Analysis: More of the same, just tighter

Business Recorder

11-06-2025

If the tax rate on bank deposit income is increased by one-third, what exactly is bold about this budget? There is no coherent strategy to broaden the tax base or to plug structural leakages. Instead, the incidence of taxation has simply been increased in selected areas. On the face of it, this is a conventional budget—lacking in imagination.
The budget speech, much like in previous years, was long on verbosity and short on substance. That said, fiscal consolidation is evidently set to continue. The revised estimate for the primary surplus in FY25 is 2.2 percent of GDP, higher than the original budgeted 2.0 percent—a rare occurrence.
The target for FY26 is set at 2.4 percent. FY25 already marks the highest primary surplus in the country's history, with another record likely to follow next year. The budget is getting tighter.
Budget FY26: fiscal discipline without reform
But nothing comes without a cost. The price here is rising poverty, a shrinking middle class, higher unemployment, and declining investment in the formal sector. Over the past few years, tax rates have increased sharply—whether income tax or indirect levies such as GST and FED. As a result, the incentive to stay informal continues to rise.
There is little meaningful relief in the budget—just a token reduction in super tax and minor adjustments for the salaried class. GST remains high, and its full rate now applies to more items. Meanwhile, enforcement and governance remain unchanged. Tax rates keep rising, but administrative capacity stays flat. The outcome is predictable.
Real reform would involve fixing customs valuation. Tariff rationalization alone is not enough. As long as income and sales taxes—many of which are collected at the import stage—remain elevated, under-invoicing will continue to be the norm.
Tariff changes in the auto sector, in particular, are confusing. Duties on expensive imported cars (Land Cruisers and the like) are being cut, while secondhand imports are set to resume. At the same time, GST is being raised on smaller, locally manufactured vehicles, and a carbon tax is being slapped on internal combustion engine (ICE) cars. Net result: small local cars will get pricier, and imported luxury vehicles are becoming cheaper.
Then there is the petroleum levy, which is budgeted to increase. A new carbon levy will be added. Electricity consumers will face a circular debt reduction surcharge. Even solar panels are now subject to sales tax. All these measures will disproportionately raise the effective tax burden on lower- and middle-income households.
Other signals in the budget suggest it is better aligned with elite interests. Tax on real estate transactions has been reduced. No new tax on stock market gains. Risky assets are being rewarded. Meanwhile, tax rates on bank deposits and fixed income mutual funds are up—hurting risk-averse savers. That will further discourage formal saving in a country already struggling with one of the lowest saving rates globally.
There is little to incentivize formal sector saving or investment.
Still, a few steps deserve mention. Tariffs on the range of imported goods are being cut, which could help ease prices in select sectors. The longstanding tax exemption for FATA is finally being phased out. Restrictions on asset purchases by non-filers have been introduced—these are positive signals.
But then, tax on cash withdrawals by non-filers is also being raised. This duality—restricting and taxing non-filers at the same time—adds confusion. The government must decide what direction it wants to take. That clarity is currently missing.
Despite the muddle, the broader fiscal consolidation continues. The total outlay for FY26 is lower than what was budgeted in FY25. The overall fiscal deficit is targeted at 3.9 percent of GDP, the lowest since FY08. External financing needs are also shrinking, which implies the current account surplus story may persist. But this also means that growth will likely remain subdued for yet another year. High primary surplus and lower fiscal deficit echo the so-called golden era of Musharraf. FY26 to FY28 might resemble FY04 to FY07. But only if we use this fiscal space wisely—for structural reform, not short-lived growth spurts.
With or without reforms, the party continues for real estate players. Stock market investors are in for more good times. Traders, as usual, remain untouched. And the salaried class? Perhaps their kids can look forward to a slightly pricier ice cream budget.
It is more of the same—except for tighter books. Let us hope this discipline is not squandered chasing ephemeral growth.
Copyright Business Recorder, 2025