High budgetary outlays on defense and debt servicing expenditures, along with low tax revenues, have squeezed the capital and social expenditures required for higher growth and social development. Pakistan's tax to GDP ratio is around 13 percent. Less than one percent of the population is effectively subject to income tax. Low tax revenues reflect a narrow tax base and a weak tax administration system. Agriculture, the largest component of GDP, is virtually untaxed.
Taxpayers often evade paying taxes in collusion with tax officials.
Higher tax revenues are, however, crucial to generating the budgetary resources for capital and social investment. Tax reform has been a central policy condition for the many IMF loans to Pakistan, including the present one. Successive governments have dodged the required changes, due to opposition from powerful business and landowning groups. The budget for 1999-2000 fails to address problems related to the tax system and to the composition of budgetary expenditures. This structure of budgetary expenditures is, however, unlikely to prove sustainable or to be consistent with rapid economic growth.