Budget 2025-26

In the lead up to the FY2025-26 budget, many doubted whether the government would be able to deliver substantial relief for the salaried classes while also fulfilling the imperative to slash expenditures and raise revenue collection. Based on the budget presented yesterday on the floor of the National Assembly by the finance minister, the government appears to have pulled off this tricky balancing act. FBR tax revenues are expected to climb by 18.7 per cent to Rs14,131 billion while the non-tax revenues target has been kept at Rs5,147 billion, up 5.0 per cent year-on-year compared to FY25. Overall federal expenditure has been slashed by 7.0 per cent to Rs17.57 trillion. Despite the belt-tightening, the budget includes substantial tax relief for most Pakistani taxpayers. The biggest winners are those making up to Rs2.2 million annually, with the minimum rate reduced by 4.0 per cent from 15 per cent to 11 per cent. Those taking home between Rs600,000 and Rs1.2 million a year will see their tax rate drop from 5.0 per cent to 2.5 per cent while those making Rs60,000 to Rs120,000 per month will only be charged a tax rate of 1.0 per cent. A 10.0 per cent hike in the salaries of government and 7.0 per cent increase in the pensions of retirees has also been proposed. In addition, the budget sees an increase of 18 per cent in defence expenditure, following Pakistan's recent skirmish with India.

Even with the relief, the government is still expecting to collect more in direct taxes in FY2025-26 as compared to the previous fiscal, Rs6.9 trillion for FY26 versus Rs5.8 trillion for FY25. More importantly, there has not been much relief regarding indirect taxation. The petroleum development levy (PDL) will now be imposed on furnace oil, in line with IMF commitments, the GST on on autos below 850cc will be raised to 18.0 per cent from 12.5 per cent and a carbon tax of Rs2.5/litre has been imposed on petrol, diesel and furnace oil for FY26. Solar panel imports, which were exempt from taxes, will now also be taxed at 18 per cent. Overall, revenue collection from indirect taxes is expected to rise to Rs7.2 trillion from around Rs6 trillion. For Pakistan’s salaried majority, indirect taxation and steep utilities bills and tariffs have often been a bigger concern than income taxes, so it is debatable how much relief this budget really provides. One must also keep in mind that the inflation target for FY26 has been raised to 7.50 per cent from the revised target 5.0 per cent for FY25, so things are likely to get more expensive too. The budget is essentially projected to be export-oriented. For this purpose, tariff slabs have been revised, and new mechanisms have been put forward to determine the customs levy on the items sent out of the country. There is also an emphasis on providing raw materials at better rates to industries and corporations to boost exports.

However, consolidation is the primary aim when it comes to the fiscal front and, in that context, the level of relief on offer should not be scoffed at. IMF guidelines call for a primary surplus of 2.4 per cent of GDP for FY26, which this budget achieves, and the federal deficit has been kept at 5.0 per cent of GDP. In this context, what the people of Pakistan really need is growth. And while the budget targets growth of 4.7 per cent of GDP, this seems highly optimistic. Growth for FY25 was at just 2.7 per cent and many have called this estimate too high. One can only hope that the government actually meets its targets this time. Much depends on the how effectively the finance and planning teams are able to achieve this. This is especially important as far as tax collection and export-oriented measures go, with new measures also taken to bring freelancers and those engaged in online work into the tax net. If the government is serious about reform, it must pair its fiscal discipline with policies that tangibly ease the burden on ordinary citizens. Otherwise, even a well-balanced budget may fall short of delivering meaningful change.