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A Critical Analysis of Pakistan's 2025-26 Budget

 Introduction: Unveiling the Economic Blueprint for 2025-26

The Federal Budget of Pakistan for the fiscal year 2025-26 is a pivotal document that defines the country's economic direction amid global uncertainties and internal structural challenges. As the government aims to achieve macroeconomic stability and inclusive growth, this budget has become a centerpiece for both public discourse and economic critique. Through this article, we present an in-depth and critical analysis of the Pakistan Budget 2025-26, evaluating its fiscal policies, revenue targets, expenditure priorities, development plans, and the socio-economic implications it carries.

Revenue Targets: Ambitious or Unrealistic?

The Federal Board of Revenue (FBR) has been tasked with collecting an unprecedented PKR 12.5 trillion in taxes for FY 2025-26, marking a 25% increase from the previous fiscal year. While the government touts this figure as essential to reducing dependency on external financing, critics question its feasibility amidst a sluggish economy and widespread tax evasion.

  • Expansion of the tax base through digitalization and documentation
  • Enhanced taxation on luxury items and real estate

Despite these measures, the implementation bottlenecks, weak institutional capacity, and a trust deficit between taxpayers and authorities pose serious concerns regarding the actual realization of these targets.

Public Expenditure: Balancing Development and Debt Servicing

Total government expenditure is projected at PKR 18.9 trillion, with over 50% allocated for debt servicing, a reflection of Pakistan’s mounting external liabilities. This allocation continues to crowd out development spending, raising questions on the long-term sustainability of the budget.

  • Debt Servicing: PKR 9.6 trillion
  • Defence Budget: PKR 2.3 trillion (8% increase from previous year)
  • Subsidies and Grants: PKR 1.1 trillion
  • Salaries and Pensions: PKR 1.8 trillion

While the increase in PSDP spending is commendable, experts warn that delays in project execution, corruption, and lack of transparency continue to dilute the impact of public investments.

Tax Reforms: Structural Fixes or Cosmetic Changes?

The budget introduces several tax policy adjustments, but many view them as incremental rather than transformational. Some of the major changes include:

  • Tax on windfall profits in the banking and energy sectors
  • Increased Capital Gains Tax (CGT) on property and stocks
  • New tax regime for freelancers and digital economy
  • Revisions in turnover tax thresholds for SMEs

Despite these changes, the core structural issue—Pakistan's narrow tax net—remains largely unaddressed. The informal sector, which constitutes over 60% of the economy, is still out of the tax ambit. Without robust enforcement mechanisms, the effectiveness of these reforms remains questionable.

Inflation Control and Monetary Policy Coordination

One of the government's top priorities for 2025-26 is inflation control, with a target of bringing it down to 12%, from the current level of 18%. This will require close coordination with the State Bank of Pakistan (SBP) to maintain a prudent monetary policy stance, while simultaneously supporting economic recovery.

  • Imported inflation due to a volatile rupee
  • Energy price hikes passed on to consumers
  • Tight monetary conditions curtailing business investment

Without fiscal discipline and targeted subsidies for the vulnerable, inflation will remain a persistent threat to household purchasing power.

Social Protection and Poverty Alleviation: Rhetoric vs Reality

While this represents a 15% increase from the previous year, experts criticize the lack of outcome-based metrics and the inefficient delivery mechanisms.

  • Poor targeting of beneficiaries
  • Leakages and mismanagement
  • Lack of data integration between federal and provincial agencies

To truly uplift the underprivileged segments, Pakistan needs systemic reforms in its social protection architecture, not just increased allocations.

Energy Sector Reforms: A Budget with Lofty Promises

The budget outlines major reforms in the energy sector, aiming to reduce circular debt, promote renewable energy, and attract foreign investment. However, actual reform implementation has historically lagged behind promises.

  • Privatization of DISCOs (Distribution Companies)
  • Tariff rationalization and reduction in line losses

While these are positive steps, the lack of political will, entrenched interest groups, and regulatory fragmentation continue to stifle progress.

Provincial Transfers and NFC Award Constraints

Under the 7th NFC Award, 58% of federal revenue is constitutionally mandated to be transferred to the provinces. This leaves the federal government with limited fiscal space for national programs and debt repayment.

This structural issue is exacerbated by provinces' own inefficiencies in revenue generation and service delivery. Calls for a revised NFC formula that ensures fiscal equity and accountability have intensified, but achieving consensus among stakeholders remains elusive.

Private Sector and Investment Climate

The budget attempts to stimulate private sector growth through:

  • Tax incentives for startups and export-oriented industries
  • Reduced customs duties on raw materials
  • Credit lines for SMEs and women entrepreneurs

However, without addressing systemic issues such as regulatory red tape, political instability, judicial delays, and security risks, investor confidence will remain fragile.

Education and Health: Chronic Underfunding Continues

The allocations for education (PKR 123 billion) and health (PKR 98 billion) are once again below the recommended UNESCO and WHO benchmarks, respectively. Despite lofty claims of a “human capital revolution,” the actual spending tells a different story.

  • Minimal investment in digital learning infrastructure
  • Insufficient funds for universal health coverage

Long-term development hinges on investments in people, and Pakistan continues to fall short on this front.