n Pakistan, the government’s pursuit of high economic growth often involves a complex interplay between tax policies, investment strategies and employment issues. While the stated purpose of increasing the tax-to-GDP ratio is to generate additional revenue for public spending, it could end up creating obstacles to economic growth.

Ignoring the low investment ratio in the economy leads to sevral problems like unemployment. This, in turn, causes problems like underpayment due to an increase in labour supply, providing opportunities for the employers to create wage disparities, further complicating the economic landscape.

In Pakistan, discussion has often focused on raising the tax-to-GDP ratio to boost revenue for public spending. However, this approach may overlook a critical issue: our low investment ratio compared to our neighbours.

While the tax-to-GDP ratio is frequently mentioned, the conversation seldom addresses the need for higher investment, which is vital for sustainable economic growth. The pursuit of high economic growth is a universal objective. The challenge lies in understanding why these targets are rarely met.

If we look at developing countries that gained independence around the same time as Pakistan, we notice that they are growing because they invest more, despite having low tax-to-GDP ratio. For instance, India’s tax-to-GDP ratio in 2024 is 11 percent. It maintains a high investment percentage that has risen from approximately 25 percent in 2015 to close to 30 percent in 2024.

China has had the highest investment percentage among these countries, around 40 percent from 2015 to 2024, highlighting its focus on long-term growth. Similarly, Bangladesh, with a tax-to-GDP ratio of 8 percent — lower than Pakistan’s — has focused on increasing its investment percentage, ranging from 25 percent to 30 percent.

By comparison, Pakistan’s investment rate has mostly remained less than 15 percent, not only for the last 10 years but since independence. Very rarely do we go beyond this. When we do, it is not the norm but due to other factors.

For about a year now discussions about national economy have often emphasised the country’s low investment levels and the measures taken to attract investors. The Special Focus on Investment in Countries programme targets Gulf nations to enhance investment in Pakistan through security assurances and incentives.

Despite these efforts, Pakistan’s investment-to-GDP ratio remains around 13 to 14 percent, which is low by international standards. The low investment level is a significant barrier to achieving sustained economic growth and addressing key issues such as unemployment and wage disparity.

Pakistan’s tax-to-GDP ratio is currently around 10 percent, relatively high considering the segment of the population actually paying taxes is very small. The main issue is that very few people contribute to the tax revenue.

If the government aims to increase this ratio without broadening the tax base, it would be unfair as it will only raise the tax burden on the existing taxpayers. This could demotivate even those who have been willing to pay their taxes and encourage more people to avoid paying taxes altogether.

Investment percentage has mostly remained less than 15 percent, not only for the last 10 years but since independence. Very rarely do we go beyond this. When we do, it is not the norm but due to other factors. 

Currently, some taxpayers face multiple layers of taxation. First, taxes are automatically deducted from their earnings. Next, when they buy groceries, they pay taxes again. After paying utility bills, which include taxes, if they manage to save some money, they have to pay taxes on any assets they purchase with the savings. Such repeat taxation on the same earnings discourages savings and investment. It is unreasonable to ask taxpayers, who have already paied taxes on their earnings, to pay additional taxes on their savings and investments.

According to the World Bank, tax revenues exceeding 15 percent of a country’s gross domestic product are crucial for economic growth and poverty reduction. This level of taxation provides the necessary funds for future investments and sustainable economic development.

Developed countries typically have much higher ratios, with OECD members averaging 34.0 percent in 2023. However, it is important to understand that the high tax ratios did not occur overnight. Initially, these countries did not impose high taxes; instead, they created an environment conducive to investment and gradually built their tax systems to achieve high ratios. An important lesson we should learn from history is that we are not on the same page as most developed countries. The developed countries behaved differently during the development process.

It is unfortunate that we compare ourselves with them while ignoring their past efforts. One of the reasons behind our persisting problems is that we cherry-pick points we believe are relevant. Whenever there is a debate in Pakistan about government services, the argument is often made that we are not as developed as other countries, so we cannot provide the same facilities. However, this point is ignored when imposing taxes.

The governments wish to increase tax revenues. However, they often overlook the need to provide adequate returns for taxpayers. The government spending on development has been steadily decreasing. This approach does not align with the principle that tax revenues should be used to foster economic growth and improve public welfare.

Investment is closely linked to employment. No government can achieve high growth without creating new jobs. Unemployment, a critical issue often overshadowed by other economic indicators, directly impacts economic growth. When individuals are employed, they can afford a decent standard of living, which fuels consumer spending and drives economic growth.

High unemployment rates continue to plague Pakistan’s economy, stalling its potential for growth. The lack of job opportunities affects not only individual livelihoods but also overall economic stability.

In Pakistan, highly qualified individuals, including some with PhDs, remain unemployed. This raises serious concerns about the value of higher education and the effectiveness of the current system. Additionally, the trend of qualified individuals leaving Pakistan for better opportunities abroad highlights the severity of the issue, reducing the pool of innovative idea producers and further decreasing economic growth.

Investing in job creation and reducing taxes can spur economic growth. Ignoring these interconnections and focusing solely on isolated aspects of the economy can lead to suboptimal outcomes. Policymakers must consider the combined effects of their decisions and ensure that efforts to improve one economic indicator do not adversely affect others. A comprehensive approach is necessary to achieve balanced and sustainable economic growth.

The writer is a consultant based in Islamabad. She can be reached at asmi78610@gmail.com