Reflections on federal budget FY27—I

In line with the overall economic policy, the important thing for a budget is to employ its tools – revenue and expenditure – to meet both over-arching goal of enhancing sustainability of macroeconomic stability, economic growth, resilience in terms of greening the economy, and welfare. For this, it is important to prioritize both outcomes, and plan revenues and expenditures in a way that enhances productive and allocative efficiencies, and puts the burden of taxation in an equitable way.

Important outcomes as per the author for Federal Budget 2026-27, for instance, include, as pointed out in my June 12 article ‘Policy philosophy correction budget–I’ published by Business Recorder (BR) ‘…water resource management, and security, energy sustainability, poverty, unemployment, and high interest payments… fiscal federalism needs to be fixed to better match responsibilities with regard to subjects shifted under the 18th Constitutional Amendment to the federating units, with the expenditure responsibilities they should incur from the transferred resources under the National Finance Commission (NFC) award for those devolved responsibilities. That would better rationalize expenditure side, and revenue raising needs of the centre, and federating units.’ Here, the overall efficiency and equitability aspects of the budget are reflected through the ‘way’ expenditure is allocated, and before that ‘how’ revenues are collected through providing positive and negative incentives in this regard to set the direction of the overall economy.

In the Federal Budget 2026-27, the first thing to realize about the budget is that it is not presented as an outcomes-based budget in terms of main goals being targeted – in particular climate change related resilience enhancing expenditure, including subsidies, and taxation – how the budget overall in terms of expenditure allocations, and domestic resource mobilization, or revenues reflects expectations.

As a related point, the chapter on climate change is among the last few chapters of the Economic Survey for fiscal year 2025-26, which is strange to say the least, given Pakistan is among the top-ten most climate change challenged countries and is currently under an International Monetary Fund’s (IMF) ‘Resilience and Stability Facility’ (RSF) programme with IMF that mainly focuses on enhancing climate change related resilience.

Moreover, a generic statement in the Annual Budget Statement (ABS) by finance secretary that ‘In framing the budget, priority has been accorded to key sectors including health, education, social protection, climate resilience, gender equity and human capital development. …to support economic recovery and inclusive growth through sustained support for productive sectors, including agriculture, industry, and small and medium enterprises, alongside measures to enhance competitiveness, employment generation, and private sector participation’ needs to be quantified in terms of indicating upfront expenditure, and revenue proposals with regard to each of these priority areas, including indicating proposed expectations by federal government for the provinces in these areas, as an overall effort by the Centre to provide guidance to the provinces with regard to bringing greater harmony in budget proposals of the federal government, and federating units. Also, the statement does not sequence priorities in terms of allocations, highlighting the order of importance of emphasis; for instance, perhaps makes sense to prioritize higher the existential threat of climate change crisis.

Before that the finance minister in his speech did not centre-stage the budget speech around highly important objectives facing the economy, where climate change – given the country has seen two catastrophic flooding during the last four years, or so – and water resource management should have been one of the most emphasized aspects of the budget, along with exorbitant level of interest payments, high level of poverty, and unemployment, for example.

Moreover, the prioritization should have followed a deep focus in terms of specific expenditure, and revenue proposals, including foreign assistance-related inflows, including climate finance, the government expected to receive.

Here, borrowing with regard to financing expenditure-revenue gap requires overall economic policy orientation – including that of the International Monetary Fund (IMF) programmes – away from over-board use of monetary austerity policy – squeezing aggregate demand through employing policy rate in an over-board way, rather than employing a more balanced aggregate demand- and supply-side policy emphasis, for instance – as an important determinant to effectively rationalize interest payments-related expenditure and, in turn, overall fiscal space, while overall adding to the sustainability aspect.

Moreover, with regard to boosting the equitability aspect of revenues, and for enhancing productive- and allocative efficiencies, requires shifting from consumption-based (indirect) taxes – which are regressive in nature and also distort prices, adding to cost-push inflation – to income-based (direct) taxes.

On the contrary, neither the budget speech nor the ‘statement of purpose’ in the ‘annual budget statement’ (ABS) emphasizes the need to make this needed shift in a mission-oriented way, especially when poverty has seen drastic increase over the last few years, and there is urgent need to move away from regressive, indirect taxes.

Moreover, the revenue shortfall from this shift, requires, in turn, announcing revenue measures that enhanced tax base, and introducing creative tax policy measures. In addition, this shift will, in turn, set a much-needed tone for provinces to reflect similar emphasis, in terms of moving away from indirect taxes, and enhancing direct tax base, in their respective budgets.

