Every June, Pakistan’s economic managers unveil a new budget with the promise of a better tomorrow. The 2025–26 budget is no different. Glossy in presentation and ambitious in numbers (fiscal deficit at 3.9% and economic growth aimed at 4.2%), it attempts to reconcile competing goals: fiscal discipline under the IMF’s gaze, and economic stimulus amid stagnation. But beneath the veneer of progress lies a stubborn continuity: structural problems remain largely unaddressed, revenue targets are over-ambitious, expenditure is skewed, and reform is, once again, more rhetorical than real.
At the heart of the budget are revenue projections that paint a picture of optimism bordering on denial. The government aims to collect Rs 19.28 trillion in total receipts, a sharp jump of 15% from last year’s revised figure of Rs 16.8 trillion. Of this, Rs 14.13 trillion is to come from taxes—nearly 20% more than what was collected last year. Yet the underlying structure remains unchanged. Reliance on indirect taxes continues, with Rs 7.2 trillion (19% year-on-year growth) projected from them, slightly outpacing the Rs 6.9 trillion (18.5% YoY growth) expected from direct taxes.
This persistent skew reflects the regressive nature of Pakistan’s tax regime, where the burden falls disproportionately on lower- and middle-income earners. Meanwhile, vast segments of the economy—real estate, retail, and agriculture—continue to operate largely outside the tax net, with the informal economy now exceeding $500 billion.
While there are reforms aimed at bringing a few sectors, such as e-commerce, into the tax net (a move which may promote a cash economy rather than a digital one), the latest budget offers little to no plan for taxing the truly wealthy. According to Chairman Rashid, the top 5% of households alone evade Rs 1.6 trillion, while the top 1% evade Rs 1.233 trillion—compared to just Rs 0.14 trillion from the rest of the workforce. This reflects an elitist taxation mechanism.
Consider the legislature itself: nearly 52% of National Assembly members are landowners, effectively guaranteeing policies that exempt their wealth from taxation. To be fair, Pakistan has passed legislation taxing agricultural income, as prescribed by the MLDA. But as highlighted by Shabbar Zaidi, rather than improving compliance, the removal of the minimum tax on land holdings has further deteriorated collections. As he puts it: “There appears to be a method in the madness as it has been ensured that no tax is actually collected.”
Non-tax revenues are also being stretched to new highs, with Rs 5.15 trillion anticipated from sources like the petroleum levy (Rs 1.47 trillion), State Bank profits (Rs 2.4 trillion)—labelled an assumption by many economists—and dividends (Rs 0.2 trillion). Such reliance on volatile and one-off sources signals the absence of a stable, broad-based revenue strategy. Moreover, the imposition of a carbon levy of Rs 2.5 per litre, set to rise to Rs 5 per litre by FY27, on top of existing fuel taxes, reflects a regressive approach that disproportionately burdens lower-income groups—especially in the absence of transparency regarding green fiscal flows.
The budget’s underlying philosophy is best described as managed austerity, thinly veiled in selective populist measures
On the financing side, the government plans to borrow heavily. Capital receipts are projected at Rs 17.27 trillion, including Rs 16.67 trillion from domestic debt, of which Rs 14.01 trillion will go towards repayments—leaving a net borrowing of Rs 2.66 trillion. Treasury Bills alone will account for Rs 8.43 trillion, underlining the government’s increasing dependence on short-term, high-interest debt.
External receipts are equally problematic. The Rs 5.78 trillion (less than the revised FY25 figures) projected here is almost entirely offset by foreign repayments of Rs 5.47 trillion, underscoring the unsustainable nature of our external financing model. With little room to manoeuvre, Pakistan continues borrowing just to stay afloat. Despite securing a $1 billion tranche under the $7 billion IMF Extended Fund Facility and a $1.4 billion RSF for climate resilience, Pakistan remains chronically reliant on debt.
The expenditure side reveals deeper structural strains. Total spending is projected at Rs 23.85 trillion, of which current expenditure accounts for an overwhelming Rs 22.07 trillion. Development spending stands at a meagre Rs 1.77 trillion—under 8% of the total outlay. Defence spending alone is Rs 2.56 trillion, up Rs 368 billion (around 17%) from last year. Debt servicing is the single largest item at Rs 8.2 trillion, consuming nearly 35% of current expenditure.
What’s left for health (Rs 31.9 billion) and education (Rs 112.6 billion) is paltry, given the scale of Pakistan’s human development crisis. The Higher Education Commission (HEC) has seen a reduction from Rs 61.1 billion (158 development projects) to Rs 39.5 billion (170 projects). Development funding for health has halved from Rs 27 billion to Rs 14 billion. There is no direct new allocation for the Sehat Sahulat Programme (Federal Social Health Insurance).
