ISLAMABAD: Pakistan’s government has unveiled a federal budget for the 2025-26 fiscal year, setting a 4.2% economic growth target while increasing defence spending by 20%, following heightened tensions with India. The budget aims to strike a balance between fiscal stability, industrial competitiveness, and key sectoral reforms.
Finance Minister Muhammad Aurangzeb presented the budget in the National Assembly on Tuesday amid opposition protests. He described it as part of a strategy to foster “a competitive economy” and promote equitable growth.
“We are focused on economic stability and prosperity. We want an economy which is equitable and sustainable,” Aurangzeb said.
The total budget outlay for FY26 stands at Rs17.6 trillion — a 7% reduction from last year’s Rs18.9 trillion allocation — as the government looks to control expenditures while meeting International Monetary Fund (IMF) benchmarks.
Key Economic Targets
The budget projects a fiscal deficit of 3.9% of GDP and a primary surplus of 2.4%. Inflation is expected to remain around 7.5%, and interest rates are anticipated to follow a similar trend.
Pakistan’s economy is forecast to grow at 4.2% in FY26, up from 2.7% in FY25. Remittance inflows, a key source of foreign exchange, are expected to reach $37–38 billion, a significant rise from last year’s $31.2 billion.
Aurangzeb highlighted the government’s success in debt management, noting that the debt-to-GDP ratio has fallen below 70%, supported by strategic refinancing and a first-ever Debt Buy Back Programme.
Major Defence Increase After India Clash
Defence spending will see a sharp increase to Rs2.55 trillion ($9 billion), up from Rs2.12 trillion, reflecting the country’s commitment to security following last month’s military clash with India. Including pensions, the overall defence allocation rises to Rs3.29 trillion ($11.67 billion).
Prime Minister Shehbaz Sharif linked this defence focus to broader national ambitions: “After defeating India in a conventional war, now we have to surpass it in the economic field,” he said.
Tax Relief for Salaried Class, Digital Reforms
One of the standout aspects of this year’s budget is targeted tax relief for the salaried class to ease financial pressures and discourage brain drain.
Income tax for those earning Rs600,000–Rs1.2 million annually will drop from 5% to 2.5%. For individuals earning Rs1.2–Rs2.2 million, rates will fall from 15% to 11%, while earners in the Rs2.2–Rs3.2 million bracket will see their rate reduced to 23% from 25%.
“We are providing tax relief to those which needs it the most, i.e. the salaried class,” Aurangzeb stated.
Conversely, taxes on interest income will rise from 15% to 20% to promote horizontal equity.
The government is also expanding its digital reforms within the Federal Board of Revenue (FBR), aiming to improve transparency and compliance. AI-driven audits, E-invoicing, and a faceless audit system are among the innovations being implemented.
Focus on Key Sectors: SMEs, Housing, Agriculture
The government is pushing for stronger support to small and medium-sized enterprises (SMEs), planning to expand SME financing to Rs1.1 trillion by 2028, up from the current Rs471 billion.
In agriculture, loans rose from Rs1.78 trillion to Rs2.07 trillion, with new initiatives focused on helping small farmers. The government also aims to modernise the seed sector and promote agricultural innovation.
On housing, the government will soon launch a programme, via the State Bank of Pakistan, to provide loans to low-income families to boost construction activity and job creation.
Energy Reforms and Privatisation Drive
Significant reforms are planned for the energy sector. The government has reduced electricity prices by over 31% for many consumers, though protected consumers will see a more than 50% tariff increase.
Aurangzeb announced that Rs3,000 billion in savings would result from renegotiated agreements with Independent Power Producers (IPPs). Two furnace oil plants with over 3,000 MW capacity have already been shut down to improve environmental outcomes.
Privatisation of three major distribution companies — Faisalabad, Gujranwala, and Islamabad — is nearly complete. The government also aims to finalise transactions for Pakistan International Airlines (PIA) and the Roosevelt Hotel within FY26.
“In short, our budget strategy is to change the economy’s DNA by bringing basic changes,” Aurangzeb explained.
Social Protection Expansion
The Benazir Income Support Programme (BISP) will see its funding grow by 21% to Rs716 billion. The Kafalat Programme will be expanded to cover 10 million households, and educational stipends will reach approximately 10 million children.
Aurangzeb emphasised the government’s commitment to inclusive growth through these social protection measures.
External Partnerships and Export Strategy
Pakistan’s export strategy includes a new “Tariff Reforms Package” designed to make exports more competitive by reducing customs duties over the next four to five years.
Additionally, the country is preparing to issue its first Panda Bonds in China to diversify sources of foreign investment.
The IMF and World Bank are expected to provide $40 billion to Pakistan over the next decade under their country partnership framework, with climate change and sustainable growth high on the agenda.
Conclusion
With this budget, Pakistan seeks to boost investor confidence, promote growth across key sectors, and deliver relief to ordinary citizens, while keeping fiscal discipline intact.
When asked about post-budget fiscal discipline, Finance Minister Aurangzeb simply responded: “Inshallah.”