Budget FY26: A steady hand on the tiller

As we start this budget day, the government faces a pivotal test: whether to solidify the fragile economic stability achieved over the past 18 months or risk squandering it for short-term gains.

With Pakistan’s fiscal team aiming to lock in a primary surplus and redirect savings toward national security and infrastructure, today’s budget is expected to outline a cautious but forward-looking path as the country seeks to break free from its destructive cycle of boom and bust.

There is some semblance of a hard-won macro-economic stability, which has been achieved over the last 18 months, and there is hope that it will not be squandered, and there will be evidence of a clear path toward durable, broad-based growth. The government’s fiscal team appears determined to deliver both, first by locking in a primary surplus, and then by reallocating every rupee of savings in financing costs toward priority sectors such as national security and critical infrastructure.

Maintaining that surplus is more than an accounting exercise; it is the most effective brake on the debt spiral that has haunted Pakistan for the last two decades. Even a modest widening of the deficit would push the public debt-to-GDP ratio back into unsustainable territory and invite a costly risk premium in domestic and international credit markets. Fiscal discipline, therefore, is not optional. It is the precondition for the lower interest rates and investor confidence that a resilient recovery requires.

The temptation, of course, is to press the accelerator on headline growth by unleashing a burst of public spending or stoking consumer imports. Experience shows where that road ends: a short-lived boom followed by balance-of-payments stress, a weaker rupee and yet another round of austerity.

Policymakers this year appear intent on a different route, one that prizes investment over consumption and exports over imports. That shift in mindset is already visible in the tariff-rationalisation package reportedly taking shape to stimulate exports by reducing tariffs on intermediate goods. 

Excess customs duties and other tariffs that once served as a fiscal crutch are slated for phased removal, signalling a move from a protected trading posture to a rules-based, outward-looking regime. Taxes on imports are effectively taxes on exports; reducing those duties can lower input costs, encourage scale and inject a measure of predictability into exporters’ business models.

Overreliance on salaried individuals and an ever-expanding web of indirect levies has produced a system that is both regressive and counterproductive. The effective tax wedge between formal and informal enterprises is so large that entrepreneurs are rewarded for staying small, low-tech, and off the books.

Meanwhile, any firm brave enough to climb the value-addition ladder is penalised by sharply higher tax rates that render its products uncompetitive. Closing that wedge — by broadening the base, digitising compliance and offering transitional relief to firms that register — is essential if Pakistan is to nurture the high-productivity jobs that lift incomes and exports alike.

A second structural plank is savings mobilisation. With the national savings rate hovering in the low teens as a share of GDP, Pakistan simply does not generate the domestic capital needed to finance an industrial takeoff. 

The budget is expected to unveil incentives for contractual savings, pension funds, insurance products and mutual funds, that channel household wealth into long-term investment rather than speculative real-estate flips. Without that pipeline of patient capital, the burden of financing development falls on the exchequer, and the fiscal squeeze tightens.

Equally crucial is expenditure quality. Defence and infrastructure will rightly absorb a larger share of the pie, but the public will demand assurances that these funds are deployed efficiently. On the social side, targeted cash transfers and conditional grants are likely to replace across-the-board subsidies that have proved both expensive and ineffective.

Taken together, these measures sketch a cautious but confident fiscal trajectory: consolidate first, then grow, though not at any cost. The authorities’ willingness to forgo quick fixes in favour of structural change suggests that the painful lessons of previous boom-and-bust cycles have finally sunk in.

Success, however, will depend on relentless execution: pruning wasteful allocations, enforcing tax compliance without harassment, and rolling back protectionist instincts whenever they threaten to resurface.

The choice before policymakers is stark. A return to import-fuelled consumption would buy applause today and hardship tomorrow. By contrast, an investment-led, export-driven strategy demands patience but offers the only sustainable route to higher living standards. The opportunity is real; the cost of letting it slip is immense.

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

The writer is macroeconomist and assistant professor of practice, IBA

Originally published in The News