Recycling budget revenues

Pakistan's federal budget for FY2025–26 reveals more than just fiscal arithmetic. It reflects a shifting economic terrain shaped by IMF oversight, macroeconomic consolidation and the intensifying demands of climate resilience and low-carbon development.

With a projected 25% increase in direct taxes — from Rs5.5 trillion in FY25 to Rs6.9 trillion in FY26 — the government has signalled a serious attempt to broaden the tax base, formalise the economy and address the persistent fiscal deficit. Income tax receipts alone are set to rise by Rs1.36 trillion. 

Meanwhile, levies and fees are up by 20%, and non-tax revenues have also registered a significant surge. These figures suggest a move toward enhanced resource mobilisation. But they also raise an essential question: are we merely collecting more, or are we reallocating better?

Beyond the pursuit of higher revenues lies a transformative opportunity: how to rewire the budget through equitable revenue recycling. In essence, revenue recycling refers to the strategic redeployment of public revenues — especially those collected from distortionary or regressive instruments — into initiatives that deliver social protection, climate resilience and productive public investment.

What distinguishes recycling from routine budgeting is the principle of intentionality: the very source of revenue becomes tied to its reinvestment logic. 

Countries like Canada, Germany and Sweden have operationalised this through carbon pricing regimes where revenues from environmental taxes are redistributed via household rebates, energy efficiency subsidies or clean infrastructure projects.

This principle acquires heightened relevance in Pakistan's context. For the first time, the FY26 budget introduces a carbon levy of Rs2.5 per litre on both petrol and diesel. While modest in rate, it carries symbolic and structural weight. 

Together with the longstanding petroleum development levy, these fiscal tools generate considerable non-tax revenues. Yet, their current treatment as fungible general revenues, blended into the consolidated fund, dilutes both their purpose and impact. 

To unlock their developmental potential, the government must institutionalise a robust revenue recycling mechanism. This begins with earmarking 100% of the carbon levy proceeds, and a significant share of the petroleum development levy, into the Pakistan Climate Fund established under the Climate Change Council and Authority.

Such earmarking is not just a technical measure but a governance imperative. 

By anchoring the recycling of climate-related revenues to a dedicated institutional vehicle, Pakistan can enhance transparency, ensure outcome-based spending, and align fiscal policy with its Nationally Determined Contributions (NDCs). 

This approach also aligns with IMF's Resilience and Sustainability Facility (RSF), which calls for climate-linked fiscal reforms as a prerequisite for long-term macro-financial stability.

Several RSF actions, ranging from the adoption of the carbon levy to the activation of the Climate Fund and the mainstreaming of climate risk into public investment management, hinge on the transparent identification and utilisation of green fiscal flows. Pakistan now has the opportunity to shift the narrative from externally imposed reforms to domestically grounded innovation.

Equitable recycling of these revenues would also have profound implications for tax morale and public trust in fiscal governance. 

When citizens witness tangible, targeted benefits — such as subsidies for rooftop solar, electric public transport, or flood-resilient infrastructure — they begin to see taxation not as a burden, but as an investment in collective well-being. This trust is essential in a country where the informal economy is vast, and perceptions of unfair taxation are deeply entrenched.

If the carbon levy, despite its regressive potential, is recycled into clean energy access for low-income households, the state will have taken a significant step toward restoring fiscal legitimacy. 

On the contrary, the newly proposed, 18% GST on imported solar panels in the name of a level playing field is a negative measure, the level playing field for domestic solar manufacturing can also be ensured through the removal of GST on domestic panels.

This is where economic theory intersects with political economy. 

The Laffer Curve — often cited to caution against excessive taxation — suggests that beyond a certain threshold, increasing tax rates lead to reduced revenue due to evasion and compliance erosion. However, this threshold is not fixed; it is shaped by taxpayer perception of fairness and utility. If revenues are visibly and equitably recycled, the 'compliance elasticity' of taxation improves.

