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Pakistan Keeps Raising Taxes. Why Does It Still Need to Borrow?

Every year, Pakistan’s federal budget raises a familiar question. The government collects taxes, pays interest on old debt and looks for ways to finance the remaining gap. Another IMF review follows. Officials speak about fiscal discipline, while taxpayers wonder why the burden continues to grow.

I have followed Pakistan’s public finances for years. Why has the state found it easier to collect more from existing taxpayers than to change the institutions that make repeated borrowing necessary?

The answer is not that Pakistan has done nothing. The government has introduced digital tax systems, tightened spending targets and begun changing how tax audits are conducted. Some reforms have produced measurable progress. Others remain incomplete.

Pakistan has made progress on revenue collection

The Federal Board of Revenue has expanded its use of technology to identify tax risks and improve compliance. Electronic invoicing and production monitoring form part of a broader effort to reduce underreporting. The government has also introduced automated methods for selecting taxpayers for examination.

Technology can identify unusual transactions, but an unusual transaction is not necessarily evidence of tax evasion. The quality of the underlying data matters. So does the ability of taxpayers to correct errors. More notices do not automatically mean better enforcement.

The September 2026 reform could change tax administration

On 25 September 2026, the FBR announced its National Faceless Centre in Islamabad. Under the announced arrangement, a computerised risk-based system selects cases and assigns them to officers. Different officers handle audit, assessment and quality review. Notices and hearings take place electronically through IRIS, with field verification where legally required.

Separating responsibilities could reduce opportunities for arbitrary decisions. Yet a faceless system does not automatically become a fair system. Taxpayers must still understand allegations, examine evidence and receive reasoned decisions. The centre’s long-term impact cannot be established from its launch announcement alone.

What has AI actually achieved?

Public discussion sometimes treats every digital audit system as artificial intelligence. The distinction is important. Tax administration technology and the Auditor-General’s examination of public spending perform different functions.

In December 2025, the Auditor-General’s department established a Centre for Government Data Analytics. Its published description says auditors are exploring AI tools using synthetic datasets, but AI is not yet being used in live government audit engagements. That is not the same as the FBR’s use of automated risk assessment in tax enforcement.

Government statements about AI-based tax audits also use different measures, including cases identified and amounts reportedly recovered. These figures should not be added together without reconciling their scope and reporting periods.

Expenditure control remains a difficult problem

Pakistan’s IMF-supported programme requires fiscal adjustment and reforms in public financial management. A central target is the primary balance. A primary surplus means revenue exceeds spending after interest payments are excluded. It does not mean the overall budget is balanced.

Pakistan can record a primary surplus and still need substantial financing to service accumulated debt. Fiscal discipline can slow debt growth without immediately ending borrowing.

State-owned enterprises reveal the institutional problem

State-owned enterprises remain a test of fiscal reform. Their financial exposure includes different types of obligations, which should not be confused with annual operating losses or direct budget subsidies. Governance rules matter, but repeated legal changes will achieve little without credible reporting and accountability for management decisions.

Privatisation is one possible response, not an automatic cure. Public ownership can shelter poor management; private ownership without adequate regulation can also impose costs on consumers.

Why borrowing continues despite reforms

Interest payments consume fiscal resources. The state also faces external financing obligations. Raising additional rupee taxes does not itself create the foreign exchange required to repay external debt. Export earnings and remittances matter alongside fiscal policy.

Pakistan reached a staff-level agreement with the IMF on programme reviews in October 2026, subject to Executive Board approval. That was evidence of programme progress, not proof that every structural weakness had been corrected.

Are ordinary Pakistanis benefiting?

Fiscal stability matters. But slower inflation does not restore purchasing power lost when prices rose sharply in previous years. Households can still struggle with food and electricity bills even as the rate of inflation declines.

Public spending choices also determine whether adjustment benefits citizens. A government can improve its primary balance while falling short of social spending targets. Expenditure control should be judged partly by the services it protects.

The next reform should be measured by results

The FBR should publish comparable figures for completed audits, legally sustainable recoveries, processing times and taxpayer complaints. The Auditor-General should explain how data analytics changes audit coverage and whether departments act on findings. State-owned enterprises should be judged through audited accounts and transparent reporting of financial exposure.

A single year of improved collection may reflect tax rates or inflation rather than stronger compliance. Lower expenditure may reflect postponed payments rather than lasting savings.

Pakistan’s fiscal problem is also a problem of accountability

It would be inaccurate to claim that nothing has changed. It would be equally premature to declare the reform programme successful simply because the government has introduced new technology or met selected IMF targets.

The government can now examine taxpayers through increasingly sophisticated digital systems. Citizens should expect comparable improvements in the examination of public expenditure. If technology makes it easier to question a taxpayer’s income, it should eventually become easier to trace how public money was spent.

Pakistan has begun strengthening the machinery that collects revenue. The harder institutional task is making the machinery that spends it answerable.

Sources and further reading

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