ISLAMABAD: A private think tank has criticised the federal budget for 2025-26, terming it a set of “misaligned expenditure priorities” and “overly ambitious revenue targets” with no meaningful reforms on either front.

In its quarterly report released on Monday, the Policy Research Institute of Market Economy (PRIME) said the government was losing sight of a coherent economic reform strategy.

Although presented as fiscally responsible and aligned with IMF benchmarks, the think tank argued that the budget was focused more on economic survival than transformation. It pointed out that over 92 per cent of the total expenditure was allocated to current spending, leaving little fiscal space for development, which has been cut by another 10pc this year.

While the decline in interest rates has slightly reduced debt servicing costs, it still accounts for the lar­gest share of current expenditure, followed by defence, pensions, and subsidies. PRIME warned that such a skewed spending pattern leaves Pakistan with limited capacity to invest in growth or public service delivery.

On the revenue side, the government has set a target of Rs14.131tr — an 18pc increase over last year. While the share of direct taxation has improved over the years, the bulk of these taxes continue to fall on salaried individuals and already compliant businesses. PRIME highlighted that the manufacturing sector, which contributes only 14pc to GDP, pays 58pc of total taxes, whereas the retail sector, which makes up 18pc of GDP, contributes just 4pc in taxes.

This imbalance, the institute noted, reflects a regressive taxation structure that penalises the formal and productive sectors while allowing large informal segments to remain outside the tax net. “The tax system continues to burden those who are already contributing while failing to broaden the base,” the report stated.

Moreover, the FY26 budget introduces new taxes that PRIME believes could hinder key sectors, particularly the digital economy. It cited the imposition of a 5pc tax on foreign digital vendors and a 1–2pc services levy on payments to freelancers and e-commerce sellers. These measures, it warned, could impede the growth of Pakistan’s nascent digital economy.

Despite some positive measures, the institute described the budget as a “tightrope walk” that fails to address long-standing structural issues in Pakistan’s fiscal framework. “Even after decades of discussion, there has been no genuine effort to lower tax rates, reduce distortionary taxes, or implement a uniform tax regime,” it said.

The report also criticised the lack of a coherent tax policy and effective administration. Selective enforcement, underutilised institutional capacity, and the persistence of exemptions and loopholes continue to weaken revenue mobilisation.

Published in Dawn, July 29th, 2025