The federal budget for FY27 has been greeted with celebration in certain quarters. The celebration may prove premature.
This is not a pro-growth budget, nor an expansionary one. Overall development spending, federal and provincial combined is set to decline. The fiscal space that has been created is being redirected largely toward a narrow elite whose consumption patterns will not meaningfully move the growth needle. At the federal level, this is a relief budget, and one that is, on paper, being financed by cutting provincial development spending.
The government is attempting to address a structural flaw in fiscal federalism, but through unconventional means. The IMF noted as far back as its 2017 special report that Pakistan’s fiscal system is “somewhat unique compared to other countries”, a uniqueness rooted in the substantial asymmetry produced by the 7th NFC Award, where the provincial share in revenue far exceeded their share in resource mobilization.
For years, the federal government has done the heavy lifting on revenue generation while provinces have spent lavishly. The provincial surpluses generated in recent years have largely remained parked with the provinces, eventually financing federal fiscal gaps by flowing into T-bills. These accumulated surpluses are dry powder, held in reserve to be deployed once the IMF programme ends.
The FY27 budget attempts, on paper, to correct this by transferring just over Rs1 trillion to the federal government. This creates room for Islamabad to lower taxes without cutting expenditure, while maintaining the targeted fiscal balance. There are, however, technical complications. Provinces receive their full revenue share until FBR collections reach Rs13.35 trillion, beyond which the incremental share is transferred as a grant to the federal government. If the FBR misses its target, provinces retain full revenue exposure rather than the standard 43 percent. The arrangement also rests on voluntary provincial cooperation, which is not a structural fix.
The federal government has used this space to provide relief to segments of the formal, affluent, and middle-income population, including salaried individuals whose tax burden was raised sharply and disproportionately in recent years. They are paying less than before, though still more than they were in 2022. Exporters will see better earnings on paper. But there is little in this budget to drive investment in productive capacity. No one appears keen to commit to new projects.
The affluent will spend more, likely on imported goods and services. Salaried households will have marginally more disposable income. But neither creates the kind of demand multiplier that shifts growth trajectories. And for the poor and the informal lower- and middle-income classes, there is essentially nothing. Whatever benefit trickles down will barely offset the direct and indirect costs of higher petroleum levies already in the pipeline.
The FBR’s targets are ambitious to the point of implausibility. Direct tax collection is projected to grow by 18.3 percent against nominal GDP expansion of 13.2 percent, and this while offering
reliefs. Customs duty is expected to increase by 20 percent even as the SBP continues to discourage non-essential imports and trade tariffs trend downward. The arithmetic does not hold together comfortably.
When the gaps materialize, and they likely will, the pressure will fall back on the FBR to perform. That means squeezing the formal sector further: demanding advance payments, applying coercive collection measures, and revisiting the same taxpayers who are currently celebrating. The jubilation of the affluent may prove short-lived.
Meanwhile, the government has significant room to increase petroleum levies without passing through the full impact to consumers, particularly if a prospective Iran-US deal keeps oil prices contained. Other forms of indirect taxation remain available. These instruments, when deployed, land hardest on those least able to absorb them.
This budget has been received as a turning point by a small group of people looking only at the relief side of the ledger. They are not accounting for the other side. The relief is real, but it rests on paper targets.
When those targets are missed, as they have been in prior cycles, the IMF will push for enforcement, and the government will reach back into the same pockets it has just partially emptied, while leaning on indirect taxes that compress the living standards of ordinary Pakistanis.
Caution is warranted. Some inflationary consequences are likely. The central bank would be wise to maintain its hawkish stance.
Copyright Business Recorder, 2026
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
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