Subsidies for the Rich, Taxes for the Poor: Pakistan’s Fiscal System Under Fire

In a major collaborative effort, researchers from the World Bank Group, the Pakistan Institute of Development Economics (PIDE), and the Planning Commission of Pakistan have delivered a revealing analysis on the impact of Pakistan’s fiscal policies. Published in May 2025 and authored by Beenish Amjad, Haydeeliz Carrasco, and Moritz Meyer, “The Effects of Taxes and Transfers on Inequality and Poverty in Pakistan” employs the Commitment to Equity (CEQ) methodology to assess whether the government’s taxation and spending policies reduce or reinforce economic inequality. Drawing on extensive microdata from the Household Integrated Economic Survey (HIES) 2018–19 and official administrative records, the study makes a startling revelation: instead of helping the poor, Pakistan’s fiscal system has made them worse off.

The Poor Pay More Than They Receive

Contrary to the expected role of fiscal policy in alleviating hardship, the study shows that Pakistan’s combination of taxes, subsidies, and transfers in fiscal year 2019 increased the national poverty headcount by approximately 2.2 percentage points. The system’s redistributive power appears minimal, with the Gini coefficient, a common measure of income inequality, barely moving from 29.0 to 28.6. Most alarming is the finding that nearly all Pakistani households, except those in the bottom decile, are net payers into the system. The poorest 10 percent receive a small net benefit, while those in the second and third deciles actually lose more through taxation than they gain through transfers. Meanwhile, the richest 10 percent shoulder a greater tax burden in absolute terms, but this is outweighed by the regressive structure of many subsidies and the underwhelming scope of targeted support for the poor.

GST Deepens Poverty While BISP Offers Relief

Among the fiscal instruments analyzed, the General Sales Tax (GST) stands out for its negative impact on poverty. While technically neutral in its application across income groups, GST represents a significant burden for poor households because it consumes over 7 percent of their pre-tax income. This tax, applied uniformly across essential and non-essential goods, is found to push vulnerable households further below the poverty line. On the other end of the spectrum, the Benazir Income Support Program (BISP) emerges as the most effective policy for reducing inequality. Its unconditional cash transfer scheme, targeted through a Proxy Means Test (PMT), delivers modest yet meaningful relief to low-income families. Public expenditure on pre-primary and primary education also contributes positively, albeit to a lesser degree, to reducing income disparities. Still, the scale of these efforts pales in comparison to the wide-ranging effects of indirect taxation.

Subsidies Flow Upward, Not Downward

The report’s most damning finding centers on the inefficiency and regressivity of Pakistan’s subsidy system. Instead of channeling benefits to the needy, most subsidies are captured by wealthier households. The richest 20 percent of the population receive a staggering 34 percent of subsidy expenditures, 29 percent of educational benefits, and 27 percent of public health benefits. This distorted distribution is largely due to better access among the wealthy to subsidized utilities like electricity and gas, as well as to advanced healthcare and higher education services. For instance, tertiary education spending disproportionately benefits the rich, who are far more likely to access university-level institutions. Meanwhile, rural and marginalized communities are left underserved, despite being more vulnerable. As a result, Pakistan’s subsidy policies are not only expensive and fiscally draining but also unfair and counterproductive from an equity perspective.

A Global Outlier in Fiscal Inequality

When compared internationally, Pakistan’s performance in using fiscal policy as a tool for redistribution is among the weakest. Out of a sample of middle-income countries, including Brazil, Mexico, Indonesia, and Turkey, Pakistan ranks at the bottom in both inequality reduction and poverty alleviation post-fiscal intervention. The reasons are structural. Revenue collection is low, at just 13.4 percent of GDP, and dominated by indirect taxes that weigh more heavily on the poor. At the same time, vital sectors like health and education are severely underfunded, with federal spending on health at only 0.07 percent and on education at 0.33 percent of GDP. Compounding this issue, much of the available fiscal space is consumed by rigid expenditures, interest payments, pensions, and defense, leaving little room for progressive spending. These constraints have prevented the government from expanding social protection or improving the quality of public services in a meaningful way.

Toward a Fairer and Smarter Fiscal Future

The study closes with a set of clear and urgent recommendations. It calls on the Government of Pakistan to restructure its subsidy programs, replacing broad and inefficient support schemes with targeted cash transfers like those offered through BISP. At the same time, improving the efficiency of public expenditure, particularly in primary healthcare and basic education, is vital to ensuring long-term social mobility. On the revenue side, strengthening the enforcement and scope of direct taxation, such as personal income and property taxes, could both enhance equity and increase fiscal sustainability. If implemented wisely, these reforms could generate the fiscal space needed to expand meaningful social protection while also reducing the tax burden on the poor. In essence, the study delivers a powerful message: Pakistan’s fiscal system is not just failing the poor; it is actively disadvantaging them. A shift toward equity-focused fiscal policy is not only necessary but long overdue.