he federal budget for fiscal year 2025-26, presented by the finance minister in the National Assembly on June 10, has an ambitious fiscal framework shaped by revenue maximising policies, austere expenditure management and strategic borrowing.

The document, drafted under prevailing economic pressures, including the International Monetary Fund conditions, targets a total expenditure of Rs 19,278 billion against a net federal revenue of Rs 11,072 billion, revealing a fiscal deficit of Rs 6,501 billion or 3.9 percent of GDP. The fiscal arithmetic reflects persistent imbalances. The government continues to rely on domestic borrowing and external assistance to finance its expenditures.

The gross revenue projection is Rs 19,278 billion. Of this Rs 14,131 billion is to be collected through taxes, mostly by the Federal Board of Revenue. Non-tax revenue is expected to contribute Rs 5,147 billion. The federal government’s share after transferring Rs 8,206 billion to provinces under the 7thNational Finance Commission Award will be Rs 11,072 billion. The projection assumes optimistic enforcement and compliance gains, although historically their realisation has been inconsistent.

The expenditure framework remains overwhelmingly current - with Rs 16,286 billion allocated towards current expenditures, accounting for over 84 percent of the total outlay. Interest payments amount to Rs 8,206 billion, eclipsing any functional expenditure category, highlighting the mounting debt servicing burden. Defence allocation has been increased to Rs 2,550 billion. The pension liabilities have swelled to Rs 1,928 billion. The recurring escalation in non-development expenditures continues to crowd out much-needed fiscal space for development priorities.

The development expenditure through Public Sector Development Programme is budgeted at Rs 1,000 billion, 10 percent less than last year’s Rs 1,100 billion. The reduction will limit growth-enhancing infrastructure investments, human capital development and regional connectivity projects. The cuts in higher education, water resource management and science and technology sectors indicate a policy preference that sacrifices long-term productivity for short-term solvency.

The financing strategy is anchored in heavy domestic borrowing. Rs 6,309 billion borrowing is projected including T-Bills, PIBs and Sukuks. Non-bank borrowings via National Savings Schemes and other instruments stand at Rs 2,492 billion. The external borrowing component is relatively modest at Rs 1,287 billion, comprising multilateral and bilateral inflows. Reliance on domestic markets could exert upward pressure on interest rates, complicating private sector credit access and investment dynamics.

The taxation policy supported by the Finance Bill accentuates indirect taxes, continuing the regressive structure that disproportionately burdens lower-income segments of the society. Sales tax remains the dominant revenue source. It is estimated to fetch Rs 6,902 billion, followed by custom duties (Rs 1,588 billion) and federal excise (Rs 888 billion). Direct tax collection, mostly through income tax, is targeted at Rs 6,811 billion. The high share of indirect taxes aggravates inequality and erodes real incomes of the working classes.

Non-tax revenues hinge heavily on petroleum levies, profits of State Bank of Pakistan and dividends. The petroleum levy alone is projected at Rs 869 billion, reflecting the government’s increasing reliance on quasi-tax measures. SBP profit is expected to be Rs 1,468 billion. This assumes a stable macro-financial environment and surplus-generating operations. Dividends from public sector enterprises (PSEs) are pegged at Rs 138 billion. However, given the chronic inefficiencies and financial distress in key PSEs, the target seems ambitious.

The allocation for subsidies has been set at Rs 1,186 billion, down from the revised estimate of Rs 1,378 billion in FY2024-25. Most of the subsidies are directed towards the power sector, (Rs 400 billion for tariff differentials and Rs 125 billion for IPP payments). The fertiliser subsidy will be Rs 24 billion and wheat subsidy Rs 40 billion. The planned reductions, although fiscally prudent, risk exacerbating inflation and food insecurity among vulnerable populations.

The taxation policy supported by the Finance Bill 2025 accentuates indirect taxes, continuing the regressive structure that disproportionately burdens lower-income segments of the economy. Sales tax remains the dominant revenue source. 

