he federal budget 2025 cannot be described as reform-oriented. The government has apparently managed to convince the IMF that it needs to roll back some of the reforms introduced last year to appease the electorate.

The finance minister has admitted that whatever concessions the government is promising will be financed through borrowing. He was justifying the meager reduction in income tax rates for the salaried workers. Confronted by the media on the hefty raises in the salaries of National Assembly speaker and Senate chairman, he said that their salaries had not been revised since 2016. All raises, he said, will be funded through loans.

Impact

The overall burden on the common man will increase. The salaries of government employees have been raised but the minimum wage for private sector workers stays at the last year’s level. One can imagine the despair among private sector workers. Even the government servants are not pleased with the 10 percent raise they are to get. Meanwhile, the capital market has been spared even justifiable taxes and the construction tycoons regaled with concessions.

Real gains are targeted in fiscal consolidation and macro stability. The fiscal deficit is to be cut from 5.9 percent to 3.9 percent of the GDP, aligning with the IMF-prompted target. This is a nominal positive for economic sustainability but the commoners, particularly the lower middle income people, will continue to suffer.

The planners have been helped by falling interest rates and subsidy cuts. The GDP growth target has been raised to 4.2 percent (up from 2.7 percent). Structural reforms and a boost in industry competitiveness are promised.

The government has apparently managed to convince the IMF that it has to roll back some of the taxes imposed on the construction sector in last year’s budget. The support for construction and real estate via tax breaks and incentives aims to revive employment and auxiliary sectors.

The government is still continuing to revamp the FBR tax reforms through AI audits, faceless customs, e-invoicing, POS integration, crackdown on non-filers. It is also trying to broaden the tax base and enhance fairness. The revenue target has been raised by 19 percent over the previous year to Rs 14.13 trillion.

The PSDP allocation of Rs 4.224 trillion is focused on infrastructure, health and inter-provincial parity under the 18th Amendment. Increased allocation (Rs 14.3 billion) for health-sector modernisation is clearly inadequate.

The consumers have been burdened with higher indirect taxes. Increase in fuel levies and electricity surcharges will add to inflationary pressures for the average consumer. Reduced subsidies, especially on energy and food, risk raising the cost of living.

Expansion of tax base and indirect taxes disproportionately affect the low- and middle-income households. Only 1.3 percent of the citizens currently pay income tax. A crackdowns on non-filers may disproportionately burden informal sector workers.

The defence spending is up by 20 percent. It is feared that this will come at the cost of essential development spending. However, India’s unrelenting hostility seems to have compelled the planners to raise the defence allocations.

Poor performance in agriculture and industry sectors may frustrate growth ambitions. The relief for real estate sector may help some, but higher fuel and energy costs will outweigh these benefits for most households. Growth push in the construction and industry could create jobs.

Infrastructure and health funding could yield long-term benefits.

While the formal sector tax burden shifts, the informal-sector consumers may feel squeezed by indirect taxes and no direct benefit. Macro-economic stability and IMF backing may be good for long-term, but short-term pain—inflation and subsidy cuts—will hit daily life.

The indirect tax raises and reduced subsidies may hit wallets via fuel, power and food. Infrastructure, growth strategies and fiscal discipline may stabilise the economy and improve living standards — if reforms hold and are executed efficiently. Informal workers and non-filers may face greater cost without direct benefits. The success of the budget hinges on implementation—especially the execution of health and infrastructure projects.

Raising the withholding tax rate on bank deposit profits from 15 percent to 20 percent while exempting National Savings Schemes from the same is designed to encourage a shift in savings from commercial banks to the NSS.

The risk-averse and tax-conscious savers, such as retired people and middle-income households will promptly shift to NSS. The NSS already offers higher returns in some product lines and enjoys sovereign backing. Now, with preferential tax treatment, it becomes even more attractive. This could divert deposits away from commercial banks, reducing their liquidity and capacity to lend.

This will create a distortion in financial markets. Banks may respond by raising deposit rates or lobbying for equal treatment. Depositors with the same income levels may now face different effective tax burdens depending on the choice of saving instrument.

Interest income from bank deposits is taxed in most countries but the methods differ. In the USA, this is treated as a part of total income; i.e. added to other income and taxed at marginal rates. In the United Kingdom, some of the interest is tax-free as a “savings allowance”. In India, the interest is taxed as “income from other sources”; banks deduct TDS (Tax Deducted at Source) if above a threshold, but final tax is based on total income. In Bangladesh, there is a withholding tax on bank interest (typically 10 percent), but total interest income is clubbed with other income for final tax liability.

In Pakistan, tax deducted at source is considered the final tax, especially for non-filers or in passive income. In a normal tax regime, the tax deducted is adjustable, and income is clubbed with other sources in the annual return. But under current practice in Pakistan, most salaried people and small investors treat the deducted tax on bank profits as final (especially if they fall under presumptive tax regime or don’t file returns). Creating unequal tax burdens skews individual behaviour in ways that may be fiscally unsound or distort capital allocation.

Climate action

The government has introduced a Carbon Levy of Rs 2.5 per litre on petrol, diesel, and furnace oil, effective from July 1. This additional levy is on top of the existing Petroleum Development Levy of Rs 78/litre on petrol and Rs 77/litre on diesel oil.

In rupee terms, this means petrol price will rise from Rs 253.6/L to Rs 256.1/L. The diesel oil rates will increase from current Rs 254.6/L to Rs 257.1/L. So consumers are effectively paying an extra Rs 2.5/L at the pump. The government plans to increase this levy to Rs 5/L in the 2026–27 budget. The new carbon levy may partially or fully offset that relief depending on global fuel price trends and FCA calculations.

Power distribution companies pass on fuel cost changes through Fuel Cost Adjustment (FCA). A raise in petrol/ diesel prices increases their operational expenses, especially for thermal-fired power plants. Industrial sector complaints have already begun, with DISCOs seeking about Rs 1.27/unit additional FCA, which offset earlier proposed tariff relief of ~ Rs 4.69/unit.

An immediate uptick in FCA of around Rs 1/unit is likely to raise the bills slightly. Industrial consumers will experience a greater squeeze.

Daily commuting and transportation will cost more: a 50 L fill-up will cost Rs 125 more. Electricity bills for households may not see the full promised relief; industrial and commercial users will share the burden through higher FCA. The promised electricity relief could be eroded or reversed depending on FCA adjustments — expect up to Rs1/unit higher tariffs. Over the long run, a switch to renewable energy and environmental funding could yield benefits, but in the short-term, expenses will go up.

The writer is a senior economic reporter at The News.