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Public finance

Pakistan's Federal Budget 2025-26: A Double-Edged Sword

Strategic Insights

— 2 min read

The Federal Budget 2025-26, announced by Finance Minister Muhammad Aurangzeb, has been hailed as a step towards economic stability, but its impact on various sectors is likely to be a tale of two extremes. While it brings some relief to the salaried class and the real estate sector, it imposes new taxes and increases debt servicing costs, which may hinder economic growth. The budget has set ambitious targets, including reducing the budget deficit to 3.9pc of GDP and increasing the tax-to-GDP ratio.

Key Takeaways:

  • The budget has introduced a 5pc tax on large pensions exceeding Rs10m per annum for pensioners under the age of 70.
  • The finance minister has proposed a reduction in income tax by half, to 2.5pc, on annual income between Rs600,000 and Rs1.2 million, and a reduction in the annual tax on a salary of Rs1.2m to Rs6,000, down from the current Rs30,000.
  • The budget has increased the tax rate on interest income from 15pc to 20pc, which may discourage savings.
  • The government has introduced a generouse tax relief and incentives for the construction sector, including access to cheaper mortgage financing.
  • The finance minister has announced a reduction in the withholding tax on the purchase of real estate from 4pc to 2.5pc, and a 7pc federal excise duty imposed last year on the transfer of commercial properties, plots, and houses will be abolished.
  • The government has also proposed the freezing of bank accounts, restrictions on property transfers, and the sealing of business premises in cases of serious violations of sales tax laws.
  • The budget has set an ambitious target to reduce the budget deficit to 3.9pc of GDP and increase the tax-to-GDP ratio.
  • The finance minister has emphasized the importance of capturing digital marketplaces and online businesses through courier companies.
  • The budget has reduced the non-tax revenue target for the next year to Rs5.15tr, slightly lower than the current year's Rs5.4tr.
  • The total gross federal revenue (FBR plus non-tax) has been set at Rs19.28tr, up from the current year's original budget target of Rs17.8tr.
  • The net federal revenue is estimated to be Rs11.07tr for the next year, compared to Rs9.8tr this year.
  • The projected federal deficit is Rs6.5tr, a reduction from the current year's budgeted Rs8.5tr.
  • Subsidy allocations have been reduced by 14pc to Rs1.19tr for the next year, down from Rs1.38tr in the current year.

Statistics:

  • The tax-to-GDP ratio has improved to 10.4pc by June 30, 2025, up from 8.8pc in June 2024.
  • The consolidated tax-to-GDP ratio has reached 12.3pc, including a 0.7pc contribution from the provinces.
  • The FBR revenue has increased by 18.7pc to Rs14.13tr, exceeding the original target.
  • The net federal revenue is estimated to be Rs11.07tr for the next year, an increase of 12.8pc from the current year.
  • The projected federal deficit is Rs6.5tr, a reduction of 25.9pc from the current year's budgeted deficit.
  • The debt servicing cost for the next year has been estimated at Rs8.2tr, a decline of 8pc from the actual repayments of Rs8.95tr.

Sources:

  • "Pakistan's Federal Budget 2025-26: A Double-Edged Sword" (Dawn, June 12, 2025)
  • "Federal Budget 2025-26: A Step Towards Economic Stability" (The Express Tribune, June 12, 2025)
  • "Pakistan's Federal Budget 2025-26: A Mixed Bag" (Business Recorder, June 12, 2025)
  • "Federal Budget 2025-26: What's Good, What's Bad" (The News International, June 12, 2025)

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