Pakistan budget 2025-2026 breaks all previous records with a massive Rs17.8 trillion spending plan. Despite facing high inflation and mounting debt burdens, the government has unveiled this ambitious financial roadmap while continuing negotiations with the IMF. We can see several noteworthy aspects in this new budget, particularly the budget salary increase of 10% for government employees and pension hikes between 5% to 7.5% for retired civil servants.
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| Pakistan Budget 2025-26: Record Rs17.8tr Spending Plan Unveiled |
Additionally, the budget pakistan approach includes a special 30% allowance for employees in Grades 1 to 16, which will be integrated into their basic pay. However, this salary budget allocation comes at a time when the country missed its GDP growth target, achieving only 2.7% against the projected 3.6%. Still, there's positive news as inflation was kept at 5%, significantly below the 12% target. Certainly, this pakistan budget salary increase will provide some relief to government workers, although the broader fiscal picture shows Rs7,503 billion allocated for domestic debt and interest payments, with another Rs1,119 billion for foreign debt servicing.
Government Unveils Rs17.8tr Budget for FY2025-26
Finance Minister Muhammad Aurangzeb presented the federal budget for fiscal year 2025-26 in the National Assembly on June 10, 2025. The federal government has rolled out a record Rs17.8 trillion budget package, which is actually slightly lower than the previous year's allocation of Rs18 trillion. Prior to the presentation, Prime Minister Shehbaz Sharif chaired a special cabinet meeting at 4 PM to approve the budget draft.
The budget pakistan fiscal strategy relies heavily on ambitious revenue targets. Total federal revenue is projected at Rs19.3 trillion, with the Federal Board of Revenue (FBR) assigned a challenging tax collection target of Rs14.1 trillion. This represents a substantial 16-18% year-on-year increase compared to the revised estimates of Rs12.33 trillion for the outgoing fiscal year.
Non-tax revenue is expected to contribute Rs3.9 trillion, primarily coming from Rs2.3 trillion in State Bank profits and Rs1.5 trillion from the Petroleum Development Levy (PDL). Furthermore, the budget includes nearly Rs2 trillion in new taxes aimed at broadening the tax base.
As per the budget documents, the federal government has proposed to transfer 57.5% of FBR tax revenues to provinces. In total, Rs8,107 billion will be given to provinces under the National Finance Commission (NFC) award. The government anticipates a budget deficit of Rs6,501 billion—approximately 5% of the gross domestic product.
For individual taxpayers, the tax-free income slab is expected to remain unchanged at Rs600,000. Nevertheless, the government has proposed a 2.5% relief across all income tax slabs, which should provide some respite to salaried individuals. Likewise, the corporate income tax rate may be fixed at 2.5%.
Among other economic projections, the current account deficit is forecast at 0.5% of GDP, roughly equivalent to Rs583.13 billion. Notably, the government gave tax exemptions worth Rs5.84 trillion to various sectors during the outgoing fiscal year, which may affect revenue collection in the upcoming period.
Government Approves Salary and Pension Increases
The federal cabinet has approved significant increases in salaries and pensions for government employees as part of the pakistan budget 2025-2026. According to budget documents, government employees will receive a 10% salary increase, while pensions for retired civil servants will rise between 5% to 7.5%.
Moreover, employees in Grades 1 to 16 will benefit from a 30% special allowance, which will be integrated into their basic pay structure, effectively replacing the existing ad hoc relief. This integration is expected to result in a permanent increase in total salaries and will impact pension calculations and future raises.
In addition, there is a proposal to merge the 2022 ad hoc relief allowance into the basic pay, which would provide additional financial benefits to government employees. This merger follows the historical pattern of incorporating temporary allowances into permanent salary structures, as was done previously with earlier ad hoc relief allowances.
Before the budget presentation, the PPP had demanded more substantial increases, calling for a minimum 50% raise in government employees' salaries and a 100% increase in pensions under the Employees Old-Age Benefit Institution (EOBI) scheme. The opposition party had also urged the government to raise the national minimum wage from Rs37,000 to Rs50,000, citing a World Bank report that 44% of the population lives below the poverty line.
