Beyond Public Finance: Towards Constitutional Po…
The first part of this series argued that Pakistan’s recurring fiscal crises cannot be understood through conventional economic analysis alone. The distinction between public finance and Constitutional Political Economy (CPE) must now be explained. Both examine the role of the state in economic life, but they begin from different assumptions and ask fundamentally different questions.
Traditional public finance is primarily concerned with what governments ought to do. In the classical framework associated with Richard Musgrave, fiscal policy performs three principal functions: allocation of resources, redistribution of income and macroeconomic stabilisation.
Governments provide public goods, correct market failures, reduce unacceptable inequalities and use taxation and expenditure to promote stability and growth. This framework remains indispensable for analysing budgets, taxes and public expenditure. The International Monetary Fund’s discussion of Musgrave’s framework confirms its enduring influence on fiscal analysis.
The difficulty arises when the state is treated as a single, impartial institution pursuing social welfare. In the real world, governments consist of politicians, bureaucrats, legislators, judges, regulators and numerous organised interests. Each operates under incentives and constraints. Political actors do not cease to pursue power, institutional advantage or personal interest merely because they enter public office.
A tax system may therefore be inefficient not because its designers misunderstood economic theory, but because inefficiency benefits influential constituencies. An exemption may survive not because it promotes investment, but because its beneficiaries possess political power. Public expenditure may be allocated not according to social need, but according to the ability of institutions and groups to influence the budgetary process.
Public finance generally asks: what tax would be efficient, equitable and productive? CPE asks a prior question: what political and constitutional arrangements will cause those in authority to adopt and administer such a tax fairly?
This difference emerged most clearly in the work of James M. Buchanan, who was awarded the 1986 Nobel Prize for developing the contractual and constitutional foundations of economic and political decision-making. Buchanan argued that economists must specify their model of politics before recommending policies. They should examine the “constitution of economic polity”—the rules and constraints within which political actors make decisions—rather than assuming that government automatically acts as a benevolent guardian of collective welfare.
In The Calculus of Consent, Buchanan and Gordon Tullock applied economic reasoning to collective decision-making. They distinguished between choices made within existing rules and choices concerning the rules themselves. Ordinary politics concerns decisions taken under established constitutional arrangements. Constitutional political economy examines how those arrangements should be designed, whose consent they require and what incentives they create.
The distinction may be understood through the analogy of a game. Public finance often studies the moves made by players: whether a tax rate should be increased, expenditure reduced, subsidies withdrawn or borrowing limited. CPE examines the rules of the game: who may impose a tax, who may approve expenditure, how revenues are distributed, what majorities are required, which institutions are accountable and what remedies exist when power is abused.
The rules determine the range of possible outcomes. Replacing one finance minister, tax administrator or economic adviser cannot fundamentally alter results if the institutional incentives remain unchanged.
Buchanan and Geoffrey Brennan developed this insight further in The Reason of Rules. Their focus was not merely upon particular policy choices but upon the rules governing political and market interaction. CPE therefore does not ask only whether a government policy appears desirable. It asks whether the institutional process through which it is adopted protects citizens against arbitrary, discriminatory or predatory use of power.
This approach does not imply hostility towards the state. A capable state is essential for education, healthcare, infrastructure, environmental protection, social security and economic development. CPE merely refuses to assume that state power will automatically be exercised for these purposes. A strong state without constitutional restraints may become strong against ordinary citizens while remaining weak before powerful interests.
These insights are neither exclusively modern nor exclusively Western. Centuries before the emergence of public choice theory, Ibn Khaldun analysed taxation as part of the broader rise and decline of states. He observed that governments in their earlier stages could obtain substantial revenues from relatively moderate assessments, whereas later rulers frequently imposed heavier burdens but collected less as incentives weakened, production contracted and coercive expenditure expanded.
Arthur B. Laffer subsequently acknowledged that the proposition associated with the Laffer Curve was not his invention and specifically identified Ibn Khaldun as an important precursor. Ibn Khaldun’s contribution, however, went far beyond a relationship between tax rates and revenue: he connected fiscal policy with political legitimacy, administrative expansion, elite consumption and institutional decline.
The Constitution of Pakistan itself demonstrates that taxation is not merely an economic instrument. Article 77 provides that no federal tax may be levied except by or under the authority of an Act of Parliament. The provision embodies the constitutional principle that taxation requires lawful legislative authority; it is not simply an administrative technique for raising revenue.
Article 160 creates the National Finance Commission and provides the framework for distributing specified revenues between the Federation and the provinces. Article 160(3A) further protects the provincial share by declaring that it cannot be lower than that provided under the preceding Award. These provisions represent a constitutional bargain concerning political authority, federalism and access to public resources. Revenue distribution is consequently not just an accounting exercise. It forms part of the structure of the federation itself.
Article 140A requires the provinces to establish elected local governments and devolve political, administrative and financial responsibility to them. Fiscal policy cannot produce accountable public services when decision-making remains remote from citizens and constitutionally required devolution is treated as optional.
Articles 37 and 38 contain important commitments regarding social justice, education, economic well-being, reduction of inequality and provision of basic necessities. They are Principles of Policy rather than directly enforceable Fundamental Rights, and Article 30 limits their judicial enforceability. Their inclusion nevertheless demonstrates that the constitutional purposes of revenue collection extend beyond achievement of numerical tax targets. The state collects resources to fulfil social and economic obligations, not merely to satisfy accountants or external creditors.
Formal constitutional rules, however, tell only part of the story. Institutions also consist of unwritten conventions, established practices and informal distributions of power. Douglass North emphasised that economic performance depends upon the incentive structure embodied in institutions. Technology, investment and human capital cannot by themselves explain development when institutional arrangements reward unproductive behaviour or obstruct productive activity.
This insight is particularly relevant to Pakistan. The country possesses tax laws, parliamentary procedures, audit institutions, regulatory bodies and an elaborate administrative structure. The problem is not the complete absence of formal rules. It is the divergence between rules as written and rules as applied.
A salaried person may face automatic deduction while a politically influential group secures preferential treatment. A documented enterprise may bear numerous withholding obligations while informal competitors remain outside effective enforcement. Digital information may be abundant, but its use may be selective. A tax exemption may be legally enacted, but the political bargaining that produced it may remain invisible.
Orthodox analysis tends to describe these outcomes as weaknesses of implementation. CPE regards them as predictable consequences of the prevailing incentive structure. What appears to be administrative failure may, from the perspective of its beneficiaries, be a successfully maintained political arrangement.
The difference is crucial. A reformer guided only by public finance may propose a better tax base, a lower rate or improved technology. A reformer guided by CPE must additionally ask who will resist the reform, who will obtain exceptions, which institution will enforce it, what safeguards will protect taxpayers and whether those imposing the burden will themselves be subject to the same rules.
Pakistan needs both approaches. Public finance can identify efficient and equitable policies. CPE explains why those policies may never be adopted, may be distorted during legislation or may be selectively enforced after enactment.
The essential lesson is that fiscal instruments cannot be separated from the rules governing political power. Better taxes require better institutions; better institutions require credible constitutional restraints, genuine parliamentary scrutiny, transparent federal arrangements, empowered local governments and equal application of law.
Public finance tells us what a rational fiscal system should achieve. Constitutional Political Economy explains why Pakistan’s existing system repeatedly produces the opposite.
In the next part, we shall examine the myth of neutral tax policy and demonstrate how every tax choice distributes not only economic burdens but also political power.
[To be continued]
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.