Social protection spending will see a moderate increase, with Rs 734 billion earmarked under various heads, including Rs 140 billion for Benazir Income Support Programme. The allocation, though sizeable, remains inadequate against the backdrop of rising poverty, high food inflation and stagnating real wages. The health sector has been allocated Rs 31.9 billion and education Rs 112.6 billion, both falling short of the global development benchmarks.

The provincial shares under the NFC Award have been calculated at Rs 8,206 billion, marking a 17 percent increase from the revised Rs 6,997 billion in 2024-25. Equitable distribution is constitutionally mandated. However, the vertical fiscal imbalance continues to cause friction in fiscal federalism. The provinces’ reliance on federal transfers underlines their limited revenue autonomy and expenditure accountability.

The green component in revenue mobilisation and expenditure planning remains marginal. These are estimated at merely Rs 1.468 billion, with most being petroleum-related levies. Green subsidies at Rs 587 billion are classified under energy and agriculture, but their impact on climate resilience remains weakly defined. The token allocations towards mitigation and adaptation fail to align with Pakistan’s international climate commitments and vulnerability profile.

The overall macro-fiscal outlook painted by the budget is cautiously optimistic but structurally fragile. The primary surplus of Rs 1,217 billion is projected to cut debt accumulation. However, this is contingent on achieving revenue targets and restraining expenditures.

The nominal GDP is projected at Rs 129.6 trillion. The fiscal deficit is 3.9 percent of the GDP, down from the revised 5.6 percent in 2024-25. The projections rest on revenue buoyancy and disciplined fiscal operations.

Long-term implications of this budget are mixed. Continuation of high interest payments, inadequate development spending and overreliance on indirect taxes portend a stagnating growth environment. Underinvestment in social sectors, particularly education and health, jeopardises human development outcomes and economic inclusivity. The crowding-out effect of public borrowing on private investment threatens productivity and employment generation.

The common man is unlikely to witness tangible relief under this budget. Rising utility payments, indirect taxation and shrinking subsidies will likely intensify the cost-of-living crisis. Stagnation in real wages, coupled with inflationary pressures, will further erode purchasing powers. Limited social safety net expansion will fail to cushion the impact for low-income households, who will bear the brunt of fiscal consolidation.

The institutional reforms needed to address structural fiscal imbalances remain elusive. The budget does not adequately tackle tax evasion, PSE inefficiencies or public financial management weaknesses. The fiscal policy remains reactive rather than transformative, prioritising balance sheet optics over structural resilience. Lack of a clear roadmap for growth-enhancing reforms, investment facilitation and employment generation dilutes the development vision.

The fiscal federalism architecture requires urgent recalibration. The 2009 NFC Award is outdated and the vertical imbalance between federal and provincial fiscal responsibilities continues to impede service delivery. Decentralisation of expenditure functions without corresponding revenue authority creates inefficiencies and accountability gaps. The budget fails to initiate dialogue or reforms in this regard.

The private sector remains peripheral to the budget strategy. Limited incentives for small and medium enterprises, export-oriented industries and digital economy players reflect a status quo policy orientation. Absence of bold reforms to catalyse private investments and entrepreneurship constrains economic dynamism. Reliance on traditional sectors and rent-seeking industries undermines innovation and competitiveness.

The macroeconomic stabilisation agenda, though well-intentioned, must be underpinned by structural transformation. The budget for FY2025-26 provides a semblance of fiscal prudence but lacks the visionary thrust required to chart a resilient and inclusive growth path. The economic narrative must shift from fiscal survival to sustainable prosperity. The policies must be rooted in equity, efficiency and empowerment.

The policymakers must revisit this fiscal framework with an eye on generational equity, climate justice and institutional integrity. The economic strategy must prioritise productivity over populism, investment over insulation and reform over rhetoric. The fiscal space must be created not just through austerity but by expanding the tax base, enhancing efficiency and democratising economic opportunities.

The federal budget 2025-26 represents a missed opportunity to initiate transformative change. The path to fiscal sustainability must be forged through inclusive growth, institutional reforms and macroeconomic innovation. Pakistan’s economic sovereignty hinges not on survivalist budgets but on visionary leadership.

Dr Ikram-ul Haq, writer and advocate of the Supreme Court, is an adjunct teacher at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.