The Federal Budget for FY2025-26 is perhaps the most anticipated and significant in recent Pakistani history. As national finances are strained, inflation slows from record highs, and tensions in the region rise, Finance Minister Muhammad Aurangzeb laid out an exhaustive master plan to stabilize the economy alongside managing important public and strategic priorities.
Economic Context
Entering the new budget year, Pakistan enters with a shaky recovery from the economic turmoil of 2022–2024. Inflation, which reached more than 26%, has decreased to single digits, but economic growth is modest. External financing pressures persist, and Pakistan’s relationship with the International Monetary Fund (IMF) continues to drive fiscal flexibility.
The government has forecast a growth rate of 4.2% in FY2026. That would be an improvement over the estimated 2.7% growth in FY2025. The target inflation was fixed at 7.5% — a realistic, if optimistic, number given global commodity trends and domestic supply chain issues.
Probably the most impressive feature of the budget is its fiscal prudence. The government is aiming for a fiscal deficit of 3.9% of GDP, a sharp decrease from approximately 5.9% last year. A primary surplus (excluding interest payments in the budget) of more than 2% is also estimated, as per IMF expectations.
Key Highlights of the Budget
The overall expenditure of the FY2025–26 budget is PKR 17.57 trillion, a 7% decrease in total spending from the last year. This is an unusual slowdown and indicates the government’s willingness to uphold macroeconomic prudence.
Tax revenues are estimated at PKR 14.13 trillion. This comprises far-reaching tax reforms, enhanced compliance, and bringing in hitherto untaxed sectors like agriculture, retail, and real estate into the tax net. The Federal Board of Revenue (FBR) will also be provided with new instruments for taxation digitization and monitoring income, particularly in the burgeoning digital economy.
The Public Sector Development Program (PSDP) will be allocated PKR 1 trillion for infrastructure, energy, and regional development projects. High-impact rather than politically driven projects are the focus.
Defence Expenditure and Strategic Reorientation
Due to recent tensions in the region, especially with India, the defence budget has seen a considerable hike. The amount has been enhanced to PKR 2.55 trillion — an increment of almost 20% over last year.
This step has evoked a broad range of responses. The argument is that in light of the turbulent geopolitical environment, higher defence expenditure is an imperative. Opponents refer, though, to the social and climate front sacrifices, where funding was reduced or allocations remained frozen in this budget.
Interestingly, defence now occupies around 14–15% of overall federal expenditures, the second-largest budgetary item following debt servicing.
Debt Servicing and Borrowing Cost
Interest payments on domestic and external debt of Pakistan have been the behemoth of its budget for a long time. This year is not any different. Approximately PKR 8.2 trillion — almost half of the total federal budget — goes towards debt servicing.
The debt burden restricts the government’s capacity to invest in social services, education, and infrastructure. The drop in interest payment share from PKR 8.9 trillion in the previous year does show better debt restructuring and fiscal management.
In spite of this, the total public debt of Pakistan is perilously close to the size of its GDP. Increased dependence on international loans from institutions such as the IMF, China, and the World Bank only complicates the economic equation further.
Tax Reforms and Revenue Measures
Perhaps the most ambitious aspect of the 2025–26 budget is its tax reforms. After decades, the government is finally making serious attempts to widen the tax base.
This year’s budget presents steps to take the agriculture, real estate, and wholesale/retail sectors into the formal tax fold. These sectors, even though they contribute a large part of GDP, have hitherto been under-taxed or exempted altogether.
To facilitate compliance, the government is investing in the digitization of the FBR’s tracking systems. Particular focus is given to e-commerce platforms, digital wallets, and non-banked transactions.
There are also modest tax bracket adjustments on salaried income. Although there have been no across-the-board adjustments to individual tax slabs, there has been limited relief at the middle-income level through modified deductions and flat-rate relief. Still, the majority of the workload in collecting new revenue will be on businesses and enterprises that were hitherto exempt.
Public Sector Salaries and Pensions
In an attempt to keep public worker morale up in the midst of austerity, the government has made a 10% pay hike for federal workers. Pensions were also raised 7.5–10%, depending on the tier of pension.
Although this will place pressure on existing spending, the rises are modest and should be absorbed in available fiscal space, particularly since other discretionary spending is being cut.
Social Expenditure: Winners and Losers
The 2025–26 budget has received both applause and criticism regarding its treatment of expenditure on the social sector. On the bright side, health and education have escaped severe budget cuts. Climate projects and farm subsidies, on the other hand, have either had their allocations put on ice or cut back.
Social protection measures like the Benazir Income Support Program (BISP) have been given nominal raises. Yet, numerous critics say these are not inflation-indexed and thus constitute a real-term reduction in benefits.
Further, whereas energy subsidies have been reduced according to IMF requirements, targeted subsidies for poor households have been preserved — albeit in a more limited capacity.
Austerity Measures and Governance Reform
To achieve budgetary goals and placate lenders, the government has introduced a series of austerity measures. They consist of a prohibition on buying new cars for use in government, lowered utility costs in government buildings, and the suspension of new government recruits for non-essential positions.
There is also a new emphasis on making public expenditures more transparent. There will be quarterly publications by the Ministry of Finance on revenue performance, expenditure control, and trends in debt — an IMF requirement that is being enthusiastically embraced by transparency groups.
External Relations and IMF Dynamics
This budget should be viewed against the backdrop of Pakistan’s continued interaction with the IMF. Having successfully finished a short-term bailout deal in early 2024, Pakistan is currently discussing a new multi-year Extended Fund Facility.
This budget sets the tone for that negotiation. By showcasing fiscal prudence, enhancing revenue collection, and trimming non-developmental expenditure, Pakistan is positioning itself to become a good partner to international financial institutions.
However, the IMF is likely to keep a tight eye on the implementation stage. Previous failed targets have depleted confidence and caused delays in disbursement, something this government is eager to prevent.
Public and Political Response
First responses to the budget were varied. Business lobbies have embraced the attempt to broaden the tax base, provided that implementation is equitable and predictable. But the new taxes on their industries have been faulted by small traders, certain farming lobbies, and opposition parties.
There have also been demonstrations by students against stagnant education budgets, and environmental NGOs have complained about the downgrading of climate projects in the face of increased environmental threats.
Nevertheless, economists have largely commended the budget for being pragmatic and visionary. Although it is free from populist handouts, it lays down the groundwork for long-term steadiness — if in good faith and without political upheaval.
What’s Next?
As the budget works its way through parliamentary discussions and approval, a number of questions will frame the country’s debate:
Can the government deliver on its ambitious tax revenue targets?
How will social tensions be contained as subsidy reforms bite?
Will the IMF approve the new fiscal trajectory and disburse additional funds?
Can economic growth pick up strongly enough to support the rosy targets?
The responses to these questions will determine not only the coming fiscal year, but perhaps the coming decade of Pakistani economic planning.
Final Thoughts
Federal Budget 2025-26 marks a turning point for Pakistan’s economy. It is not a populist one. It is a technocratic, reform-focused, and politically perilous budget that seeks to put right decades of fiscal mismanagement.
Its focus on expanding the tax base, cutting wasteful expenditure, and ensuring macroeconomic stability sends a powerful signal to investors and foreign lenders. Yet, it also poses hard questions of equity, burden-sharing, and public confidence.
If the government sees the budget through — and withers political pressure to go back — this budget might be remembered as a starting point for a more autonomous and resilient Pakistan.
