Pakistan's federal budget for the fiscal year 2023-24, which was released on Friday, reveals a staggering budget deficit of Rs.6923 billion ($24.2 billion), which is 82 percent higher than last year's projection and represents 6.54% of the country's gross domestic product (GDP), as opposed to the 4.9% gap projected last year.

Out of the total current expenditure of Rs. 13320 billion ($46.6 billion), Rs. 9100 billion ($31.8 billion) would go for only two items: defense expenditure and debt servicing. The interest payment or debt servicing is the single largest entry on the expenditure side, which will consume Rs. 7303 billion ($7.3 billion)—15.4% higher than last year and account for 1.7% of the GDP.

For the fiscal year 2023–24, the Unity government has budgeted a total revenue of Rs. 1216.3 billion ($42.6 billion). Consistent with the inefficiency and corruption of the nation's tax collection apparatus, the revenue forecast appears to be extremely optimistic. Pakistan's Federal Board of Revenue (FBR), which collects taxes for the government, has been given a difficult target of Rs. 9200 billion ($32.17 billion) to meet, primarily because the government has not made an effort to expand the tax net, and existing industries and businesses are rapidly closing.

Economic survey 

Earlier on Thursday, Finance Minister Ishaq Dar presented the fiscal year 2023 economic assessment in Islamabad, showing a 3% industrial sector shrinkage. Before presenting the survey, the minister ranted about his government's economy, which, he claimed prioritized macroeconomic stability and left the country in good economic shape in 2017.

According to cabinet figures, Pakistan's GDP grew 0.29% last fiscal year-- much below the 5% projection—with agriculture grew 1.55%, Industry -2.94%, and Services 0.86%. Industrial production fell 2.94% from 7.1%. Ministerial documents show 28.2% inflation in Pakistan from July 2022 to March 2023, up from 11% the year before. Data reveals that the government has failed to meet 11.5% inflation target last year due to currency devaluation and global supply shocks that raised import prices.

According to the survey, Pakistan's exports fell 9.9% to $21bn from $23bn and Imports fell 25.7% from $58.9billion to $43.7billion. The trade deficit dropped 10.4% to 6.6% while the current account deficit fell 74.1% from $13bn to $ 3.4 billion in 2023. The current account deficit dropped to 1% of GDP from 4.7% last year.

"The primary driver behind this improvement was the 29.7pc fall in the merchandise trade deficit on the basis of substantial decline in import payments to $41.5 billion in Jul-Mar FY2023 from $ 52.7 billion previous year," the document states.

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 Asad Umer, a former finance minister and secretary general of Pakistan Tehreek Insaf (PTI), tweeted, "According to government statistics, GDP growth decreased from 6.1% last year to 0.3% this year. For Pakistan, this is the largest growth decrease since 1971. the highest rate of inflation in the nation’s history. The economic downturn is disastrous. This is not effective. Time to reflect, restart, and rejuvenate.”

Inequalities in the tax system

The Pakistani tax system has had difficulty developing beyond its current scope of levying duties on imports and consumer spending. Indirect taxes on utilities, foods, services, and recreation account for over 60% of the FBR revenue while only 36 to 39% comes from direct taxes.

Pakistan has not been able to raise taxes. The tax-to-GDP ratio has remained constant at 10% of GDP despite various reform initiatives funded by donors. As the government did not increase the tax income, significant gaps appeared in the provision of public services. For example, over 20 million people lack access to clean water, one in three people lack a functional toilet, and 40% of children under the age of five have stunted growth.

The under-taxation of agricultural revenue, urban real estate, and the retail sector makes these inequalities worse. Pakistan's tax system encourages businesses and investors to invest in urban real estate as opposed to industries that could produce exportable goods or services. By undertaking the property sector, the government itself encourages investments in unproductive sectors. According to recent research, the Indian city of Chennai, which has a population of roughly 10 million, collects more urban property tax than the entire state of Punjab in Pakistan with a population of over 110 million. Agriculture contributes to almost one-fifth of the GDP but only accounts for less than 1% of total national tax collection, making it another industry that is undertaxed.

More than Rs. 1.7 trillion ($6 billion) in lost tax income occurred in the past year due to loopholes in Pakistan's tax legislation. The federal government typically grants these exemptions at its discretion to favor certain industries. They could also undermine the information trail necessary for extending the tax system, which could lead to distortions in the system. Some of these exclusions are simply strange; for example, until very recently, red chiles were exempt from sales tax in Pakistan's tax code while green chilies were not.

Subsidies to elite 

Despite facing an acute resource crunch in the absence of an IMF bailout package, Pakistan's financial managers are still reluctant to withdraw subsidies of over $17.4 billion enjoyed by Pakistan’s elite groups, corporate sector, feudal landlords, politicians, and the country’s powerful military.

In 2021, the UN Development Programme (UNDP) released a National Human Development Report (NHDR) for Pakistan, which focused on issues of inequality in the South Asian country of 220 million people. The report claimed that around 6% of the country's economy went to the elite in undue privileges.

The report says that the corporate sector, which reaped an estimated $4.7 billion in privileges, was determined to be the biggest beneficiary of the benefits, including tax rebates, low input costs, higher output prices, or privileged access to capital, land, and services.

The richest 1 percent of the population, who jointly control 9 percent of the nation's total revenue, and the feudal landowner class, which makes up 1.1 percent of the population but owns 22 percent of all fertile farmland, were determined to be the second and third-highest privilege receivers. Both groups are well-represented in the Pakistani Parliament, with candidates from the nation's major political parties typically hailing from either the feudal landowner class or its commercial elite.

It was discovered that the nation's military received $1.7 billion in benefits, mostly in the form of tax exemptions and privileged access to property, capital, and infrastructure. Nonetheless, the research pointed out that in addition to being Pakistan's largest urban real estate developer and manager and having extensive involvement in the development of public projects, the military is also "the largest conglomeration of economic enterprises in Pakistan."