As a result, Pakistan ranks 168th out of 193 countries on the Human Development Index, with just 0.9% of GDP spent on health and 0.8% on education, according to the Economic Survey 2025. Moreover, Pakistan has been ranked last among 148 countries in the World Economic Forum’s Global Gender Gap Report 2025, reflecting persistent disparities in economic participation and political representation, despite modest gains in female literacy. These indicators highlight that while the state is committed to balancing books and repaying creditors, it has little capacity to invest in its people.
The budget’s underlying philosophy is best described as managed austerity, thinly veiled in selective populist measures. A cut in the policy rate from 22% to 11% did allow for some fiscal manoeuvrability. Relief has been offered to the salaried class, and the Benazir Income Support Programme (BISP) has received an allocation boost to Rs 716 billion (a 21% rise). But these measures are cosmetic at best. With non-discretionary spending (debt, defence, pensions) consuming most of the outlay, little remains for meaningful development or welfare.
Despite claims of reform, many measures introduced through the Finance Bill 2025–26 appear ad hoc. These include changes to customs duties, new tax rules for e-commerce, a proliferation of new taxpayer categories (filer, non-filer, late filer, eligible, ineligible), and sweeping new powers for the FBR—raising concerns about violations of Articles 4, 8, 14, 18, 23, and 25 of the Constitution. There are also higher levies on dividends and debt income, signalling the government’s intent to penalise risk-averse investors—another parochial approach in place of structural reform.
The power sector continues to bleed, with circular debt rising and budget allocations declining
At the same time, the burden continues to fall on compliant sectors. According to the finance minister, Rs 400 billion of the Rs 600 billion in incremental tax measures will come from “enforcement”. Against the backdrop of a ruthless socioeconomic bloodbath in recent years, tax cuts on salaries and the super tax are not intended to attract investment or prevent brain drain. Solar panels, for example, are now (hopefully temporarily) subject to 18% sales tax—contradicting Pakistan’s own climate goals under its Nationally Determined Contributions. Meanwhile, livestock (which comprises 50% of agriculture) remains untaxed, despite being a federal subject; the Tajir Dost scheme has failed; and tax expenditures have ballooned to Rs 5.8 trillion in 2025—up Rs 1.96 trillion or 51%. Pakistan seems like Murphy’s utopia.
Politically, the budget treads a familiar path. Parliamentarians’ discretionary schemes have been boosted by 172% to Rs 70 billion. The defence ministry’s development budget has risen 114% to Rs 11.6 billion. Meanwhile, critical sectors like higher education, health, IT, space, and water infrastructure have seen massive cuts. Federal spending on areas constitutionally assigned to provinces continues, undermining the 18th Amendment and the National Fiscal Pact. These choices reflect the political economy of budgeting in Pakistan, where elite interests—particularly landowners, military-industrial lobbies, and entrenched bureaucracies—dictate resource allocation.
On paper, the government has set a privatisation target of Rs 86.55 billion—a tenfold increase from last year. But this mirrors countless past promises that failed to materialise. With state-owned enterprises losing Rs 851 billion last year alone, further delay is no longer viable. Yet IMF projections suggest zero proceeds from privatisation until 2030, casting serious doubt on this target.
The same contradictions appear in wage policy. Despite the announcement of a minimum wage last year of Rs 37,000/month—barely in line with the World Bank’s poverty threshold—there is no effective enforcement. Over 80% of industries in Sindh, and an even larger share of the services sector, fail to pay it. Trade unions have been systematically undermined over decades, and social security enforcement is riddled with corruption. The result: rising inequality, gender wage gaps, and stagnant consumption—hardly the hallmarks of a pro-growth strategy.
Pakistan’s chronic economic challenges remain: low investment, weak exports, falling agricultural output, rising joblessness, and climate vulnerability. Yet the budget offers no credible cure. Agriculture remains in crisis, with growth at just 0.56%, dragged by steep declines in major crops: cotton (-30.7%), maize (-15.4%), and wheat (-9%). Large-Scale Manufacturing has followed a similar downward trend.
Yet, no coherent recovery plan has been presented. The power sector continues to bleed, with circular debt rising and budget allocations declining. Exports remain at just 9% of GDP—far below historical averages or regional peers. Policy unpredictability, failed import substitution, and cascading tariffs continue to deter investors. Foreign Direct Investment is at a dismal 0.5% of GDP—highlighting the gap between government rhetoric and economic reality.
Ultimately, this budget is not a Copernican revolution. It is yet another Ptolemisation—an exercise in adding epicycles to preserve a broken model. What Pakistan needs is a complete reimagining of its fiscal architecture: from indirect to direct taxation, from elite capture to equity, from survivalist budgeting to nation-building.