxation ever could. This transformation has profound consequences. A worker earning Rs 60,000 a month and a senior executive earning Rs 600,000 both pay the same General Sales Tax when purchasing flour, cooking oil, medicines, school books, clothing or household appliances. The tax rate is identical, but the burden is not. For the lower-income family, these expenditures account for almost their entire monthly income. For the wealthier household, they represent only a small fraction of total earnings.

The result is a fiscal system that appears neutral on paper but is highly unequal in practice. Successive governments have defended indirect taxation because it is easier to collect. Consumption is visible; income is often not. Pakistan’s large informal economy, weak documentation and chronic tax evasion make direct taxation politically and administratively difficult. Faced with these challenges, policymakers have increasingly turned to the simplest solution: tax everything that people buy rather than what they earn.

From a revenue perspective, the strategy has worked. Consumption taxes provide a relatively predictable stream of income for the government. They are difficult to evade and relatively inexpensive to administer. Yet what is efficient for the tax collector can be profoundly damaging for society. When taxation is concentrated on........

© The Friday Times