11 Jun
Pakistan’s Federal Budget 2025–26: Balancing Defence, Austerity, and Recovery
1. Overview & Fiscal Context
On June 10, 2025, Pakistan presented its federal budget for FY 2025–26. Total expenditures are set at ₨17.57 trillion (~US $62 billion), marking a 7% decrease from the previous year’s ₨18.9 trillion budget. This tightening is part of conditions for a $7 billion IMF program, with the government aiming to reduce its fiscal deficit to 4.8% of GDP, down from 5.9%
2. Defence Spending on the Rise
Despite overall cuts, the defence allocation has surged by 17–20%, increasing from ₨2.12 trillion to ₨2.55 trillion (~US $9 billion). The budget reflects rising geopolitical tensions with India, including recent missile and drone exchanges. Though smaller than India’s defence spending, this remains a historic jump for Pakistan
3. Economic Performance & Goals
Pakistan’s economy shows tentative signs of stabilization:
- Inflation has dropped from ~26% last year to an estimated 4.7%
- GDP growth, projected at 2.7% for FY 2024–25, has a rebound target of 4.2% for FY 2025–26.
Still, sectors like agriculture and manufacturing face challenges, including a 13% drop in crop production.
4. Revenue & Tax Reform
To fund its priorities, the government plans to boost revenue by 18%, targeting ₨14.1 trillion in tax collection . Key measures include:
- Widening the income tax base,
- Taxing agricultural incomes, and
- Reducing subsidies to ease fiscal pressure. .
Yet, challenges persist: only approximately 1.3% of adult Pakistanis currently pay income tax, raising concerns over revenue realization
5. Debt Servicing & Structural Concerns
Nearly 46% of the budget goes toward interest payments . This high debt servicing burden restricts discretionary spending and complicates efforts to stimulate growth.
6. Analysis: Priorities & Trade‑offs
| Domain | Highlights |
| Spending Cuts | 7% reduction to curb deficit and satisfy IMF conditions |
| Defence Priority | Defence budget up nearly 20% amid regional tensions |
| Growth Target | Ambitious 4.2% growth forecast against structural headwinds |
| Tax Reforms | Revenue push through broader tax base and subsidy cuts |
| Debt Pressure | Nearly half of budget consumed by debt servicing |
This budget embodies a balancing act between national security imperatives and economic stabilization, with fiscal discipline as its cornerstone.
7. What to Watch Going Forward
- Can Pakistan deliver ₨14.1 trillion in tax revenue, despite structural issues in tax compliance?
- Will GDP growth reach 4.2% amid unresolved sectoral weaknesses?
- How will enhanced defence spending impact sectors like health, education, and infrastructure?
- Will implementation of IMF conditions hold, and can external pressures (like US tariffs) be navigated?
Conclusion
The 2025–26 federal budget reflects a difficult balancing act: substantial defence spending set against an overall cutback in expenditure, underpinned by IMF conditionality and an ambitious growth objective. The effectiveness of this budget will largely hinge on how successfully Pakistan can implement tax reforms, manage debt, and translate its security focus into long‑term growth.