The federal budget for fiscal year 2025–26, presented by Finance Minister Muhammad Aurangzeb, outlines a rigorous path of fiscal consolidation aimed at satisfying International Monetary Fund (IMF) demands while offering selective relief to vulnerable and strategic groups.
Though ambitious in its revenue targets and focused on curbing public expenditure, critics argue the relief is more symbolic than substantial, calling it a budget of “crumbs” for the people. Now we are about to analyze features of this austerity-driven budget.
Fiscal Strategy: Austerity with Aggressive Revenue Goals
Despite encountering a tax shortfall of Rs 1.07 trillion in the current year, the federal government has set an ambitious revenue target of Rs 14.13 trillion, reflecting an 18.7% increase. The ambitious goal is based on:
• Projected inflation of 7.5%
• Economic growth forecast of 4.2%
• Additional taxation measures worth Rs840 billion
• Automatic tax adjustments of Rs1.39 trillion
The government is strongly working to cut back its budget deficit to 3.9% of GDP (which is Rs 5.04 trillion), down from this year’s 5.6% of GDP (Rs 6.44 trillion), which is considered to be the lowest in a decade.
Debt Servicing and Spending Cuts
One of the budget’s most notable achievements is expenditure containment of Rs 2.26 trillion, mainly due to:
• Declining interest rates from a peak of 22%
• Debt servicing costs were projected to drop to Rs 8.2 trillion (from Rs 8.95 trillion)
• A 16 percent cut in original debt servicing estimates
However, these savings come at the cost of development spending and welfare programs.
Tax Relief for the Salaried Class
After two years of punishing inflation and heavy taxation, the government offered some relief to the middle class:
• Tax rate minimized to 2.5percent for annual incomes between Rs 600,000 and Rs 1.2 million
• Some confusion remains, as the Finance Bill mentions only a 1% tax rate for the lowest slab
• Income tax cut from 15% to 11% for salaries up to Rs 2.2 million
• Reduction from 25% to 23% for those earning between Rs 2.2 million and Rs 3.2 million
• 1% reduction in surcharge for high-income earners making over Rs 10 million
Pay and Pension Adjustments
To cushion the impact of rising living costs:
• 10% increase in salaries of government employees
• 7% increase in pensions for civil servants
• 25% salary increase for armed forces personnel, in recognition of their service
Read more: IMF wants Pakistan to focus on rightsizing measures to reduce costs
Focus on Construction and Real Estate
In a bid to revive the construction sector and boost economic activity:
• Withholding tax on property purchases reduced from 4% to 2.5%
• Lower rates for other tax slabs as well
• Abolishment of 7% FED on commercial property transfers
• Tax credit for home mortgages (homes up to 10 marla or flats of 2000 sq. ft.)
• Stamp duty in Islamabad reduced from 4% to 1%
• Incentives for low-cost housing schemes and easier mortgage access
Subsidy Reductions and Revenue from Petroleum
Subsidy allocations have been slashed by 14%:
• Rs1.19 trillion earmarked for subsidies (down from Rs 1.38 trillion)
• Power sector subsidies has decreased by Rs 154 billion
• Tariff subsidies for K-Electric and AJK reduced significantly
Petroleum levy increased to Rs 1.47 trillion for basic compensation, up 26%, and a new carbon levy of Rs 2.5/litre on petrol, diesel, and furnace oil has been introduced.
Expanding the Tax Net and Tightening Enforcement
The government is taking aggressive steps to improve compliance and widen the tax base:
• Interest income tax increased from 15% to 20%
• 5% tax on pensions exceeding Rs10 million (for retirees under 70)
• 1% advance tax on cash withdrawals for non-filers (up from 0.6%)
• E-commerce brought into the net via courier tracking
• Ban on large transactions for non-filers (property, cars, securities)
• Penalties for unregistered traders including freezing bank accounts and sealing premises
Provincial Contributions and Surplus Goals
While provinces missed their Rs 1.22 trillion surplus target for FY2024–25, they still contributed Rs 1.01 trillion, enabling the center to outperform its fiscal deficit target. For FY2025–26, a provincial cash surplus of Rs 1.46 trillion is anticipated to meet the budget deficit reduction target.
Non-Tax Revenues and State Bank Contributions
Key non-tax revenue streams for next year include:
• Rs 5.15 trillion in non-tax revenue (vs. Rs 4.9 trillion this year)
• Rs 2.4 trillion from State Bank of Pakistan profits
• Petroleum levy to generate Rs 1.47 trillion
Improving the Tax-to-GDP Ratio
A major success highlighted by the finance minister:
• Tax-to-GDP ratio increased to 10.3% (from 8.8%)
• Projected to reach 10.4% by June 2025
• Federal tax-to-GDP improved to 11.6%
• Consolidated tax-to-GDP at 12.3% including provinces
• FBR revenue up 1.6% of GDP — the highest in Pakistan’s history
Conclusion: A Balancing Act Between Austerity and Relief
The Budget 2025-26 reflects a clear intention to tighten Pakistan’s fiscal position while attempting to address the grievances of overtaxed salaried citizens and jumpstart the construction sector. However, with minimized subsidies increased fuel levies continued IMF oversight, the room for true public relief remains limited.
The government’s ability to meet its ambitious targets will highly show dependance on improved compliance, successful enforcement, and a rebound in economic growth.