Introduction
Pakistan’s fiscal deficit remains one of the most pressing economic challenges, consistently exceeding 6% of GDP over the past decade. For FY 2023-24, the fiscal deficit is projected at 7.5% of GDP, significantly above sustainable levels. The increasing gap between revenue and expenditure has forced the government to rely on domestic and external borrowing, leading to unsustainable debt accumulation.
Key Issues Driving the Fiscal Deficit
- Weak Revenue Mobilization: Pakistan’s tax-to-GDP ratio stands at 9.2%, one of the lowest in South Asia, compared to India’s 17% and Bangladesh’s 10.2%.
- Soaring Debt Servicing: In FY 2022-23, 55% of total revenue went toward debt servicing, leaving little for development.
- Inefficient Subsidies: The government spent over PKR 1.3 trillion on energy and food subsidies, often benefiting the privileged rather than the poor.
- Expanding Public Sector Wage Bill: Government salaries and pensions now account for nearly 30% of current expenditures.
Strategies to Reduce the Deficit
- Tax Reforms: Expanding the tax net, enforcing tax compliance, and taxing under-taxed sectors (real estate, retail, agriculture) can boost revenues.
- Expenditure Rationalization: Phasing out inefficient subsidies and implementing zero-based budgeting can curb wasteful spending.
- Debt Management: Restructuring high-interest debt and prioritizing domestic financing can ease fiscal pressures.
- Provincial Revenue Generation: Strengthening Provincial Finance Commissions (PFCs) can enable provinces to raise their own revenues rather than relying on federal transfers.
If not controlled, the fiscal deficit will lead to further currency depreciation, inflation, and economic instability. A sustainable fiscal policy is the need of the hour.