As per finance ministry sources, various proposals were under active consideration, including the 10% increase in line with rising inflation. The approved measures, therefore, represent a balance between fiscal constraints and the need to provide relief to government employees facing economic pressures.
Specifically, the budget summary indicates that this salary budget allocation aims to provide relief for salaried individuals at a time when the country continues to face economic challenges. The final approval came during a special cabinet meeting chaired by Prime Minister Shehbaz Sharif, held prior to the budget announcement.
IMF Pushes for Tax Reforms and Austerity Measures
The International Monetary Fund (IMF) has mandated over fifty conditions for Pakistan's 2025-26 budget, reaching into virtually every aspect of the country's fiscal policy. These demands come as part of the PKR 1943.77 billion bailout package signed last summer.
A central IMF requirement focuses on broadening the tax base, with particular emphasis on three previously undertaxed sectors: agriculture, retail, and real estate. Consequently, the new budget proposes taxing agricultural income for the first time, bringing freelance and digital platform earnings under the tax umbrella, as well as increasing capital gains tax on property transactions from 15% to potentially as high as 40%.
In line with IMF directives, the government has planned unprecedented restrictions against non-filers. These individuals will be:
- Banned from purchasing vehicles and real estate
- Prohibited from investing in stock markets and mutual funds
- Barred from foreign travel except for religious pilgrimages
- Subject to doubled withholding tax on cash withdrawals exceeding Rs50,000, from 0.6% to 1.2%
Simultaneously, austerity measures have been proposed to reduce government spending. These include a prohibition on federal ministries purchasing new vehicles and mandatory reductions in gas and electricity consumption across government departments.
Meanwhile, the IMF has opposed the tax-free income slab of Rs1.2 million annually, subsequently keeping it at Rs600,000. Furthermore, a minimum 1% income tax on annual salaries of Rs1.2 million has been proposed.
The government faces significant challenges in meeting these conditions. Currently, just 1.3% of Pakistan's population paid income tax in 2024. Furthermore, the IMF has demanded a nationwide corruption and transparency audit by July 2025.
Primarily, the IMF aims to increase Pakistan's tax-to-GDP ratio to 11% in the upcoming fiscal year. This push comes amidst continuing efforts to withdraw subsidies and raise electricity tariffs—policies that have already created tension between IMF orthodoxy and political realities.
Conclusion
Balancing Ambitions with Economic Realities
Pakistan's record Rs17.8 trillion budget for 2025-26 stands as both ambitious and pragmatic. Despite falling short of GDP growth projections, the government has managed to keep inflation significantly below target at 5% - a noteworthy achievement amid global economic uncertainties. Additionally, the 10% salary increase for government employees, coupled with pension hikes between 5-7.5%, attempts to provide relief during challenging times.
FBR faces a substantial challenge with its Rs14.1 trillion tax collection target, representing a 16-18% year-on-year increase from revised estimates. This goal seems particularly daunting considering only 1.3% of Pakistan's population paid income tax last year. Nevertheless, the government appears determined to expand its tax base through targeted reforms in agriculture, retail, and real estate sectors.
The strict measures against non-filers highlight the government's commitment to widening tax compliance. These policies, including bans on vehicle purchases, real estate transactions, and foreign travel, signal a shift toward more robust enforcement mechanisms. Meanwhile, austerity measures across federal ministries demonstrate awareness that fiscal discipline must start from within government ranks.
Pakistan's economic tightrope walk continues as it balances IMF demands with domestic realities. The pressure to increase the tax-to-GDP ratio to 11% while simultaneously managing public expectations presents a formidable challenge. Though controversial, these reforms might prove necessary for long-term economic stability.
The success of this budget ultimately depends on implementation effectiveness and public cooperation. Without addressing fundamental economic challenges like broadening the tax base and reducing dependency on foreign loans, even the most carefully crafted budget will struggle to achieve its objectives. Pakistan's economic future consequently rests not just on the numbers presented but on the political will to transform ambitious targets into tangible results.
