Budget, free market and democracy

I have been advocating ideas and policies for free enterprise, open trade, limited government and low tax rates in these columns. These institutions are pillars of prosperity. This budget has brought good news on some of these fronts.

To begin with, import tariffs and taxes are coming down. The government has decided to reduce average customs duties from 20% to 10%, eliminate regulatory duties and additional customs duties, simplify customs duty slabs to 0%, 5%, 10% and 15% and phase out all customs duty exemptions – all in five years. This, if properly implemented, will go a long way in creating a competitive economy.

Unsurprisingly, business groups are not happy with the new tariff policy, set to be enforced from July. Their argument is familiar: we need more time, and this time is not right.

However, the current National Tariff Policy (2019-24) had already set this direction and even in the new policy, there is a five-year window, which should be sufficient time for re-adjustment and re-calibration. In fact, I worry that this may not be sufficiently ambitious to remove protections available to selected sectors.

Public expenditure as a percentage of GDP, as an indicator of the size of the government, indicates that the government has planned to restrain its expenditures. In 2024-25, public expenditure rose to 26% of GDP, which has been budgeted at 22.6% in 2025-26, including both federal and provincial numbers.

What drove a decline, or at least a budgeted reduction? In an ideal world, this should have been a result of reduction in the size of the government. The government has announced its intent, but it is yet to be translated into a solid plan.

In the absence of rightsizing, a reduction in public spending can be explained by a significant reduction in the cost of debt servicing due to declining interest rates and the under-utilisation of development budget.

While acknowledging these positive developments, the government did not communicate any meaningful commitment to reducing income tax rates on salaried individuals, business individuals and corporates, barring an increase in the income tax threshold, which is a welcome step. Top marginal rates, including the surcharge and super tax, remain punitively high and serve as a major barrier and disincentive to grow and invest.

I am told by the CEO of a leading manufacturing firm, which has substantial local and export sales and operates in a highly competitive market, that with a profit margin of 5%, the effective tax burden on income is 52% and it can go as high as 74%, if the profit margin goes down to 3%! Profit margins for large-scale businesses are usually very low, and our tax code penalises such businesses.

Budget should be a democratic exercise. For the first time in our constitutional history, the National Assembly Standing Committee on Finance and Revenue, chaired by former finance minister Syed Naveed Qamar, was empowered to review the Finance Bill, clause by clause, and to make recommendations, some of which were eventually accepted as part of the amended Finance Bill 2025.

As an independent economist, I got the privilege to participate in all meetings of the standing committee this year, briefed them, and observed the debate between the government and members of the National Assembly on all aspects of the federal budget and the Finance Bill. It was heartening to see a rich cross-partisan debate on issues pertaining to taxes and revenue measures.

That the budget was meant to be an exercise to plan our taxation and spending in the strict framework of the IMF is not a surprise. Also, the constitutional structure of the National Finance Award pre-assigns revenue shares to all provinces regardless of fiscal performance. Within these two broad constraints, the Finance Bill was thoroughly reviewed.

The standing committee recommended a significant reduction in the rate of GST on the import of solar panels from 18% to 10%, introduced safeguards against the arbitrary use of the power of the executive to arrest taxpayers in the case of alleged tax fraud, pushed for equal rights for taxpayers and tax authorities for condonation of delays in specific types of cases, and introduced limits on the use of authority to close bank accounts in case of failure to register with the GST regime. The income tax rate for the second slab has been brought down from 2.5% to 1%.

To build on this democratic experiment, I believe that all such proposals, and counter-proposals should be backed up by open and accessible research papers. The formation of Parliamentary Budget Office, as proposed by a private member bill, if established, will be a great step forward in moving towards democratic governance and accountability of the government. This will enable parliament to get independent research and analysis necessary to formulate its opinion on all fiscal matters.

Budget 2025-26 has brought some good news for democracy and free markets, showing that Pakistan has a chance to continue on reform path, while strengthening both democratic and economic institutions.

The writer is the founder and executive director of Policy Research Institute of Market Economy (PRIME)