Budget: getting close to plugging the gap

EDITORIAL: Credible though still unconfirmed reports suggest that the two major coalition partners - the Pakistan Muslim League-Nawaz at the Centre and in Punjab and the Pakistan Peoples’ Party a coalition partner at the Centre and in Sindh - have agreed to a freeze in the divisible pool releases in 2026-27 to the same level as in the revised estimates in the outgoing fiscal year.

The Federal Board of Revenue’s (FBR’s) projected shortfall of 868 billion rupees against the downward revised target of 12.09 trillion rupees from the budgeted 14 trillion rupees implies total revenue collection at 11.2 trillion rupees out of which the provincial share as per the National Finance Commission award is 6.4 trillion rupees.

Out of the revenue actually collected by FBR Punjab’s share for the current year is estimated at 3.68 trillion rupees (51.74 percent of the provinces’ share in the divisible pool), Sindh’s is 1.57 trillion rupees (24.55 percent), Khyber Pakhtunkhwa’s is 935 billion rupees (14.62 percent) and Balochistan’s is 633 billion rupees. The agreement is that Sindh and Punjab would accept this same amount under the divisible pool next fiscal year – an amount that, if disbursements under the NFC in 2024-25 are taken into account, would imply that the federal government would have access to an additional 1.7 to 2 trillion rupees, that is the usual increase in FBR collections in any given year – an amount that is reportedly sought by the federal government for its strategic funding and Federal Public Sector Development Programme. It is however unclear whether KPK and Balochistan governments would face a similar freeze, with or without their concurrence; and if so, what recourse would be available to them for possible redressal.

What is also relevant to note is that this amount would be in addition to the provincial surplus that has been agreed by provincial governments with the International Monetary Fund (IMF) under the ongoing programme. The budget 2026-27 documents would indicate the precise amount generated by the provinces in the current fiscal year, budgeted at 1.48 trillion rupees, for use to balance the federal budget. In addition, the IMF third review documents dated mid-May 2026 urge provinces to “accelerate the collection of GST on services by strengthening enforcement. To ensure that gains from the agricultural income tax (AIT) reform materialize, provinces should take advantage of data sharing with the FBR, increase the automation of AIT procedures and dedicate additional human and IT resources to enforcement. IMF Country Director has been providing regular tailored advice to provinces to address their specific implementation challenges.” And in the Memorandum of Economic and Fiscal Policies it was noted that “revenues from agricultural income tax fell short of expectations because of delays in the application of revised rates and other implementation challenges. The FBR has begun sharing income tax information with the provinces to support the collection of provincial revenues in FY27.”

Thus the provinces’ own income is projected to rise, which would reduce the heavy current reliance on divisible pool taxes to fund a large part of their budgets. In theory, this is precisely what is required; however, in the current Middle East conflict crisis that is fuelling a global recession, and Pakistan is not immune to this, the duration and its negative fallout on our economy, especially in terms of revenue collection capacity of the FBR, will no doubt be impacted.

It is, however necessary to emphasise that a change in policy no matter how well thought-out it maybe, requires a gestation period for maximising effectivity – a period whose duration is likely to be constrained by public opinion. And, as frequently supported by the Business Recorder, it may be appropriate during the inception phase for the federal government to slash current expenditure, especially non-operational expenditure, which would automatically reduce the pressure to generate more revenue.

Copyright Business Recorder, 2026