Fiscal consolidation continues. FY26 is expected to be the third consecutive year of a primary fiscal surplus. This should help lower the public debt-to-GDP ratio and provide some cushion for future growth. However, economic strangulation is also likely to persist, as the government remains reliant on higher direct taxes without offering any relief to salaried individuals or the corporate sector. This is not going to be a revolutionary budget. It is simply a continuation of policies already agreed upon with the IMF. Pressure on tax revenues will remain. As interest rates decline, banks and depositors’ incomes will fall — dragging down the corresponding tax collections. Income from the oil and gas sectors may decline due to reduced domestic production (to accommodate imported RLNG) and subdued global prices. Fertilizer sector margins are expected to stay suppressed. Consequently, direct tax collection at current rates may be lower in FY26 compared to key contributors the preceding year. Meanwhile, the IMF is pushing for implementation of the National Tariff Policy (NTP), but the government is hesitating. The FBR is concerned about lower collections from customs duties. The question, then, is how to plug the fiscal gap. The standard response is to go after retailers and wholesalers and talk of expanding the tax net. History suggests these efforts rarely yield results. There are gaps in the revenue framework. This is why the IMF has not agreed to reducing the effective tax burden on salaried individuals or to scrapping the super tax on corporates. The Federal Excise Duty (FED) on certain items is likely to be increased — or newly imposed, including on cigarettes and ultra-processed foods. But without better enforcement, these measures will only push more activity into the informal economy. Already, the formal footprint in sectors like dairy and fruit juice is shrinking due to recent indirect tax hikes. Poor governance and the prevalence of other taxes will dilute any benefit from reducing import tariffs. While economic theory supports lower tariffs to disincentivize smuggling, other taxes create perverse incentives. For example, the FBR collects withholding tax (WHT) and sales tax at the import stage, followed by GST and FEDs on final products. Ideally, these taxes should also be reduced — but that is wishful thinking. In fact, the FBR is proposing new, unconventional taxes — such as a 1.5 percent WHT on all imports. If the NTP is implemented, lower import prices may drive up import volumes, increasing pressure on the PKR. In response, the FBR may increase GST or FED on selected goods, such as automobiles. One area urgently needing reform is the customs department. Rampant under-invoicing not only erodes tax revenue but also undermines domestic manufacturing. Without fixing this, the effectiveness of the NTP will be limited. The FBR, however, appears desperate. There is already a shortfall of Rs 1 trillion in tax revenue during the first 11 months of FY25, and meeting the FY26 target will be even more difficult. As always, the burden will fall on the already-taxed formal sector. Non-tax revenues are expected to perform well. The SBP is likely to post another bumper year of profits, driven by over Rs 13 trillion in open market operation (OMO) injections. Last year, the SBP contributed Rs 2.5 trillion to non-tax revenues, and a similar figure is expected this year. The government is also relying on petroleum levy, which already stands at around Rs 80/liter and may be increased to Rs 100/liter. Additionally, a carbon levy of Rs 5–10/liter is under consideration. There is limited space for expenditure cuts, aside from some savings in interest payments on debt. The government has reportedly secured IMF approval for a significant increase in defence spending. However, negotiations are ongoing regarding the size of the development budget. Regardless of what is initially allocated, it is likely to be trimmed later if tax revenues from retailers and the real estate sector do not materialise. In conclusion, the upcoming FY26 budget reflects a cautious, IMF-driven approach—prioritizing fiscal consolidation over transformative change. While primary surpluses and robust non-tax revenues, bolstered by SBP profits and petroleum levies, offer some macroeconomic stability, the continued reliance on existing taxpayers and indirect taxes risks stifling growth and further entrenching informality. Without bold reforms—particularly in customs enforcement and tax administration—structural weaknesses will persist, limiting the effectiveness of flagship measures like the National Tariff Policy. Though lower commodity prices and fiscal discipline may support modest growth in FY27 and FY28, the absence of meaningful structural change leaves Pakistan’s fiscal trajectory precariously balanced. Copyright Business Recorder, 2025