Fiscal discipline achieved – can growth be next?
The last fiscal year’s bottom-line numbers are promising. The consolidated deficit was reduced to 2.6 percent of GDP, the lowest since FY04. It is a long way from FY22 and FY23, when the deficit averaged 7.9 percent of GDP and the country was on the verge of default. The government has posted a primary fiscal surplus for the third consecutive year, clocking 2.9 percent of GDP in FY26, perhaps the…
The fiscal year's end numbers show significant progress. The consolidated deficit fell to 2.6 percent of GDP, the lowest since FY04. This marks a stark contrast to the 7.9 percent average in FY22 and FY23, when the nation teetered on the brink of default. The government has achieved a primary fiscal surplus for three consecutive years, with FY26 registering a record 2.9 percent of GDP.
This fiscal discipline has resulted in gross public debt declining from 75.2 percent of GDP in FY23 to 68.3 percent in FY26. Debt servicing costs have also plummeted from 122 percent to 66 percent of net fiscal revenue over the same period, providing much-needed breathing room. However, this fiscal success has come at a price: a high tax burden and under-investment in development spending have stifled economic growth.
The government could have used this fiscal space to lower the tax burden, but it only made minor adjustments, leaving the tax load higher than in FY22. IMF pressure to maintain primary fiscal surpluses has led to unachievable revenue targets, particularly from the Federal Board of Revenue (FBR). Despite this, the government expects growth in 2026, as it refuses to lower tax rates despite soaring global petroleum prices.
Petroleum levy revenues, up 28.5 percent to Rs1.6 trillion, will likely contribute to this growth. While overall fiscal expenditure fell by 4 percent to Rs23.1 trillion, federal spending dropped by 10.3 percent to Rs15.3 trillion, primarily due to a 22 percent decrease in debt servicing costs. However, federal current expenditure rose by 10.5 percent, with government and military expenses growing in real terms.
Defence spending increased by 18 percent, while civil government expenditures grew by 16 percent. Austerity is conspicuously absent, with subsidies down 22 percent, mainly due to full power sector cost recovery. The federal fiscal deficit narrowed to Rs4.8 trillion, or 3.8 percent of GDP, from 6.2 percent last year, with provinces posting a surplus, bringing the overall deficit to 2.6 percent of GDP.
Financing now relies more on external sources, up 90 percent to Rs1.2 trillion, while domestic financing fell by 62 percent to Rs2.1 trillion. Domestic debt, however, remains higher than external debt as a percentage of GDP. The path forward requires building foreign financing on a long-term basis and reducing taxes to encourage private-led growth.
Written by urgent.news from Business Recorder's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