Unfortunately, rather than not only any significant intent shown with regard to making this shift, the current direction has, in fact, been perpetuated whereby as per budgetary estimates for FY2026-27, indirect taxes are more than direct taxes. Hence, while rather direct taxes related budget estimates for 2026-27 were slightly increased to Rs7.6 trillion, from budget estimates for FY2025-26 of Rs.6.9 trillion, and revised estimates of Rs6.4 trillion.

On the other hand, budgeted indirect taxes for the upcoming fiscal year (FY) saw an increase from revised estimates of the ongoing fiscal year by Rs1.1 trillion, to stand at Rs.7.7 trillion; here, budgeted estimates for the ongoing fiscal year stood Rs7.2 trillion.

In addition, the budget process needs to have a better learning curve – and overall economic policy, and IMF programmes for that matter – whereby over the medium-term pro-cyclical budgets – enhancing tax- and policy rates to rein-in aggregate demand – have not lent sustainability to even, at best, short-term achieved macroeconomic stability, while unduly giving so deep and prolonged sacrifice of economic growth, and reaching a very low level of foreign direct investment (FDI), which, in turn, has led to hardship in terms of rising levels of unemployment, inequality, and poverty. It is, indeed, overdue then to shift away to move towards taking a counter-cyclical orientation of budget by providing a much more balanced aggregate demand, and supply-side focus of the budget.

This means that the budget should look to have a relatively greater emphasis in terms of development spending, in particular focusing on important areas in terms of marking prioritized spending, and putting the burden of development spending, including that of the prioritized areas, on the Centre, and the federating units in line with the responsibilities as envisaged under the 18th Constitutional Amendment and the National Finance Commission (NFC) award. It is also important to note that the budget does not much underline better aligning provincial responsibilities, with expenditure rationalization, whereby, for instance, social welfare programme Benazir Income Support Programme (BISP) related allocation, which should be the concern of the respective province, given under the 18th Constitutional Amendment social welfare is a provincial subject, yet it continues to be allocated through federal budget Rs.844.8 billion for the upcoming fiscal year.

At the same time, the fact that the budget estimates for the upcoming fiscal year are the same as the last fiscal year means lesser allocation in real terms, which is strange given poverty, and income inequality are rising in the country.

In the same vein, for instance, education, health, and perhaps social protection, which appear similar to social welfare, all fall within the responsibility of provinces under the 18th Constitutional Amendment, yet there is duplication in terms of significant allocation of non-development current expenditure at the federal level; where directional guidance from Centre at the policy level for these subjects could be provided by the planning ministry from the already existing research staff since all development related areas are part of the overall planning of country’s economy, while running the educational, and health affairs concerning the Centre jurisdiction of Centre – including running the affairs of Higher Education Commission, which is not a devolved entity – would in turn likely be a small fraction of what is being allocated currently.

Hence, in an overall budgetary estimate of current expenditure for the upcoming fiscal year at Rs.17.5 trillion, a little more than Rs.1 trillion goes to these three concerns – ‘Education Affairs and Services’ allocated Rs.117.1 billion, ‘Health Affairs & Services’ Rs.37.4 billion, and ‘Social Protection’ Rs.867.0 billion; where this saving could mean less primary surplus target, and overall greater fiscal space for enhancing development spending – where PSDP from this saving in federal budget could in fact around be doubled – along with lesser need for seeking provincial surplus, which has been budgeted Rs.1.8 trillion! Here, it needs to be indicated that even if the budgetary estimate for FY2026-27 for ‘Tertiary Education Affairs and Services’ at Rs.84.5 billion are taken out of the total current expenditures, they still stand close to Rs.1 trillion, or Rs.927.1 billion to be more precise. It is strange that most of the tertiary level Rs84.5 billion expenditure will likely be with regard to providing research grants, and should therefore be part of the development expenditures of the federal government, and not current expenditure.

Moreover, the budget should focus on reaching primary deficit, while reducing fiscal deficit. This is important to avoid fiscal austerity in the overall effort to provide a counter-cyclical budget, which is, in turn, essential for both stability and growth; and should not be wrongly seen as a matter of trade-off between the two, at least not over the medium-term. This is because targeting inflation should not mean primarily aggregate demand squeeze emphasis, given both traditionally inflation being an equally fiscal phenomenon in developing countries, and more so, in the wake of elevated level, and frequency of aggregate supply shocks due to fast-unfolding climate change crisis, increasing probability of related ‘Pandemicene’ phenomenon, and heightened level of conflict globally.

(To be continued on Sunday)

Copyright Business Recorder, 2026