In other words, citizens are more willing to pay when they see results, and the state can maintain or even increase revenue without raising rates. For the carbon levy, this means sustained or even growing fiscal returns — not because the tax is high, but because its impact is high-profile, progressive, and publicly accountable.

The FY26 budget structure reinforces the urgency of this reallocation agenda. While direct taxes and other receipts have increased, indirect taxes have declined by 3%, potentially indicating economic contraction or policy moderation. 

Civil administration receipts are down by 4%, reflecting inefficiencies in non-tax collections. This mix calls for a rebalancing of fiscal strategy — from reliance on regressive consumption-based taxes to progressive, equity-oriented spending.

There are several high-impact avenues for deploying recycled funds. 

One is subsidising rooftop solar installations for protected and low-income consumers, reducing their dependence on high-cost grid electricity and simultaneously lowering the government's annual subsidy burden.

Another is the development of electric bus corridors and charging infrastructure in major cities, which can decarbonise urban mobility and improve air quality. 

Revenues can also finance just transition programmes, such as vocational retraining for workers in fossil fuel sectors, and investment in water-efficient agriculture and local adaptation systems in flood-prone districts.

To operationalise this strategy, the Ministry of Finance should establish a Revenue Recycling Unit in collaboration with the Ministry of Climate Change and Climate Change Council and Authority. This unit should be mandated to track the origin and use of recycled funds, publish annual audits, and align expenditures with the Medium-Term Budgetary Framework (MTBF). 

Pilot initiatives, such as city-level green transit or district-level solar voucher schemes, can serve as scalable models. Importantly, parliament must be granted oversight to ensure public legitimacy, and provincial coordination must be built through climate-linked grants under the NFC framework.

Resistance is inevitable. Fossil fuel lobbies may oppose the redirection of levies; ministries may resist loss of discretionary budget control; provinces may assert their claims over centralised climate funds. These are not insurmountable roadblocks, but design challenges. 

A well-governed and transparently managed Climate Fund, backed by legislation and public engagement, can become a cornerstone of Pakistan's green fiscal architecture.

Ultimately, recycling budget revenue is not just about fiscal innovation but about reimagining the social contract. A carbon levy that burdens the poor while funding government overhead will only breed resentment. But a carbon levy that finances solar panels in working-class neighbourhoods, electric buses in congested cities, and flood barriers in vulnerable districts becomes a tool of empowerment.

Budget 2025-26 offers Pakistan a fork in the road: either continue extracting without reform, or embrace a regenerative fiscal strategy that recycles pain into progress.

To translate the promise of revenue recycling into action, the following targeted reforms are recommended. 

First, earmark all proceeds from the carbon levy and a substantial share of the petroleum levy to the Pakistan Climate Fund — moving beyond climate tagging to enforceable, transparent allocation. Second, establish a Revenue Recycling Unit within the Ministry of Finance, in collaboration with the Climate Ministry, to track, audit and report on recycled funds under parliamentary oversight.

Third, launch high-impact pilot projects — such as solar subsidies, green transit, and climate-resilient infrastructure — to build public trust and demonstrate results financed by recycled revenue of carbon levy and taxation. Fourth, incentivise climate-linked NFC allocations and devolve funding access to district-level governments to strengthen local ownership and equity in green spending.

Fifth, run a public awareness campaign linking the carbon levy to visible community benefits, boosting transparency, trust and voluntary compliance.

These reforms can transform revenue collection from a fiscal necessity into a tool for climate justice and sustainable development. If implemented with vision and discipline, revenue recycling can do more than meet RSF reform conditions. It can restore public faith in taxation, expand compliance and transform Pakistan's budget from a balance sheet of burdens into a blueprint for resilience.

Twitter/X: @Khalidwaleed_ Email: [email protected] The writer has a doctorate in energy economics and servesas a research fellow in the Sustainable DevelopmentPolicy Institute (SDPI).

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Originally published in The News