Extractive state & death of growth
The federal budget for fiscal year 2026-27, Finance Bill 2026 and Economic Survey 2025-26 once again present a familiar narrative. Macroeconomic stability is improving, inflation is moderating, the current account is manageable, and fiscal indicators appear less alarming than a year ago. However, beneath these encouraging statistics lies a far more disturbing reality: Pakistan's economy continues to lose its capacity to generate sustained growth, productive investment and decent employment.
The explanation is neither mysterious nor ideological. Pakistan has gradually evolved into what economists describe as an extractive state – a system that increasingly survives by extracting resources from productive sectors rather than creating conditions for those sectors to flourish. The distinction between an inclusive and an extractive state is fundamental. An inclusive state taxes citizens and businesses to finance public goods: quality education, healthcare, infrastructure, law and order, scientific research, social protection and equal economic opportunity. An extractive state, by contrast, views society primarily as a source of revenue for sustaining political patronage, bureaucratic expansion, debt servicing and elite privileges. Pakistan increasingly resembles the latter.
Consider the burden imposed upon a formal business enterprise. Before a company reaches the stage of earning distributable profits, it may face corporate income tax, minimum tax on turnover, super tax, sales tax, further tax, customs duties, regulatory duties, additional customs duties, withholding taxes, workers' welfare contributions, social security levies, infrastructure cesses, professional taxes and electricity-related duties. Federal and provincial authorities simultaneously claim shares in the same economic activity. Compliance itself has become a separate industry.
The cumulative impact extends far beyond statutory rates. Businesses must finance the state's cash flow through advance taxes, endure prolonged refund delays, navigate overlapping jurisdictions and devote substantial resources to audits and litigation. Capital that should be expanding factories and creating jobs is diverted towards satisfying an increasingly complex revenue machinery.
The result is predictable. Investment remains chronically weak. Manufacturing struggles to maintain momentum. Export diversification remains limited. Productivity growth is stagnant. Entrepreneurs increasingly prefer trading, speculation, property holdings or capital flight over productive investment. This is not accidental. It is the logical consequence of a system that taxes economic activity before it generates income. Among the most damaging examples is the minimum tax regime. A business suffering loss due to inflation, currency depreciation, energy shortages or declining demand may still be required to pay tax on turnover. Such a levy abandons the basic principle that taxation should be linked to income. It transforms taxation into a charge on existence itself.
The super tax tells a similar story. Introduced as a temporary measure, it has become a permanent feature of the fiscal landscape notwithstanding some relief proposed in Finance Bill 2026. Combined with ordinary corporate taxation, it has pushed effective tax burdens to levels that discourage expansion and reinvestment. Businesses are repeatedly told that economic growth is a national priority while simultaneously being treated as inexhaustible sources of revenue. The state appears unable to recognise a simple reality: businesses do not create wealth because they are taxed; they can be taxed only because they create wealth.
The Economic Survey 2025-26 reveals another uncomfortable truth. Despite continuous increases in taxation and revenue mobilisation efforts, Pakistan's social outcomes remain disappointing. Educational indicators lag behind regional competitors. Public health spending remains inadequate. Human development outcomes remain among the weakest in comparable economies. The question therefore arises: where is the return on extraction? Citizens are entitled to ask why increasing fiscal demands have not produced corresponding improvements in public services. Businesses are entitled to ask why compliance costs continue to rise while infrastructure, governance and institutional quality remain deficient. The answer lies in the structure of public finance itself.
A growing proportion of public resources is absorbed by debt servicing. Successive governments have relied upon borrowing not primarily to finance transformative investments but increasingly to service earlier debt obligations. This has created a vicious cycle in which new revenues finance old liabilities rather than future growth. Long-term borrowing for productive infrastructure can generate economic returns sufficient to service debt. Borrowing to pay interest on previous borrowing achieves the opposite. It transfers resources from the future without creating additional productive capacity. Consequently, taxation increasingly serves the objective of sustaining the fiscal system itself.
The burden falls disproportionately upon the documented sector because it is visible, accessible and easy to tax. Meanwhile, large segments of economic activity remain outside the effective reach of the tax machinery. The result is a widening divide between those who can avoid the state and those who cannot. Pakistan's formal sector has effectively become the state's captive revenue base. This phenomenon extends beyond taxation. Electricity tariffs, fuel pricing, withholding tax regimes and regulatory compliance requirements collectively function as instruments of extraction. Each may appear defensible in isolation. Together they create an environment in which productive enterprise becomes progressively less attractive.
The consequences are visible everywhere. Young professionals increasingly seek opportunities abroad. Industrial investment shifts to competing jurisdictions. Informality expands. Innovation declines. Economic dynamism weakens. No country has achieved sustained prosperity through such a model. The experience of successful Asian economies demonstrates a different approach. States that achieved rapid industrialisation initially focused on expanding productive capacity, encouraging investment, building human capital and supporting exports. Revenue growth followed economic growth. Pakistan has frequently attempted the reverse. It seeks revenue first and growth later. History offers little evidence that such a strategy can succeed.
The federal budget 2026-27 has failed to avail the opportunity to rethink these priorities. The objective to increase revenue targets or satisfy short-term fiscal benchmarks is not possible without creating conditions under which businesses can invest, expand and generate employment. The Finance Bill 2026 proposes just the opposite. Tax policy to reward productive activity, rather than penalise it, is missing. Turnover-based taxation is retained, rather reinforced for traders having turnover up to Rs200 million. Temporary levies masquerading as permanent taxes have not been reconsidered. Provincial and federal tax systems are not harmonised. Compliance costs would further increase.
Most importantly, the state has not yet recognised that economic growth is not a residual outcome of taxation. Sustainable taxation rests upon the foundation. The greatest threat to Pakistan's fiscal future is not an insufficient number of taxes. It is the gradual destruction of the productive capacity upon which all taxation ultimately depends. An extractive state may survive for a time by squeezing existing taxpayers harder each year. Eventually, however, the source of extraction begins to shrink. In the National Assembly and Senate, debate on budget should concentrate on one point: can country continue treating businesses as revenue-generating targets while wondering why investment remains elusive. It is high time to rebuild the relationship between state and society on a different principle: that governments prosper when citizens prosper, and that taxation is sustainable only when it follows growth rather than attempting to replace it.
The writer is the Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and visiting senior fellow of PIDE