Lahore School of Economics Report Highlights Pakistan’s Economic Challenges

Overview of the New Budget

Pakistan’s economic outlook is currently marred by fiscal challenges, as detailed in the Lahore School of Economics’ recent report. For the fiscal year 2024-25, the budget has been significantly expanded, with expenditures rising from Rs14.5 trillion to Rs18.9 trillion. This increase is largely driven by the government’s ambitious target to boost tax revenue from Rs9.4 trillion to Rs12.9 trillion. However, this goal may prove overly optimistic given the country’s current economic difficulties, including stagnant growth, falling investment, and rising capital outflows.

Reliance on Borrowing

A major concern highlighted in the report is the heavy reliance on borrowing to meet these increased expenditures. Currently, borrowing constitutes 57% of the total expenditure, a figure that underscores the unsustainable nature of the current fiscal policy. The report criticizes the budget for its excessive optimism without addressing the deeper issues within the economy, such as the decline in large-scale manufacturing and an over-reliance on agriculture.

Economic Implications of Increased Taxation

The report also points out the irrationality of raising taxes without ensuring that the economy can support such an increase. The budget’s strategy to reduce borrowing from 51.8% to 45% by raising tax revenues might inadvertently stifle economic growth if higher taxes act as a disincentive for businesses and consumers. Furthermore, a significant portion of the budget is allocated to repaying existing debt, with the repayment of borrowings rising from 54.8% to 56.8% of total expenditures.

Recommendations for Economic Stabilization

To address these fiscal challenges, the report recommends reducing borrowing and its associated costs. It argues that the current approach of increasing expenditure funded by debt is neither sustainable nor effective. Instead, there is a need for expenditure cuts and a reduction in the budget deficit to stabilize the economy. Additionally, the report advocates for targeted welfare measures to mitigate the effects of high inflation on the poorest segments of society. Given the sharp increase in poverty rates—from 5% in FY 2019-20 to 18% in FY 2022-23—the report suggests implementing direct transfers, such as providing free wheat to the poor, to alleviate extreme poverty.

Conclusion

The Lahore School of Economics’ report provides a critical assessment of Pakistan’s fiscal policies, emphasizing the need for a balanced approach that integrates budgetary discipline with genuine economic growth and effective welfare measures. Addressing these issues is crucial to avoid exacerbating the country’s economic challenges and to foster a more sustainable fiscal environment.