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CWA # 1750, 16 July 2025
PR Takeaway
Pakistan’s Budget 2025-26: Five takeaways

  Swati Sood

On 26 June, the National Assembly of Pakistan passed the Finance Bill and allocated PKR 17.6 trillion for the fiscal year 2025-26. The Federal Budget 2025-26 was introduced on 10 June, nearly a month after Pakistan’s four-day military conflict with India and against the backdrop of the Iran-Israel conflict. Finance Minister Muhammad Aurangzeb upheld the budget as “balanced” and “growth-oriented.” The budget incorporated various amendments from the finance committees of both houses of parliament. All amendments proposed by the opposition were rejected. The current government’s obstinacy over the budget has not only revealed cracks within the ruling coalition but has also exposed the IMF’s grip over Pakistan’s economic decision-making.
 
The Budget’s ‘Statement of Purpose’ highlighted that “demand for grants for FY2025-26 primarily address debt servicing of both domestic and external obligations, as well as funding for recurrent and development expenditures aimed at revitalizing sustainable economic growth.” Natural disasters represent “the largest fiscal risk identified in the statement,” besides macroeconomic (high interest rates), revenue, debt-related, public enterprise-related, and climate change risks. Mitigation strategies are stated to consist of widening the tax base, efficient management of public expenditure to protect social welfare and development programs, extending maturities and increasing fixed borrowing to reduce interest rate shocks, public enterprise reforms to enhance financial discipline and reduce contingent liabilities, investment in climate-resilient infrastructure, and targeted subsidy programs. 
 
1.Fiscal Consolidation versus Economic Stimulus
The budget comprises an increase in taxes to facilitate fiscal consolidation. Pakistan’s tax-to-GDP ratio for FY 2025-26 is projected to be 14 per cent. The government has set a tax collection target for the Federal Board of Revenue (FBR) at PKR 14.1 trillion. Such a target is challenging considering the government missed its annual tax collection target last year by a margin of approximately PKR 1.2 trillion. The federal budget has granted additional powers to the Federal Board of Revenue (FBR) personnel for reducing evasion. Relief has been provided to salaried individuals earning PKR 3.2 million annually, providing a benefit of PKR 56 billion. However, the impact of indirect taxes like the GST and petroleum and gas levy will be felt by the middle class, while reliance on sales tax and excise duties continues. Overall, the federal government has focused on increasing compliance rather than distributing the tax burden. Considering the FBR has failed to pursue enforcement of punitive measures for non-compliance, the effectiveness of proposed taxation measures depends on strict implementation.
 
For FY 2025-26, targets for the fiscal deficit are adjusted to 3.9 per cent. Last year, the fiscal deficit stood at 2.6 per cent of GDP. Widening fiscal deficit must be offset by higher economic growth. However, Pakistan’s economy is projected to grow at only 4.2 per cent for FY 2025-26. To fuel economic growth, the government must undertake fiscal expansion. Instead, public expenditure is being sharply reduced by 7 per cent to PKR 17.57 trillion in FY 2025-26. Further, last year, Pakistan underutilised its development expenditure under the Public Sector Development Programme (PSDP). One of the reasons behind this shortfall is the Finance Ministry curtailing PSDP spending to achieve quarterly and annual primary surplus targets, aligning with the IMF programme. Thus, short-term considerations to achieve fiscal consolidation have overtaken long-term priorities to induce economic growth.
 
Debt servicing remains the single largest expenditure item, accounting for approximately 47 per cent of total spending at PKR 8.2 trillion. Last year, the primary surplus stood at 3 per cent of GDP. This year, primary surplus projections are set at 2.4 per cent of GDP, largely driven by increased central bank foreign exchange reserves of USD 14.51 billion as of 30 June. Maintaining a high primary surplus can suppress public investment and aggregate demand, undermining long-term economic recovery. On the other hand, it can result in relatively improved external account management by reducing debt stock over a period of time. Achieving these targets will require a non-negotiable commitment: the federal government must spend less than its non-interest revenues.
 
2.Absence of major reforms
Structural reforms, which are a prerequisite to achieving fiscal deficit targets and a growth rate of 4.2 per cent, remain mostly absent in this year’s budget. Pension rationalization stands as an exception amidst the macroeconomic stabilization drive, focusing on meeting revenue generation targets to keep fiscal account imbalances in control rather than reducing economic inequalities or driving economic growth. No substantial measures have been introduced to address the decline in industrial sectors so as to increase investor confidence.
 
3.Increased Defence spending
Defence allocation has been increased by 20 per cent to PKR 2.55 trillion after Pakistan’s four-day conflict with India. This is the single largest allocation for any department, amounting to 2.5 per cent of Pakistan’s GDP. The Pakistan Army has been allocated PKR 1.17 trillion, accounting for nearly 46 per cent of the total defence budget. The air force and navy received just more than PKR 520 billion and PKR 265.9 billion, respectively.
 
4.Climate resilience and natural disaster preparedness
The ‘Climate Budget Statement’ acknowledges the higher fiscal risk associated with climate change and natural disasters, and the accompanying costs of mitigation strategies. Increased government spending on climate-resilient infrastructure is expected to widen the fiscal deficit in the short term. For FY 2025-26, green budgeting constitutes 6.9 per cent of the current budget and 8.2 per cent of the development budget. Almost 50 per cent of subsidies are ‘climate-responsive.’ Whereas, the ‘Disaster Budget Statement’ stipulates 1 per cent of the federal budget for natural disasters. An average disaster event could increase the fiscal deficit by as much as 1.03 per cent of GDP.
 
5.Gender Parity
The ‘Gender Budget Statement’ highlights that in FY 2025-26, the government allocated 6.9 per cent of the development budget to “gender sensitive areas,” amounting to approximately PKR 291 billion. Public spending of 5,000 cost centers of the federal budget has been segregated under multiple gender classifications.
 
References
“Federal Budget 2025-26,” Finance Division, Government of Pakistan
“Finance minister unveils Rs17.6tn budget, targets 4.2% growth,” The Express Tribune, 10 June 2025
“Highlights - Pakistan Economic Survey 2024-25,” Economic Adviser’s Wing, Finance Division, Government of Pakistan
Ariba Shahid & Asif Shahzad, “Pakistan boosts defence budget by 20% but slashes overall spending in 2025-26,” Reuters, 10 June 2025
Shahbaz Rana, “Govt misses development target,” The Express Tribune, 3 July 2025
Erum Zaidi, “Pakistan’s forex reserves with SBP reach $14.51bn in FY25, exceeding IMF’s target,” The News International, 3 July 2025
“Govt introduces significant pension reforms to reduce burden,” The Express Tribune, 11 June 2025
Abid Hussain, “How is Pakistan raising money for a 20 percent hike in defence spending?” Al Jazeera, 12 June 2025
Shahbaz Rana, “Salaried class paid Rs555b in FY25,” The Express Tribune, 4 July 2025

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