Dr. Ikramul Haq & Abdul Rauf Shakoori
The federal budget for fiscal year (FY) 2025-26, presented by the finance minister in the National Assembly on June 10, 2025, shows an ambitious fiscal framework shaped by revenue maximizing policies, austere expenditure management, and strategic borrowing.
The document, drafted under prevailing economic pressures, under the tight noose of International Monetary Fund (IMF), targets a total expenditure outlay of Rs. 19,278 billion against a net federal revenue of Rs. 11,072 billion, revealing a fiscal deficit of Rs. 6,501 billion or 3.9% of GDP. The fiscal arithmetic reflects persistent imbalances, where the government continues to rely heavily on domestic borrowing and external assistance to finance its expenditures.
The gross revenue projections of Rs. 19,278 billion, of which Rs. 14,131 billion is to be collected through taxes, majorly by the Federal Board of Revenue (FBR). Non-tax revenue is expected to contribute Rs. 5,147 billion. The federal government’s net share after transferring Rs. 8,206 billion to provinces under the 7th National Finance Commission (NFC) Award settles at Rs. 11,072 billion. The projections assume optimistic enforcement and compliance gains, but their realization is historically inconsistent.
The expenditure framework remains overwhelmingly current in nature, with Rs. 16,286 billion allocated towards current expenditures, accounting for over 84% of the total outlay. Interest payments alone amount to Rs. 8,206 billion, eclipsing any functional expenditure category, highlighting the mounting debt servicing burden. Defense allocation has been increased to Rs. 2,550 billion, while pension liabilities have swelled to Rs. 1,928 billion. The recurring escalation in non-development expenditures continues to crowd out much-needed fiscal space for development priorities.
The development expenditure through Public Sector Development Programme (PSDP) is budgeted at Rs. 1,000 billion, curtailed from Rs. 1,100 billion in the previous year, reflecting constrained fiscal space. The reduction undermines growth-enhancing infrastructure investments, human capital development, and regional connectivity projects. The cuts in higher education, water resource management, and science and technology indicate a policy preference that sacrifices long-term productivity for short-term solvency.
The financing strategy is anchored in heavy domestic borrowing, with Rs. 6,309 billion projected from bank borrowings including T-Bills, PIBs, and Sukuks. Non-bank borrowings via National Savings Schemes and other instruments stand at Rs. 2,492 billion. The external borrowing component is relatively modest at Rs. 1,287 billion, comprising multilateral and bilateral inflows. Reliance on domestic markets could exert upward pressure on interest rates, complicating private sector credit access and investment dynamics.
The taxation policy through Finance bill 2025 accentuates indirect taxes, continuing the regressive structure that disproportionately burdens lower-income segments. Sales tax remains the dominant revenue source among indirect taxes, estimated to fetch Rs. 6,902 billion, followed by custom duties at Rs. 1,588 billion, and federal excise at Rs. 888 billion. Direct tax collection, mostly through income tax (though many withholdings are pass through), is targeted at Rs. 6,811 billion. The disparity between direct and indirect taxation aggravates inequality and erodes real incomes of the working classes.
Non-tax revenues hinge heavily on petroleum levies, profits of State Bank of Pakistan (SBP), and dividends. The petroleum levy alone is projected at Rs. 869 billion, reflecting the government’s increasing reliance on quasi-tax measures. SBP profit is expected at Rs. 1,468 billion, which assumes a stable macro-financial environment and surplus-generating operations. Dividends from public sector enterprises (PSEs) are pegged at Rs. 138 billion, a target that seems overly ambitious given the chronic inefficiencies and financial distress in key PSEs.
Allocation for subsidies has been rationalized at Rs. 1,186 billion, down from the revised estimate of Rs. 1,378 billion in FY2024-25. The bulk of subsidies are directed towards the power sector, with Rs. 400 billion allocated for tariff differentials and Rs. 125 billion for Independent IPP payments. Fertilizer subsidy has been limited to Rs. 24 billion, while wheat subsidy is capped at Rs. 40 billion. The targeted reductions, although fiscally prudent, risk exacerbating inflation and food insecurity among vulnerable populations if not supplemented with effective social safety nets.
