Budget 2025–26: Between recovery and reality

Business Recorder

19 hours ago

As the government tabled the federal budget for FY2025–26 on June 10, it did so against a backdrop of cautious optimism. The Pakistan Economic Survey 2024–25 painted a picture of an economy clawing its way back from the brink, supported by record-low inflation, fiscal discipline, and a current account surplus. Budget 2025–26 now attempts to build on that fragile stability, setting an ambitious fiscal trajectory while contending with the deep structural limitations of Pakistan's public finance system.
The federal budget for FY2025–26 has been set at Rs 17.57 trillion, marking a 7 percent decline from the revised figures of the outgoing year. Of this, Rs 16.28 trillion is allocated to current expenditures and Rs 1 trillion to the Public Sector Development Programme (PSDP). Interest payments alone are projected at Rs 8.21 trillion, while defence expenditure has been increased to Rs 2.55 trillion. The government expects a fiscal deficit of 3.9 percent of GDP and a primary surplus of 2.4 percent, in line with IMF expectations for fiscal consolidation.
The Economic Survey confirms that GDP grew by 2.68 percent in FY2024–25, driven by 3.42 percent growth in industry and 3.8 percent in services. Inflation, previously a key destabilizer, fell to an average of 4.7 percent between July and April FY25, down from 26 percent a year earlier. The current account recorded a US$1.9 billion surplus, thanks to a 31 percent increase in remittances (to US$31.2 billion) and a 6.4 percent rise in exports. Foreign reserves stood at US$16.6 billion as of April. However, growth in agriculture stagnated at 0.56 percent, large-scale manufacturing contracted by 1.47 percent, and foreign direct investment remained subdued at $1.8 billion reflecting in the fact that the recovery remains fragile and uneven.
To finance this year's outlay, the government expects gross revenues of Rs 19.28 trillion. The Federal Board of Revenue (FBR) is tasked with collecting Rs 14.13 trillion in tax revenues, a nearly 40 percent increase over the previous year. Non-tax revenues are expected to add Rs 3.58 trillion, with the petroleum levy budgeted at a record Rs 1.468 trillion. As per the 7th National Finance Commission (NFC) Award, 57.5 percent of the divisible pool will be transferred to provinces, amounting to Rs 5.14 trillion. This leaves the federal government with a shrinking share to finance debt servicing, national defence, subsidies, and federal programmes a structural constraint repeatedly highlighted in the budget document.
A defining feature of the budget is its revised tax regime for salaried individuals. To provide relief to the middle class, income tax slabs have been adjusted. No tax is due on annual income up to Rs 600,000. Income between Rs 600,001 and Rs 1.2 million is taxed at 1 percent, while rates for higher income brackets are 11 percent (Rs 1.2–2.2 million), 23 percent (Rs 2.2–3.2 million), and 35 percent for income above Rs 4.1 million. These revisions aim to marginally reduce the burden on lower-income earners, though inflation continues to weigh heavily on real incomes.
To broaden the tax base and crack down on informal economic activity, the government has taken a tough stance on non-filers. Withholding tax on cash withdrawals by non-filers has increased from 0.6 percent to 1 percent. Additionally, non-filers will be barred from opening bank accounts, investing in mutual funds or securities, and purchasing vehicles or immovable property. These measures are part of a broader effort to increase documentation and compliance, although past experience suggests that enforcement will remain a major challenge.
On the corporate front, the government has slightly reduced the super tax on high-income corporations from 10 percent to 9 percent. A new National Tariff Policy has been announced, promising gradual reductions in additional customs and regulatory duties. A carbon levy of Rs 2.5 per liter has been introduced on petroleum products, to be raised to Rs 5 per liter next year, in line with green finance commitments under the IMF's Resilience and Sustainability Facility.
The budget makes space for social protection, albeit selectively. The Benazir Income Support Programme (BISP) has received a record allocation of Rs 716 billion, expected to support over 9 million families. Pension outlays have been set at Rs 1.055 trillion, and subsidies for the power sector at Rs 1.036 trillion. Despite these efforts, combined allocations for education, health, and population welfare remain under 2 percent of GDP far below international benchmarks. Human capital investment continues to lag behind, undermining long-term development goals.
Climate change receives token attention in the budget. While the Economic Survey mentions carbon markets, green sukuks, and Article 6 cooperation under the Paris Agreement, the budget lacks specific allocations for climate adaptation or mitigation. Gilgit-Baltistan and Khyber Pakhtunkhwa, which offer immense potential in forest-based carbon credits remain excluded from federal fiscal incentives tied to environmental performance. Notably, forestry which offers one of the most viable and scalable options for carbon offset generation in Pakistan remains underfunded and absent from core budgetary priorities. Gilgit-Baltistan, Khyber Pakhtunkhwa, and parts of Balochistan, which hold significant forest reserves, could become leaders in nature-based solutions if adequately supported through fiscal incentives and carbon financing frameworks.
Nominal GDP for FY2025–26 is projected at Rs 129.57 trillion, with growth expected to reach 3.6 percent. These targets hinge on sustained macroeconomic stability, improved investor confidence, and an uninterrupted flow of multilateral financing. Risks include global economic headwinds, geopolitical uncertainty, and Pakistan's limited fiscal space, which is heavily consumed by debt obligations.
In essence, Budget 2025–26 reflects a cautious but necessary balancing act. It offers incremental relief to salaried taxpayers, strengthens social protection through BISP, and recommits fiscal responsibility under the IMF's watch. However, the structural issues persist: an overreliance on indirect taxation, underinvestment in people and climate, and a weak provincial-federal fiscal arrangement that curbs development ambition. The true test lies in implementation whether the promises made in this budget can be translated into lasting, inclusive, and sustainable economic resilience for the people of Pakistan.
Copyright Business Recorder, 2025