Balancing the books and the battlefield: Pakistan’s fiscal strategy for FY2025–26—I

On June 10, 2025, Finance Minister Muhammad Aurangzeb unveiled Pakistan’s federal budget for FY 2025–26, presenting a masterful exercise in fiscal restraint.

Total expenditures have been trimmed by 7 percent to Rs 17.57 trillion (USD 62 billion), while defence spending has been augmented by a 20 percent, rising to Rs 2.55 trillion (USD 9 billion). This recalibration reflects the heightened military posture following recent India–Pakistan tensions and is widely perceived as a well-deserved recognition of the Pakistan Army’s recent victory in the conflict.

Their strategic acumen and operational excellence not only safeguarded national sovereignty but also elevated Pakistan’s regional stature.

Despite the defence surge, the budget maintains a tight rein on the deficit — targeting around 3.9 percent of GDP, with a forecasted primary surplus of 2.4 percent. Growth is projected at 4.2 percent, a significant recovery from prior stagnation.

Inflation is expected to settle between 7–7.5 percent, supported by targeted subsidy removals, fiscal tightening, and administrative price controls.

To meet its revenue objectives, the government has committed to robust tax reforms. These include phasing out the non-filer category, digitizing the Federal Board of Revenue (FBR), and expanding the withholding tax regime. The goal is to enhance the tax-to-GDP ratio from its current 9.5 percent to a more sustainable 14 percent in the coming years.

Muhammad Sheroz Khan Lodhi (Karachi)

Copyright Business Recorder, 2025