Budget 2025-26: Pakistan targets 4.2% growth as Aurangzeb presents proposals ‘for a competitive economy’

Finance Minister Muhammad Aurangzeb announced Pakistan’s federal budget 2025-26 “for a competitive economy” on Tuesday, targeting a modest 4.2% growth for the coming fiscal year, compared to 2.7% expected in the outgoing FY25.

The budget was announced, amid ruckus from the opposition lawmakers of Pakistan Tehreek-e-Insaf (PTI), with a total outlay of Rs17.6 trillion, down 7% or Rs1.3 trillion as compared to the Rs18.9 trillion budgeted outlay of FY25.

The CPI inflation rate is budgeted to be around 7.5% in FY26, whereas the budget fiscal deficit is expected to be around 3.9% of the GDP, while the primary surplus is budgeted at 2.4% of the GDP.

“We are focused on economic stability and prosperity. We want an economy which is equitable and sustainable,” said Aurangzeb in his address.

Relief for the salaried class

The government has decided to significantly reduce tax rates in various income tax slabs of the salaried class, the finance minister said.

“We are providing tax relief to those which needs it the most, i.e. the salaried class,” said Aurangzeb.

For the salaried class falling under the Rs600,000-Rs1.2 million tax slab, the government has decided to reduce the tax rate from 5% to 2.5%, he said.

Whereas, the income tax rate on those earning between Rs1.2-Rs2.2 million has been reduced from 15% to 11%.

“Those earning between Rs2.2-Rs3.2 million will now pay 23% income tax as compared to 25%,” he said.

Meanwhile, the government, in its bid to reduce the ongoing brain drain, has decided to reduce the surcharge on those earning over Rs10 million by 1%.

The government, in its bid to promote horizontal equity has decided to raise tax rate on interest income from 15% to 20%.

Talking about the outgoing fiscal, the minister said that the country achieved a surplus of around 2.4% of the GDP in FY25, whereas the CPI rate declined to 4.7%.

“We expect a current account surplus of around $1.5 billion this fiscal,” he said, adding that remittance inflows are expected to hit $37-38 billion in FY25.

On taxation measures, Aurangzeb said that from July onwards, the tax filing process will be simplified.

Tax on solar panels

The budget proposes to levy a sales tax of 18% in the FY26 budget.

Aurangzeb, presented the federal budget for the second time as the coalition government seeks to revive the economy, meet the International Monetary Fund (IMF) benchmarks and provide some relief to the tax-weary masses.

Mark-up Payments

Of the total expenditure, Rs8.2 trillion has been allocated for mark-up payments, accounting for 47% of the total government expenditure.

PSDP

The federal government has allocated Rs1 trillion for the Public Sector Development Programme (PSDP).

FBR Tax Target

The Federal Board of Revenue (FBR) is assigned to collect Rs14.13 trillion in FY26, up 9% as compared to Rs12.9 trillion budgeted for FY25.

The tax collection for FY26 includes Rs6.9 trillion in direct taxes and Rs7.2 trillion in indirect taxes.

The federal government targets to collect Rs5.15 trillion from non-tax revenue measures.

Defence budget shoots up

Pakistan has allocated Rs2.55 trillion for defence in the incoming fiscal year, higher than Rs2.12 trillion, i.e. an increase of over 20% allocated in FY25.

Pensions and Grants

The government has allocated Rs1,055 billion for pensions and Rs1,186 billion under subsidies. Meanwhile, Rs1,928 billion has been budgeted for grants.

BISP

The government allocated Rs716 billion for the Benazir Income Support Programme (BISP), which is 21% higher than the previous year.

For the energy sector, the government has allocated Rs90.2 billion for 47 development schemes in FY26.

Talking about debt management, the finance minister reiterated that the preparation for the issuance of the first Panda Bonds is completed to penetrate the Chinese capital market.

He added that the privatisation process of PIA and the Roosevelt Hotel will be completed in the incoming fiscal year.

Finance Minister Aurangzeb, who delivered his second budget speech in the National Assembly, will also lay the Finance Bill 2024 in the Senate on the same day, as required under Article 73 of the Constitution.

Ahead of the budget address, the federal cabinet approved the budget proposals for the next fiscal year (2025-26).

Addressing the federal cabinet meeting, Prime Minister Shehbaz Sharif said Pakistan has now come into a take-off position as all economic indicators are satisfactory.

“After defeating India in a conventional war, now we have to surpass it in the economic field as well,” he added.

Some areas of interest:

• GDP growth target
• External financing estimates
• Taxation on the salaried group
• PSDP size and focus
• Broadening the tax base
• Defence budget

The budget comes a day after the government missed its GDP growth target of 3.6% in the outgoing fiscal year, posting a figure of 2.7%, as revealed in the Economic Survey 2024-25.

However, Aurangzeb, during his press briefing while unveiling the Pakistan Economic Survey 2023-24, highlighted a strong 4.8% rebound in industrial activity, pushing the economy’s size to $411 billion for the first time and raising per capita income to $1,824.