Social protection spending, however, registers a moderate increase, with Rs. 734 billion earmarked under various heads, including Rs. 140 billion for Benazir Income Support Programme (BISP). The allocation, though sizeable, remains inadequate against the backdrop of rising poverty, high food inflation, and stagnating real wages. The health sector is allocated Rs. 31.9 billion, and education Rs. 112.6 billion, both of which fall short of the benchmarks set by global development goals and regional comparators.
The provincial shares under the NFC Award have been calculated at Rs. 8,206 billion, marking a 17% increase from the revised Rs. 6,997 billion in FY2024-25. Equitable distribution remains constitutionally mandated, yet the vertical fiscal imbalance continues to create friction in fiscal federalism. The reliance of provinces on federal transfers underlines their limited revenue autonomy and expenditure accountability.
The green component in revenue mobilization and expenditure planning remains marginal. These are estimated at merely Rs. 1.468 billion, with most being petroleum-related levies. Green subsidies at Rs. 587 billion are classified under energy and agriculture, but their impact on climate resilience remains weakly defined. Token allocations towards mitigation and adaptation fail to align with Pakistan’s international climate commitments and vulnerability profile.
The overall macro-fiscal outlook painted by the budget is cautiously optimistic but structurally fragile. The primary surplus of Rs. 1,217 billion is projected to reduce debt accumulation, but it is contingent on achieving revenue targets and restraining expenditures.
The nominal GDP is projected at Rs. 129.6 trillion, and fiscal deficit at 3.9% of GDP, down from the revised 5.6% in FY2024-25. The assumptions rest on optimistic revenue buoyancy and disciplined fiscal operations.
Long-term implications of this budget are mixed. Continuation of high interest payments, inadequate development spending, and overreliance on indirect taxes portend a stagnating growth environment. Underinvestment in social sectors, particularly education and health, jeopardizes human development outcomes and economic inclusivity. The crowding-out effect of public borrowing on private investment threatens productivity and employment generation.
The common man is unlikely to witness tangible relief under this budget. Rising utility costs, indirect taxation, and shrinking subsidies will likely intensify the cost-of-living crisis. Stagnation in real wages, coupled with inflationary pressures, will further erode purchasing power. Limited social safety net expansion fails to cushion the impact for low-income households, who will bear the brunt of fiscal consolidation.
The institutional reforms needed to address structural fiscal imbalances remain elusive. The budget does not adequately tackle tax evasion, inefficiencies of Public Sector Enterprises (PSEs), or public financial management weaknesses. The fiscal policy remains reactive rather than transformative, prioritizing balance sheet optics over structural resilience. Lack of a clear roadmap for growth-enhancing reforms, investment facilitation, and employment generation dilutes the development vision.
The fiscal federalism architecture requires urgent recalibration. The 2009 NFC Award remains outdated, and the vertical imbalance between federal and provincial fiscal responsibilities continues to impede service delivery. Decentralization of expenditure functions without corresponding revenue authority creates inefficiencies and accountability gaps. The budget fails to initiate dialogue or reforms in this regard.
The private sector remains peripheral in the budget strategy. Limited incentives for small and medium enterprises (SMEs), export-oriented industries, and digital economy players reflect a status quo policy orientation. Absence of bold reforms to catalyze private investments and entrepreneurship constrains economic dynamism. Reliance on traditional sectors and rent-seeking industries undermines innovation and competitiveness.
The macroeconomic stabilization agenda, though well-intentioned, must be underpinned by structural transformation. The budget of FY2025-26 provides a statistical semblance of fiscal prudence but lacks the visionary thrust required to chart a resilient and inclusive growth path. The economic narrative must shift from fiscal survival to sustainable prosperity, with policies rooted in equity, efficiency, and empowerment.
Policymakers must revisit this fiscal framework with an eye on generational equity, climate justice, and institutional integrity. The economic strategy must prioritize productivity over populism, investment over insulation, and reform over rhetoric. The fiscal space must be created not just through austerity but by expanding the tax base, enhancing efficiency, and democratizing economic opportunities.
The federal budget 2025-26 reflects economic epitomes, but it also represents a missed opportunity to initiate transformative change. The path to fiscal sustainability must be forged through inclusive growth, institutional reforms, and macroeconomic innovation. The numbers offer temporary respite, but the economy’s soul demands renewal. Pakistan’s economic sovereignty future hinges not on survivalist budgets but on visionary leadership.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.