Pakistan's Federal Budget 2025-26 Offers Relief for Salaried Workers and Boost to Defence Expenditure

Strategic Insights -

The new federal budget presented by Finance Minister Muhammad Aurangzeb aims to alleviate the income tax burden for middle- and high-income earners in Pakistan, with a focus on supporting salaried individuals. The budget also allocates a significant increase in defence expenditure, citing the recent conflict with India. Additionally, the government has proposed measures to retain highly skilled professionals by reducing surcharges on high-income earners. The budget's primary goal is to stabilize the economy, which had faced concerns of defaulting on its debts as recently as 2023.

Key Takeaways:

  • The government has proposed across-the-board cuts in income tax rates for the salaried class, with a minimum rate reduced from 15% to 11% for taxpayers earning up to Rs2.2 million annually.
  • Tax rate for individuals making between Rs600,000 and Rs1.2 million a year will drop from 5% to 2.5%.
  • Similar cuts are being proposed for higher income brackets, with a 1% reduction in surcharge for those earning over Rs1 million.
  • The budget aims to provide relief and keep salaries in line with inflation, with the government recognising the need to retain highly skilled professionals.
  • Defence expenditure has been increased by 20% to Rs2.55 trillion ($9 billion) in FY26, following a recent conflict with India.
  • The government has projected 4.2% economic growth in 2025-26, after steadying the economy, which had looked at risk of defaulting on its debts as recently as 2023.
  • Growth this fiscal year is likely to be 2.7%, against an initial target of 3.6% set in the budget last year.
  • Interest rate cuts by the central bank should aid economic expansion, but monetray policy alone may not be enough to address fiscal constraints and IMF-mandated reforms.

Statistics:

  • Overall spending has been shrunk by 7% to Rs17.57 trillion ($62 billion) in the federal budget for FY26.
  • Defence expenditure has been increased by 20% to Rs2.55 trillion ($9 billion) in FY26.
  • The government has allocated Rs2.55 trillion ($9 billion) for defence spending in FY26, compared to Rs2.12 trillion in the fiscal year ending this month.
  • Economic growth is projected to be 4.2% in 2025-26.
  • Growth this fiscal year is likely to be 2.7%, against an initial target of 3.6% set in the budget last year.
  • Interest rate cuts by the central bank should aid economic expansion, with a sharp drop in the cost of borrowing.

Sources:

  • Pakistan announced its federal budget for fiscal year 2025-26 on Tuesday, shrinking overall spending by 7% to Rs17.57 trillion ($62 billion).
  • The finance minister presented a budget that allocated Rs2.55 trillion ($9 billion) for defence spending in FY26, compared to Rs2.12 trillion in the fiscal year ending this month.
  • The government has projected 4.2% economic growth in 2025-26, saying it has steadied the economy, which had looked at risk of defaulting on its debts as recently as 2023.
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