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Pakistan ended FY25 with its strongest fiscal numbers in over 20 years and its weakest development budget in a generation. The deficit narrowed to 5.4 per cent of GDP, the primary surplus reached 2.4pc, the current account turned positive for the first time in 14 years, and reserves crossed $21 billion. The July-March data for FY26 has extended that into the lowest fiscal deficit in 27 years at 0.7pc of GDP, with a 3.2pc primary surplus.
Yet, federal development spending has been compressed to barely above 1pc of GDP, then cut mid-year from Rs1 trillion to Rs837bn, far below its peak of around 7pc in the public-investment era. Banks hold the bulk of their assets in government securities rather than private credit, and 25 state-owned enterprises lost Rs832bn last year.
Stabilisation has been delivered by squeezing the parts of the economy that generate growth — a pattern that FY26 has continued. The FY27 budget is the moment to correct this without surrendering what stabilisation has bought.
My earlier column, ‘Reforms for investment-led growth,’ argued that raising Pakistan’s investment rate requires tax reform. The same logic requires expenditure reform alongside it. The deficit those tax cuts would deepen is the one already crowding out the formal economy from credit and public investment.
