ISLAMABAD: Pakistan’s federal government on Tuesday unveiled a Rs17.573 trillion federal budget for fiscal year 2025–26, combining promises of austerity, economic growth, and targeted relief for the salaried class, while introducing sweeping measures to crack down on tax evasion.
Despite a 6.9% reduction in overall budget outlay compared to the previous year, the government is projecting an ambitious 4.2% GDP growth rate.
This forecast is underpinned by a sharp increase in development spending and targeted reforms across key economic sectors.
The budget session opened amidst loud protests from opposition benches but proceeded uninterrupted.
The finance bill introduced wide-ranging tax reforms and compliance measures aligned with Pakistan’s broader fiscal restructuring goals.
Key Numbers and Priorities
Current expenditure is projected at Rs16.286 trillion—5.33% lower than last year. Interest payments, or debt servicing, remain the largest expense, absorbing Rs8.207 trillion—nearly half the total budget.
Defence spending is set to rise by 20.2% to Rs2.55 trillion, now accounting for 1.97% of GDP, up from 1.71% last year.
The Public Sector Development Programme (PSDP) has been allocated Rs4.224 trillion, prioritizing the completion of ongoing infrastructure projects, water reservoirs, energy corridors, and digital connectivity initiatives.
Debt Servicing Dominates Budget
While debt servicing has decreased by 16% to Rs8.207 trillion, it still accounts for nearly 50% of the total budget—remaining the government’s single largest expenditure.
In his budget speech, the finance minister noted improvements in debt management. The debt-to-GDP ratio, which stood at 74% two years ago, has fallen below 70%, with efforts underway to bring it down further.
Major Relief for Salaried Individuals
The government has proposed a 10% salary increase for employees from Grade 1 to 22, along with a 7% hike in pensions.
The monthly allowance for differently-abled employees has also been raised to Rs6,000.
Income tax relief
- Individuals earning between Rs600,000 and Rs1.2 million annually will see their tax rate halved from 5% to 2.5%.
- Those earning up to Rs2.2 million will have their tax rate reduced from 15% to 11%.
- Individuals earning between Rs2.2 million and Rs3.2 million will face a 23% tax rate.
Additionally, the super tax rate for corporations earning between Rs200 million and Rs500 million annually is proposed to be reduced to 5%.
Crackdown on Non-Filers
A strict clampdown is being launched against non-filers:
- Withholding tax on cash withdrawals has been increased from 0.6% to 1%.
- Non-filers will be barred from opening bank accounts, purchasing vehicles or real estate, and investing in securities or mutual funds.
The government aims to eliminate the filer/non-filer distinction altogether. Only individuals submitting tax returns and wealth statements will be permitted to engage in major financial transactions.
External auditors will be enlisted to expand the tax base and enforce compliance.
Investment and Sectoral Highlights
The budget allocates Rs300 billion in funding for 95,000 SMEs under the National SME Risk Coverage Scheme.
In a push to expand the digital economy, the government plans to boost IT exports to $25 billion over the next five years, building on a 21.2% increase in IT exports this year.
Agriculture—contributing 34% of GDP—will benefit from the upcoming National Seed Policy 2025 and National Agri Technology Policy 2025. The sector generated Rs2.64 billion in export earnings in FY24–25.
Under social protection, the Benazir Income Support Programme continues to support education for over 11 million children and offers maternal health and financial literacy programs to more than 1.7 million women and families.
Looking Ahead
The Federal Board of Revenue has been tasked with collecting Rs14.131 trillion in taxes—an 8.95% increase from last year.
This goal will be supported through digitization, legal enforcement, and adherence to international commitments.
A comprehensive overhaul of customs duties and tariffs is expected under the new National Tariff Policy, to be rolled out over the next five years.
The budget sets the stage for Pakistan’s next IMF programme, promising macroeconomic stability while aiming to stimulate growth through sectoral reforms, enhanced tax compliance, and focused relief.
Whether these policies will translate from paper to performance remains to be seen, particularly in a year defined by high debt servicing costs, increasing defence expenditures, and fragile public sentiment.
