Narrow Budget Path Ahead for FY2025-26
ISLAMABAD:
The federal government is set to present a tightly constrained budget for the upcoming fiscal year, projecting a federal deficit of Rs6.2 trillion—equivalent to 4.8% of GDP—as part of its fiscal year 2025-26 plan, to be unveiled on Tuesday.
According to budget estimates from the Finance Ministry, the total outlay is expected to be around Rs17.6 trillion, reflecting a 7.3% decrease compared to the current year’s original budget, largely due to a reduction in projected interest payments.
Government officials noted that although the Rs6.2 trillion deficit appears substantial, it marks the first time that the fiscal gap is expected to shrink both in absolute terms and as a share of GDP, down Rs2.3 trillion or 2% of GDP from the current year’s projections.
The budget outlines a fiscal consolidation target of 2% of GDP, with Finance Minister Muhammad Aurangzeb scheduled to deliver his second budget speech on June 10.
Limited Fiscal Space
While the expenditure side remains largely constrained and predictable, sources indicate that the government may once again rely on traditional, unsustainable revenue strategies. This poses a risk to the country’s already strained salaried and corporate sectors.
Despite efforts at fiscal consolidation, a significant portion of government spending remains tied up in debt servicing and defense allocations, leaving little room for productive investments. Officials also criticized the quality of spending, citing disproportionate funding for politically motivated provincial projects and discretionary schemes at the expense of crucial sectors such as space technology and nuclear energy.
Revenue Goals and Public Burden
To bridge the fiscal gap, the government is projecting gross federal revenues of Rs19.4 trillion—an increase of Rs1.6 trillion over the current year. This includes a tax revenue target of Rs14.13 trillion and Rs5.2 trillion in non-tax revenues. Much of the non-tax income will come from an increased petroleum levy—expected to rise to nearly Rs100 per liter—and profits from the State Bank of Pakistan.
However, officials acknowledge that the Federal Board of Revenue (FBR) may again underperform. The FBR is unlikely to meet its already lowered target of Rs12.3 trillion for the current year, casting doubt on its ability to achieve the new, higher goal.
Despite Prime Minister Shehbaz Sharif’s repeated attempts to reform the FBR, including efforts to improve revenue forecasting, results have fallen short. This year, even World Bank experts were enlisted to assist with revenue projections.
Under the National Finance Commission (NFC) award, Rs8 trillion from FBR tax revenues will be distributed among the provinces, leaving the federal government with just Rs11.4 trillion in net revenues—insufficient to cover even debt and defense expenses. As a result, the government will need to borrow Rs6.2 trillion to finance its expenditures.
IMF Conditions and Provincial Constraints
Under the terms of the IMF programme, all four provinces are expected to collectively maintain a cash surplus of Rs1.33 trillion to help bring the consolidated budget deficit down to Rs4.8 trillion, or 3.7% of GDP.
Achieving this target will require strict adherence to both revenue and spending benchmarks at the federal and provincial levels. However, provinces have already indicated plans for nearly Rs2.9 trillion in development spending—Rs850 billion more than what the IMF has permitted under the fiscal framework.
Punjab is leading with a record Rs1.2 trillion proposed for development, followed by Sindh with Rs995 billion.
In summary, the government’s upcoming budget reflects a significant effort at fiscal consolidation. But with high borrowing needs, uncertain revenue performance, and limited fiscal space, the path forward remains precarious.
