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o manage a country’s economy, a government primarily relies on two types of economic policies: monetary policy and fiscal (budgetary) policy. The goals of these policies typically include controlling inflation and unemployment, boosting economic growth and maintaining a balance in payments. In recent times, the role of monetary policy has been mostly limited to controlling inflation. Consequently, the importance of fiscal policy has increased significantly.
This raises the question: will the federal budget for the fiscal year 2025-26 achieve these objectives? Will it help reduce poverty and unemployment?
The budget size is Rs 17,573 billion, Rs 1,304 billion less than the previous year. Rs 16,286 billion (93 percent) has been allocated for current (non-development) expenditures and Rs 1,287 billion (7 percent) reserved for development expenditures.
Among the current expenditures, the largest component is interest payments. These amount to Rs 8,207 billion (47 percent of the total budget). Notably, this amount exceeds by Rs 879 billion the total spending by federal and provincial governments on health and education over the past four years. Out of the interest payments, 88 percent will be used for domestic debt servicing and 12 percent for foreign debt payments.
The second largest component of current expenditures is defence-spending, which constitutes 15 percent of the budget. Given the regional tensions, this spending is considered unavoidable. The third major component is grants and transfers. Rs 1,928 billion (11 percent of the total budget) has been allocated for this. A significant portion of this is earmarked for social protection, including Rs 722 billion for the Benazir Income Support Programme, a 21 percent increase over the previous year.
Next come subsidies. The allocation is Rs 1,186 billion (7 percent of the total budget). Of this, Rs 1,032 billion (87 percent) is for the power sector, including Rs 125 billion for Karachi Electric.
It is noteworthy that while the government is providing the subsidies to the power sector, it has also imposed an 18 percent sales tax on solar panels, making it harder for people to invest in renewable electricity. According to a newspaper report, this tax is expected to generate Rs 20 billion.
The fifth major allocation is pensions. At Rs 1,055 billion these make up 6 percent of the total budget. Of this, 70 percent is for military pensions, and 23 percent for civilian pensions. [What is the rest for?] The next is federal government operational expenses, for which Rs 971 billion (5.5 percent of the total budget) has been allocated. The final major category is contingency and emergency spending, for which Rs 389 billion (2.2 percent of the total budget) has been allocated.
Among the current expenditures, the largest component is interest payments. It now stands at Rs 8,207 billion (47 percent of the total budget). This amount exceeds by Rs 879 billion the total spending on health and education by federal as well as provincial governments over the past four years.
Note that the development expenditure is limited to Rs 1,287 billion (7 percent), including Rs 1,000 billion for the Public Sector Development Programme (PSDP). The meager development spending speaks of the IMF’s emphasis on reducing government spending.
On the revenue side, the government expects to collect Rs 14,131 billion in tax revenues, and receive Rs 5,147 billion from non-tax sources. Out of this Rs 8,206 billion will be transferred to the provinces. This leaves the federal government with Rs 11,072 billion from domestic sources after the provincial transfers.
Within tax revenues, direct taxes constitute 48.8 percent, and, indirect taxes make up 51.2 percent. The increasing share of direct taxes is a positive sign. The proportion of indirect taxes—especially taxes on essential goods and services —should be reduced further. There was a strong push in the previous year’s budget to bring retailers and wholesalers into the tax net. There appears to have been little progress on that front.
The federal government’s total revenue is Rs 11,072 billion and total expenditures Rs 17,573 billion. This leaves it a budget deficit of Rs 6,501 billion. A part of this deficit will be covered through aid and privatisation, but most of it—around 97 percent-will be financed through borrowing. This means that debt servicing debt (interest plus principal) will remain a major challenge over the coming years.
One can conclude that while there is a significant focus on keeping the current account deficit low, effectiveness of measures meant to control poverty, inflation and unemployment remains uncertain.
The minimum wage has not been revised although after the introduction of the carbon levy, petrol will cost Rs 2.5 per liter more. Issues like affordable housing, clean water access and cheaper electric power remain unaddressed. For the extremely poor, the BISP may offer short-term relief. However, long-term solutions require the creation of employment opportunities, promotion of industrial development, law and order, and provision of interest-free loans to small and cottage industries.
The writer is an assistant professor at the Applied Economics Research Centre, University of Karachi. He can be reached at mr.ammadgmail.com.