Pakistan unveiled a budget worth 18.77 trillion rupees ($67.49 billion) on Friday, signalling a sharp increase in defence expenditure while curtailing development spending.
The government is attempting to balance the demands of the International Monetary Fund program with domestic political sensitivities, leaving limited space for welfare measures or tax relief.
Finance Minister Muhammad Aurangzeb announced that defence allocations would rise to 3 trillion rupees in the fiscal year beginning July, an 18% increase compared with the outgoing year. Federal development spending, however, has been capped at 1 trillion rupees, reflecting the government’s prioritisation of security and debt obligations over infrastructure and social investment.
The increase in defence spending followed consultations with provincial governments, which agreed to pool fiscal resources for security needs, resulting in cutbacks to provincial development plans. Aurangzeb emphasised that defence spending had been raised “to make the country invincible due to the uncertainty in the region.”
The budget underscores Pakistan’s limited fiscal manoeuvrability, with debt servicing, defence requirements, and IMF targets dominating priorities. Tax revenue is projected at 15.26 trillion rupees, up 8.2% from the previous year’s 14.13 trillion, despite the Federal Board of Revenue missing its earlier target.
Much of this revenue is expected to come from taxes and levies, particularly petroleum levies, which are budgeted to generate 20.60 trillion rupees. Analysts caution that the burden will fall disproportionately on salaried workers and businesses already within the tax net, while politically influential sectors such as agriculture, retail, and real estate remain resistant to taxation.
The federal deficit is projected at 7.02 trillion rupees, with the overall fiscal deficit targeted at 5.23 trillion rupees, or 3.6% of GDP, after accounting for a provincial surplus of 1.79 trillion rupees.
Islamabad has committed to achieving a primary budget surplus of 2% of GDP, excluding debt-service payments, as part of its IMF program obligations. This requirement effectively forces the government to collect more than it spends before interest payments, leaving little scope for tax cuts or new welfare initiatives.
The budget was delayed by a week and arrives amid renewed inflationary pressures triggered by the U.S.-Israeli war on Iran. The conflict has driven global oil prices higher, pushing Pakistan’s inflation back into double digits just as signs of stabilisation had begun to appear.
The government has set ambitious targets of 4% economic growth and 8.2% inflation for the coming fiscal year, compared with 3.7% projected growth and 6.7% average inflation in the outgoing year.
Pakistan’s economic challenges remain acute. Having narrowly avoided default in 2023, Islamabad is striving to keep its $7 billion IMF program on track. Debt repayments, rising defence costs, and external shocks from regional conflicts are squeezing fiscal space, leaving little room for welfare expansion or relief measures. Analysts note that the adjustment burden is likely to fall on the middle class, exacerbating social pressures at a time when inflation and unemployment remain high.
The government’s fiscal strategy reflects a delicate balancing act between external commitments and domestic stability. While the IMF program demands fiscal discipline and surplus generation, political realities constrain the government’s ability to broaden the tax base or introduce reforms in sectors dominated by powerful lobbies.
The emphasis on defence spending highlights the security-first approach, but it comes at the expense of development and welfare, raising concerns about long-term growth and social equity.
Agencies
