Budget FY26: balancing social sector priorities amid fiscal constraints

Pakistan’s federal budget for FY2025-26 has come at a critical time. The country is going through a fragile phase of economic recovery; provisional GDP for FY stands at a recovering & stable rate of 2.68 percent, remittances are increasing, inflation rates have declined and primary surplus currently constitutes 3 percent of the GDP (March-July 2024-25).

Economists and fiscal experts are now debating whether the determined budgetary outlay will help maintain this trajectory or not. However, with persistent structural challenges in the country, i.e., rising gender inequality and regional disparity, growing climate vulnerability and a youth bulge, one also needs to analyze the situation based on considerations for resilient growth and inclusive development, mandates that can only be achieved through equitable social sector investment. Will this fiscal outline help align national goals with SDGs as well as move forward the mandate of URAAN Pakistan with its 5Es framework?

To have a quick overview, the budget has assumed a modest economic rebound for the fiscal year 2025-26, characterized by an economic growth rate of 4.2 percent but an inflation rate as high as 7.5 percent. Amidst the challenging environment of two IMF Programmes, the Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF), the budget has somewhat prioritised fiscal consolidation and revenue-based targets; 18 percent taxation on imported solar panels, higher petroleum development levy (collection target of Rs 1.468 trillion) and FED revenue target of Rs 888 billion for FY 2025–26. The tension, however, has slightly been eased up by measures such as strategic relief for the salaried class (mainly lower to middle income tiers) and a 7 percent increase in pensions.

The National Economic Council has established a budget of Rs 4224, out of which Rs 1000 billion has been issued for the Federal PSDP (60 percent focusing on large-scale infrastructural projects), and a handsome amount of Rs 2,869 billion for provincial ADPs.

With reference to social sector development, this is the most relevant area of concern, particularly after the passage of the 18thamendment, that led to the devolving of areas such as health and education to provinces. Unfortunately, despite the continuous efforts to bring social development into the heart of our development agenda, the budgetary priorities have caused significant cuts in social sector allocations.

In the health sector, while non-development expenditures have increased, development expenditures have reduced from Rs. 27 billion to Rs 14.3 billion (almost half). This caters to 21 ongoing and new initiatives for preventive care, treatment and disease control and modern infrastructure, medical education, extension of cancer hospital and critical care facility, and the largest share being attributed to a tertiary care facility completion in Islamabad.

In Budget FY 2024-25, one billion was allocated to the Federal Social Health Insurance, Sehat Sahulat Programme, while there is no direct allocation mentioned in this year’s budget. The sustainability of this programme has long been a challenge, particularly due to its overambitious expansion of population and treatment coverage.

However, this programme still serves as a major relief for the poorest segments of our society and protects them from catastrophic health expenditures that can push families below poverty line. Higher Education Commission (HEC) has experienced a drop from Rs.61.1billion (158 development projects) to Rs 39.5 billion (170 HEC projects). The combined allocation for water sector and hydropower projects has also seen major slashing and mismanagement, despite the ongoing concerns over potential water blockages by India.

These financial cuts not only compromise critical areas of human capital development, but also deepen socioeconomic crises such as illiteracy, limited access to education facilities, malnutrition and water scarcity and mismanagement for the most vulnerable groups of our society, i.e., adolescent girls, children and the youth. While stability and reform are integral for the country’s economic future, one needs to question as to what price will the common citizens have to pay, in exchange for their compromised socioeconomic well-being, financial security and the basic right to life?

Considering the evolving dynamics of the world, there have been some significant strides as well; climate tagging of subsidies for government officials, incorporation of the component of disability-friendly infrastructure in HEC initiatives, and alignment of youth skill development programmes (allocation of Rs 4.3 billion) with the mandate of URAAN Pakistan. Moreover, BISP (Social Protection) has seen financial allocations grow 21% than last year, a generous amount for the expansion of its flagship initiatives. However, despite these positive developments, persistent institutional flaws, fiscal pressure, and political interference continue to hinder progress in the social sector.

In short, at a time when inclusive growth and creation of a resilient workforce should be national imperatives, merely focusing on infrastructural revamping and macroeconomic stability is not the right way forward. While the government has announced some remarkable interventions in critical areas of health, education and social protection, they are still unable to fully embrace the principles of inclusive, resilient and well-governed growth.

To truly align our national goals with SDGs, the policy and institutional framework needs to be thoroughly analyzed to make sure that the social sector is not overlooked under fiscal constraints but rather seen as a core pillar of human capital development and hence, economic progress. Only by placing the vulnerable groups of society at the heart of our development agenda and policy can Pakistan move towards sustainable prosperity.

Copyright Business Recorder, 2025