Pakistan’s PKR17.57tr budget sees 20pc hike in defence allocations

ISLAMABAD: As Finance Minister Muhammad Aurangzeb presented budget for the fiscal year 2025-26 (FY26) on Tuesday, the government raised the allocations for defence by 20 per cent, with the defence budget fixed at Rs2.55 trillion amid the recent conflict with India.

The total budget volume for fiscal year 2025-26 stood at Rs17.573 trillion. It projected a fiscal deficit of 3.9 per cent against 5.9 per cent in 2024-25, while inflation is expected to reach 7.5 per cent and GDP growth at 4.2 per cent.

On the other hand, the development budget [PDSP (Public Sector Development Programme)] got Rs1,000 billion.

Interestingly, the total budget outlay Rs17.573 trillion is 6.9 per cent less than the previous year’s budget.

TAX CUT FOR SALARIED CLASSES

However, the most significant news for the people (salaried classes) the reduction of tax rates, as the income tax rate for those an annual income of Rs600,001 to Rs120,000 has been slashed to 2.5 per cent from the present level of 5 per cent.  

Those earning Rs2,200,000 a year would now have to pay 11 per cent tax instead of 15 per cent.

For those falling in the Rs2,200,001-Rs3,200,000 category, the new rate is proposed at 23 per cent. Currently, it is 25 per cent.

In this connection, the finance minister said the goal was to enhance the takeaway (net) salary – the amount received after various deductions – amid the persistent inflation.

PAY AND PENSION

Given the reduced purchasing power, the government servants were expecting a much higher pay raise. However, the finance minister announced a 10 per cent pay hike for the federal government employees.

On the other hand, the pensions will see a 7 per cent hike.

Meanwhile, the conveyance allowance for disabled (special) persons is being increased from Rs4,000 t0 Rs6,000.

The budget 2025-26 also addresses the issue of disparity reduction allowance. It is proposed the eligible civil servants will get a 30 per cent stipend.  

One the other hand, the armed forces personnel are to get a special allowance. However, the criterion to determine ratio or amount isn’t clear yet.

CARBON LEVY

Among the non-tax revenue measures, the introduction of carbon levy is the newest step to meet the target set for the Federal Bureau of Revenue (FBR).

Hence, the budget contains a proposal that suggests an Rs2.5 per litre carbon levy on petrol, high-speed diesel and furnace oil – a move that will directly affect the consumers and increase transportation costs.

Governments around the world, especially in Europe, are imposing carbon levy or carbon tax to expedite the green energy transition. Through this measure, the governments are expecting to discourage the use of fossil fuels. It is mostly accompanied by expanding the mass transit system in urban centres.

However, the case in Pakistan is different, as the sole focus is to generate more revenue.

That is why the finance minister says they would hike the carbon levy to Rs5 per litre in 2026-27.

DOES SOLAR ENERGY REMAIN A TARGET?

The government is imposing the carbon levy with a stated goal of to ensure green transition. However, the overall picture shows a different picture.

In this heat AC is not a luxury it's a necessity. Electricity should be affordable so people can use it tension free.

— iffi (@iffiViews) June 9, 2025

How? The budget proposals contains an 18 per cent sales tax on imported solar panels to boost domestic manufacturing. It will certainly discourage the shift towards solar energy by raising the costs.

The move comes in the backdrop of the power sector crisis, where higher electricity prices are forcing the people to ditch national grid. But the government is “unhappy” with the trend given the capacity charges paid to the IPPs. Hence, the power tariffs are no more affordable for domestic, commercial and industrial consumers.       

PROPERTY SECTOR BAILOUT?

In a major policy change, the government intends to do away with the up to 7 per cent federal excise duty (FED) on transfer of commercial or residential properties. The measure was introduced in last fiscal year amid the calls for bringing the property sector in tax net.

At the same time, the government has also reduced the rate of withholding tax imposed on property transactions (purchases).

The new rates for the three existing slabs are: from 4 per cent to 2.5 per cent, from 3.5 per cent to 2 per cent and from 3 per cent to 1.5 per cent.              

COMPETITIVE ECONOMY

The budget session is held a day after the Economic Survey 2024-25 showed an alarming decrease in agriculture output while people grappling with a sharply shrinking purchasing power are hoping for some relief.

Earlier, the federal cabinet approved the document at a meeting chaired by Prime Minister Shehbaz Sharif, who said the government was raising the pay and pensions by a level more than it could afford.

Read more: Salary raise: Govt employees protest ahead of budget announcement

In his budget speech, the finance minister said the budget revolved around an overall government objective of developing a competitive economy.

Aurangzeb said he wanted to avoid Pakistan’s boom and bust cycles of the past.

“The macroeconomic stability that we have achieved, we want to absolutely stay the course,” he said. “This time around we are very, very clear that we do not want to squander the opportunity.”

ACHIEVEMENTS

To begin with, Aurangzeb in his speech praised the armed forces for thwarting the Indian aggression and highlighted the steps taken to stabilise the economy during the past year.  

“This budget is being presented at a historic time when the nation showed unity [and] determination.”

In this connection, the finance minister added, “The spirit with which we protected our national sovereignty, we need to ensure our financial security in the same way.”

He listed the decrease in inflation, ensuring a current account surplus, interest rate cuts, increase in remittances as well as foreign reserves and improved rating by international agencies as major achievements of the government.

About the government goals, Aurangzeb said the government would have to ensure a stable economy and the people’s welfare, , amid the protest and chants raised by the opposition benches.  

“The sacrifices the common man has made, the burden the salaried class has borne in the previous budget. They say ‘we are salaried class but still gave Rs400 billion to the treasury […] what have the elite and the wealthy groups contributed compared to us?” he remarked.

While talking about the electricity tariff cuts, the finance minister said the power sector required extensive reforms.

TARIFF REFORMS

Aurangzeb said the government was aiming at rationalising and slashing tariffs to enhance Pakistan’s exports.

He claimed the tariff reforms would bring Pakistan at par with the countries like Vietnam in the region.

PRIVATISATION AND RIGHTSIZING

The finance minister said the privatisation of state-owned enterprises (SOEs) would remain pivotal goal. It included PIA and the power distribution companies (DISCOs), he mentioned.

As directed by the prime minister, Aurangzeb told the House that the government was working on rightsizing like merger of different ministries and divisions. The plan had been approved covering 10 ministries, which would soon be completed, he said.