Pakistan Bulletin
An up-to-date and informed analysis of key issues of Pakistan.
Balancing the Scales: Fiscal Policy for All
December 2024
Fiscal policy across the world has proven its potential towards improving equity. However, in Pakistan, the miniscule share of direct taxation in the total tax revenue – coupled with limited effort by the government to turn the situation around – has worsened income inequality.
Fiscal policy determines how taxes and government transfers are used to influence the economy. It, therefore, plays a critical role in addressing socioeconomic challenges, including poverty, income inequality, and gender disparity. Pakistan currently has a tax-to-GDP ratio of 8.77% which is well below the recommended 15% for developing economies. This greatly limits the redistributive capabilities of Pakistan’s fiscal system. This article provides an overview of how the country’s fiscal policy performs with respect to its impact on poverty, inequality, and gender disparity, and discusses where there is room to improve equity.
Pakistan’s fiscal policy focuses on improving revenue generation through broadening the tax base and increasing direct tax collection to address the persistently low tax-to-GDP ratio. The failure to effectively implement these tax reforms forces the country to be reliant on indirect taxes. Currently, 60 percent of the country’s tax revenue comes from indirect taxes including sales tax, customs duties, and excise taxes, which disproportionately impact lower-income classes.
Sixty percent of the country’s tax revenue comes from indirect taxes including sales tax, customs duties, and excise taxes, which disproportionately impact lower-income classes.
On the expenditure side, a significant portion of the budget is allocated to defense and debt servicing, limiting spending on social sectors. Social protection programs, such as the Benazir Income Support Programme (BISP), have received increased funding, with allocations reaching PKR 400 billion, yet overall spending on social security remains under 0.5% of GDP, which is much lower than the global average of 1.5-2% for developing countries. With a fiscal deficit at 5.9% of GDP and growing public debt, the focus shifts towards fiscal consolidation, i.e. implementing a fiscal policy that aims to increase revenues through higher taxes, and reduced expenditures. This is bound to have an adverse effect on the already failing redistribution role of Pakistan’s fiscal policy.
In 2024, fiscal consolidation and high inflation led to a poverty rate of 40.5 percent and an additional 2.6 million Pakistanis fell below the poverty line. Indirect taxes exacerbate this vulnerability by increasing the cost of essential goods. For example, the 17 percent general sales tax (GST) on food and energy disproportionately affects low-income households, which spend over 50 percent of their income on basic consumption.
Conversely, targeted transfer programs like BISP have demonstrated some success in poverty alleviation. As of 2023, BISP supports over 8 million families, with cash transfers averaging PKR 7,000 (approximately USD 25) per quarter per family. Between 2011 and 2019, the percentage of BISP beneficiaries below the poverty line fell from 90pc to 72pc. Conditional cash transfers have also improved school enrollment for children. However, the BISP handout is not only limited to only a small percentage of those living below the poverty line but also covers just 10% of the household consumption expenditures which is not enough to have a considerable impact on poverty reduction.
Income inequality in Pakistan, measured by the Gini coefficient, where 0 represents perfect equality and 100 represents perfect inequality, was 37.2 in 2019. Wealthier households benefit from tax exemptions on capital gains, property, and agricultural income. The regressive nature of indirect taxation contributes to this inequality. According to the World Bank, the poorest 40% of households pay 16% of their income in indirect taxes, compared to only 10% for the wealthiest 10%. This is because the poor have a higher marginal propensity to consume, and the rich have the capacity to save a high proportion of their income. For as long as direct taxation, in the form of personal and corporate income tax, fails to contribute a larger part of tax revenue, fiscal policy will continue to worsen income inequality in the country.
In Pakistan, there is significant gender inequality in economic participation, education, and health. Fiscal policy can influence this disparity in both positive and negative ways. Indirect taxes on essential goods disproportionately impact women, who typically manage household consumption in low-income families. Moreover, women often work in the informal sector, where they face lower wages and lack access to social security benefits, making them more vulnerable to the regressive effects of taxation.
On the other hand, programs like BISP, which channel cash transfers directly to women, enhance their financial autonomy, improve their decision-making power within households, and provide a buffer against economic shocks. Additionally, conditional cash transfers linked to children’s education and healthcare have shown positive spillovers for gender equity, fostering improved opportunities for girls. The federal budget for the Fiscal Year 2023-24 promoted gender equity through its allocations for Social Protection (PKR 499,940 million), Women’s Economic Empowerment (PKR 442,497 million), Social Services, including education, healthcare and other basic services, (PKR 254,799 million), Gender Based Violence (PKR 31,912 million) and, Advancing Women’s Rights (PKR 225 million) for institutions advancing women’s rights. Structural barriers such as limited access to education, credit, land ownership, and employment opportunities continue to hinder women’s economic empowerment, but it is the duty of the government to ensure that they are not made worse through the implementation of economic policy.
The overall spending on social security in Pakistan remains under 0.5% of GDP, which is much lower than the global average of 1.5-2% for developing countries.
To address the challenges of growing inequality, Pakistan must implement comprehensive reforms. It is imperative that tax reform shifts the dependency away from indirect taxation towards progressive direct taxation by expanding the tax base to include under-taxed sectors like agriculture and real estate. Higher revenue generation will allow for the expansion of the budget for social protection programs to the recommended 1.5-2% of the GDP. This should include greater coverage of conditional cash transfers linked to health and education outcomes. Investments in health and education should be increased to the regional benchmarks. It is also time for Pakistan to implement gender-responsive budgeting strategies. Reduce taxes on goods disproportionately consumed by women, such as healthcare and menstrual hygiene products. The investments in women-centric programs must be given priority in the federal and provincial budgets. Overall, there is a need to shift towards ex-ante data-driven policymaking. Research on fiscal incidence should be conducted regularly to determine how these policies are impacting poverty, inequality, and gender equity.
Fiscal policy across the world has proven its potential towards improving equity. In Pakistan, while programs like BISP have demonstrated the potential to alleviate poverty and empower women, the broader fiscal framework—dominated by regressive taxes and limited redistributive spending—continues to perpetuate inequality and gender disparities. With effective taxation reforms and expansion of social security coverage, Pakistan can create a fiscal system that will help promote inclusive growth and equitable social progress.
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