The expectations - voluntary ceding of the annual rise in the provincial share of the divisible pool to the Centre - premised on a much publicised debate between the Centre and its federating units had been raised to a fever pitch only to be dashed by the budget 2026-27 bringing to mind T S Eliot’s famous proverb in his poem titled The Hollow Man - not with a bang but a whimper.
These expectations were reaffirmed a couple of hours before the budget was presented to parliament by Prime Minister Shehbaz Sharif during his televised address subsequent to formal cabinet approval of the budget as he praised his brother, the leader of his party, his niece, the Chief Minister Punjab, the leadership of the Pakistan Peoples’ Party as well as the Balochistan and last, but perhaps not least, the Khyber Pakhtukhwa governments for cooperating with the Centre in agreeing to key budgetary proposals. The declaration by Finance Minister Muhammad Aurangzeb that this measure has been postponed till next year raises questions about whether he will be able to deliver on this pledge when he clearly failed to get a consensus on other aspects of this year’s budget that required the intervention of the hybrid government as well as a 30- to 40-minute-long chat between the Prime Minister with the Managing Director of the International Monetary Fund (IMF).
Nonetheless, the budget does envisage generating about a trillion rupees more from the provinces in the current year – a rise that from an economic point of view cannot be supported: a rise in provincial surplus from 1379 billion rupees (revised estimates of 2025-26) to 1794 billion rupees in 2026-27 that would generate an additional 415 billion rupees for the Centre. And a reduction in the provincial budgeted allocation for development from 2.869 trillion rupees in the budget last year to 2.224 trillion next year or an additional 649 billion rupees that would accrue to the Centre.
Two observations are relevant. First, this accrual will be spent by the Centre on current non-development expenditure accounting for 93 percent of the total budget 2026-27 like last year, which is anti-growth and inflationary to boot as it is not backed by a rise in output. And second, it will further slow-down any move towards devolution, a policy that seeks to meet the needs/requirements of local communities. Instead, the Centre will take over project decision-making from the next tier of government, i.e., the provinces though one may assume that the more politically well-placed a party maybe the more the Centre will heed their demand for specific projects.
The question is: is there anything that is different about the budget from previous ones? There are five takeaways that show that little was changed in the budget.
First, the reliance on external borrowing is to rise to 23.3 billion dollars next year (at 290 rupees to the dollar parity) against the 19.9 billion dollars budgeted for the outgoing year but at last count only 11.068 billion dollars had been received in 2025-26 – an inflow that surely must be a source of concern to the government. This perhaps explains why the Finance Minister was at great pains during the unveiling of the Economic Survey a day prior to the budget presentation to emphasize the enhanced access to commercial borrowing, Panda ponds (only 250 million-dollars equivalent have been issued) and issuance of other debt equity instruments like Sukuk and Eurobonds. Total debt, including domestic debt and mark-up, is budgeted to rise next year by 16 percent – from the revised estimates of 6.9 trillion rupees to next year’s 8.05 trillion rupees.
Not included in debt figures noted above, but a debt nonetheless is the estimated closing guaranteed debt position for the issuance of contingent liabilities on 30 June 2025 estimated at 3.950 trillion rupees in last year’s budget, understated by 372 billion rupees as per the 2026-27 budget documents. The envisaged rise till 30 June 2027 is 5.005 trillion rupees or a rise of 16 percent.
Second, all components of current expenditure were raised and reflected the inability of the elite to show a reduction through either: (i) implementing reforms, pensions budgeted to receive 1.16 trillion rupees next year as opposed to 1.05 trillion rupees in the outgoing year, though
facetiously the documents note a 10 billion rupee pension fund though it is not clear whether this fund is set up at the taxpayers’ expense or whether this is the outcome of the policy announced last year that envisages employee contribution effective for only new entrants. Defence was also upgraded by 412 billion rupees though the bulk of this for operational expenses due to the uptick in terror attacks (and one would assume the 7 percent pay raise for all state employees).
Third the budgeted development outlay is contained at one trillion rupees in 2026-27, the same amount as budgeted in 2025-26. However, actual disbursement by the Finance Ministry (as opposed to the authorisations by the Planning Ministry) in the outgoing year has to-date been less than 50 percent. The allocations are indicative of a long-standing PML-N philosophy, notably big infrastructure projects will promote development as well as the party’s popularity. Sadly, here too the focus remained on roads rather than on water reservoirs, given that the country is now defined as severely water stressed.
Fourth, Federal Board of Revenue tax collections are budgeted to rise by 17.5 percent to 15.26 trillion rupees – the 2025-26 budgeted FBR collection was 14 trillion rupees that was revised downward to 12.9 trillion rupees (though FBR sources have revealed that the shortfall may still be in excess of 800 billion rupees). This indicates that the tax target, in yet another budget, is unrealistic.
In addition, the bulk of the government revenue is to be from sales tax whose incidence on the poor is greater than on the rich. It includes 4.9 trillion rupees under the head of sales tax, and another 5.3 trillion rupees from withholding taxes levied in the sales tax mode but credited under income tax (a practice that FBR does not desist from in spite of exhortation by the Auditor General of Pakistan). And kept outside the purview of the FBR (to ensure that it is not part of the divisible pool and therefore to be shared with the provinces) is the petroleum levy budgeted to generate 1.67 trillion rupees next fiscal year. In effect, the burden on the public through these three sales tax sources will be 11.8 trillion rupees next year – a fact that undermines the adequacy of the 838 billion rupees budgeted for the Benazir Income Support Programme, especially given poverty rate of 44 percent, if measured as per the calorific value.
And finally, the 4 percent growth next year may have to be revised downward given the severely contractionary monetary and fiscal policies in place due to the IMF’s harsh and upfront conditions and in the words of the Annual Budget Statement 2026-27 “a one percentage point decline in real GDP growth could lower government revenues through reduced tax collections, while also increasing expenditure pressures, particularly on social safety nets.”
Copyright Business Recorder, 2026
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