Ahsan Ansari
Pakistan’s federal budget for the fiscal year 2025–26 announced on June 10, 2025, by Finance Minister Muhammad Aurangzeb. The Federal Cabinet approved a total expenditure outlay of Rs 17.57 trillion (about US $62 billion), marking a 7 percent reduction from the previous fiscal year. This reduction in spending was a deliberate move aimed at conserving fiscal resources, driven largely by Pakistan’s obligations under the IMF programme and mounting geopolitical tensions, particularly recent military skirmishes with India.
One of the most eye-catching features of the new budget is the substantial 20 percent hike in defence expenditure, which was raised to Rs 2.55 trillion (approx. US $9 billion), up from Rs 2.12 trillion the year before . This decision came in the immediate aftermath of an intense cross-border conflict with India, which involved missile and drone exchanges and resulted in dozens of fatalities. While the spending on the military remains significantly lower than India’s—India allocates nearly US $78.7 billion, over eight times Pakistan’s defence budget —the increase nonetheless reflects Islamabad’s priority on national security amid heightened tensions.
Notably, the budget documents indicate that interest payments alone are expected to consume Rs 8.21 trillion, a staggering figure that underscores the burden of debt servicing in Pakistan. The fiscal deficit is projected at 3.9 percent of GDP, aiming for a primary surplus of 2.4 percent . These targets represent a modest improvement over the previous year’s deficit of 5.9 percent of GDP, reflecting the government’s fiscal consolidation efforts under IMF guidance. Islamabad plans to meet its revenue targets with a gross revenue target of Rs 19.28 trillion and an ambition for tax receipts totaling Rs 14.1 trillion .
Economic growth projections presented in the budget are cautiously optimistic, with the GDP growth forecast to rise to 4.2 percent in FY 2025–26, improved from an expected 2.7 percent in FY 2024–25. The government attributes this anticipated growth to factors such as lower borrowing costs following a series of central bank rate cuts, increases in IT exports, remittances, and improved macroeconomic stability. IT export revenues have surged recently, with some reports estimating growth between 24–32 percent year‑on‑year, while remittances continue to flow in the region of US $37–38 billion .
On the front of citizen relief, the budget unveiled several measures aimed at softening the impact on everyday Pakistanis. Government employees and pensioners will benefit from pay increases: a 10 percent raise for civil servants and 7.5 percent for pensioners, along with an additional “disparity allowance” of 30 percent for lower grades (1–16) and 15 percent for higher grades (17–22). Income tax reforms also aim to provide relief: the tax‑free threshold has been raised from Rs 600,000 to Rs 1 million annually, meaning individuals earning up to Rs 83,000 monthly are now exempt. The salary range of Rs 120,000–220,000 per month will now face an effective tax rate of 11 percent, noticeably lower than previous slabs. However, with only about 1.3 percent of Pakistan’s population currently filing income tax returns, this remains a structural challenge.
Broadening the tax base is another pivotal strategy in this budget. New taxes will extend to ultra‑processed foods—including soft drinks, chips, noodles, ice cream, biscuits, frozen meats, and ready‑to‑eat meals—with excise duties ranging from 5 percent to 20 percent, and in some cases escalating to 40 percent on sugary beverages and snacks. The Ministry of Health has even recommended a “health tax” of 20 percent on processed foods, with a phased plan reaching 50 percent by 2029 to both discourage unhealthy diets and generate revenue for healthcare . Moreover, e‑commerce services will now attract an 18 percent sales tax, and new levies are expected on vehicles, digital income, and agricultural produce—including a 3.5 percent tax on social media earnings and higher levies for pensioners earning above Rs 400,000 monthly .
Fuel and electricity users face additional burdens. A newly introduced carbon tax of Rs 2.5 per litre will add to petrol and diesel prices, while gas tariffs are set to rise by Rs 116.90 per MMBTU, and electricity rates may also be adjusted upward despite previous rollbacks . These direct cost increases will hit low‑ and middle‑income families, exacerbating inflation pressures and offsetting the benefits of salary and tax relief. Official forecasts peg inflation at 7.5 percent, though many experts worry underlying consumer price increases may prove steeper .
Spending on social sectors remains a concern. While allocations to the Higher Education Commission are at Rs 39.5 billion, and agriculture gets Rs 4.25 billion, these amounts remain small against the scale of Pakistan’s needs. Health spending is anchored at roughly 1.4 percent of GDP, and education receives about 2.1 percent, both levels trailing significantly behind South Asian peers . With nearly 45 percent of the population living below the poverty line, and 16.5 percent in extreme poverty, the gap between fiscal allocation and social demand is stark .
The Public Sector Development Programme (PSDP) shows little improvement. At around Rs 1.06 trillion, it remains squeezed, as defence and debt servicing absorb roughly 70 percent of federal expenditures. This leaves minimal scope for infrastructure investments, educational expansion, and health system strengthening.
On the upside, the government is pushing structural reforms. It intends to simplify customs duties and gradually eliminate regulatory tariffs, aiming to make trade more competitive. Ambitious privatization plans involve state enterprises like Pakistan International Airlines (PIA), expected to reduce fiscal drag over time. The authorities are also targeting income from agriculture, retail, and real estate to boost tax revenues, following IMF advice. If implemented effectively, these reforms could improve Pakistan’s economic efficiency and support long‑term fiscal health.
Nevertheless, significant risks remain. Achieving the targeted tax revenue increase of 10 percent from the Federal Board of Revenue (FBR) will demand robust policy enforcement; economists caution that Pakistan may miss its ambitious targets without deep structural change . Meanwhile, expanding levy on processed foods, while serving public health goals, may burden the formal food industry—particularly those already grappling with tight margins and informal sector competition.
Pakistan remains vulnerable to climate risks—droughts, floods, and agricultural shocks are real threats, especially with the sector having contracted by approximately 13.5 percent last year. Poor farmers and rural communities may bear the brunt of this contraction, especially in the absence of stronger government support.
In conclusion, the 2025–26 federal budget offers a mix of relief and restraint. On the plus side, it provides higher take‑home pay, a wider tax‑free income threshold, and signals positive expectations in export‑driven sectors such as IT. However, rising excise taxes, fuel and utility price increases, and a stagnant social services agenda may erode these benefits for the middle and lower-income groups. A much‑needed priority for Islamabad now is to implement its stated reforms: channel savings from defence into health and education, expand the tax base beyond the elite, and ensure reforms deliver visible improvements in governance and service delivery.
The budget thus stands at a crossroads—it carries both promise and peril for the common man. Its success hinges on prudent implementation, genuine redistribution of resources, and lasting structural reforms that empower citizens rather than burden them.
Author is senior analyst . He can be reached at [email protected]
