World Bank Blames GST and Poor Fiscal Policy for Rising Poverty in Pakistan

A recent World Bank report has delivered a sobering assessment of the poverty and inequality crisis in Pakistan, pointing directly to the country’s taxation structure and inefficient fiscal policies as major contributors. Titled “The Effects of Taxes and Transfers on Inequality and Poverty in Pakistan,” the study analyzes how current fiscal tools are exacerbating hardship for Pakistan’s most vulnerable communities, while offering insight into what reforms could reverse the trend.

At the core of the report’s findings is the role of the General Sales Tax (GST), which the World Bank identifies as the fiscal instrument with the largest marginal contribution to the rise in poverty. The GST is a consumption-based indirect tax levied at each stage of the supply chain, ultimately burdening end consumers—including low-income households. According to the study, GST accounts for over 7% of pre-tax household expenditure in Pakistan, disproportionately affecting poor families who already spend a greater share of their income on basic goods and services.

This tax burden, when layered onto households already struggling with rising inflation, limited income opportunities, and weak social protections, pushes them further into poverty. The regressive nature of GST means that it impacts low-income populations more severely than wealthier segments, effectively widening the poverty gap. The World Bank warns that this dynamic needs urgent redress if Pakistan is to reverse its deepening poverty crisis.

In contrast, the report highlights the positive role played by targeted welfare programs such as the Benazir Income Support Programme (BISP). BISP, which provides monthly cash assistance to Pakistan’s poorest families, has had the most significant marginal effect in reducing income inequality. The World Bank notes that such transfers not only provide immediate financial relief but also serve to soften the harsh effects of regressive taxation.

However, the benefits of social transfers like BISP are being undermined by broader systemic flaws. One of the most startling conclusions in the report is that Pakistan’s poorest citizens are, on balance, net payers into the fiscal system. This means the taxes they pay, particularly through indirect means like GST, exceed the value of public benefits and services they receive in return. This is a deeply troubling insight into a fiscal system that, instead of lifting people out of poverty, is actively impoverishing them.

The report doesn’t stop at identifying problems; it also makes a series of strong recommendations. It urges Pakistan to shift its taxation strategy away from indirect taxes like GST and toward more progressive direct taxation. This would mean taxing higher income earners more heavily while easing the burden on low-income households. Direct taxes, such as income and property taxes, are typically more equitable and can be structured to target wealthier segments more effectively.

In terms of expenditure, the World Bank calls for a fundamental overhaul of how public funds are allocated. Currently, the inefficiencies in Pakistan’s public spending—particularly in education and healthcare—are not only a missed opportunity but are also contributing to the perpetuation of inequality. Surprisingly, the study found that expenditures on pre-primary and primary education, which should ideally be equalizers, have a negative impact on inequality due to access issues, quality gaps, and misallocation.

The World Bank emphasizes that Pakistan must improve both the mobilization of domestic revenue and the efficiency of public expenditure. By generating more fiscal space through tax reform and reducing wasteful spending, the government can significantly expand its social safety nets and invest in long-term human development sectors.

The report is especially timely as Pakistan continues to grapple with an economic crisis, including a growing debt burden, dwindling foreign reserves, and stagnant growth. Amid these challenges, poor and middle-income households are bearing the brunt of austerity measures and rising costs. Structural reforms, while difficult, are increasingly being seen as necessary to avert a prolonged social and economic disaster.

Furthermore, the findings underscore the need for stronger governance and transparency in fiscal management. Without robust monitoring mechanisms and accountability, even well-intentioned reforms can fall short of delivering their intended outcomes.

In conclusion, the World Bank’s latest report paints a stark picture of the poverty landscape in Pakistan, but it also offers a path forward. Rebalancing the fiscal system to favor progressive taxation, increasing the efficiency and scope of social welfare programs, and prioritizing human development in public spending can collectively reduce poverty and inequality. The government now faces a critical decision: continue down a path that disproportionately burdens the poor, or embrace meaningful reform that can uplift millions of lives and steer the country toward inclusive and sustainable growth.