EDITORIAL: The Federal Finance Minister, Muhammad Aurangzeb, in his winding-up speech confirmed what had been stated by Chairman Federal Board of Revenue during his interaction with the National Assembly and Senate standing committees notably that 36 billion-rupee additional taxation measures would be taken in lieu of the projected shortfall from the target as agreed with the committee members.
He added that “to keep government spending in check and ensure fiscal responsibility, we have introduced new taxes amounting to just 0.25 percent of the GDP…our emphasis remains on expanding the tax net rather than burdening existing taxpayers.” Two observations are critical.
First, all components of current expenditure, including on civilian administration have been raised, partly due to a 10 percent rise in salaries of the 7 percent of the country’s total workforce paid at the taxpayers’ expense, with the exception of mark-up on the assumption that the discount rate would further decline in months to come.
The Finance Minister confirmed this in his interactions during a standing committee meeting though the decision to reduce the rate, he added was in the domain of the Monetary Policy Committee (MPC) headed by the Governor State Bank of Pakistan.
While this is technically correct yet any decision to change the rate would require International Monetary Fund’s (IMF’s) approval, which is on record in its uploaded documents on 17 May 2025 that the revised regulations, concerning SBP’s collateral framework and counterpart eligibility policy, in line with the recommendations of the 2023 safeguards assessment will help mitigate financial and reputational risks arising from monetary policy operations.
In this context, it is relevant to note that the MPC’s decisions on the discount rate have been contrary to inflation data released in recent months: not reducing the rate when inflation plummeted to under 1 percent and not raising it when it increased in May 2025. The 16 June 2025 MPC meeting kept the discount rate unchanged when inflation rose from 0.3 percent to 3.5 percent.
And second, the Finance Minister emphasised the need for enforcement measures backed by draconian measures (scaled back with cases below 50 million rupees, arrests requiring a court order and oversight to be ensured through a three-member FBR committee and mandatory presentation before a special judge within 24 hours) by arguing that if these measures are not adopted additional 400 to 500 billion rupee taxes would have to be imposed.
Given that the Finance Minister claimed in his budget speech that the IMF has acknowledged 389 billion-rupee revenue generated from enforcement measures in 2024-25, it begs the question as to why the government requires draconian measures to generate the same amount from this source next fiscal year and, additionally, why in the event of failure to generate this amount would the government impose 600 billion rupee additional taxes rather than the amount set from enforcement measures.
The Finance Minister announced the withdrawal of sales tax and duty exemptions on imported cotton and yarn in support of local farmers; however, this may lead to lower value-added exports in the event.
One would have hoped that the Finance Minister had also considered phasing out the wheat support price instead of simply withdrawing it in the current year, which has reduced the price of wheat on the market but is expected to lead farmers to shift to a more lucrative crop next year that would almost certainly entail importing the commodity to meet domestic demand — imports that may well put further pressure on the country’s scarce foreign exchange reserves.
It is critical for the government to acknowledge that even after taking account of slashing development outlay next year, a standard policy used by all administrations (with the outlay slashed by 40 percent in the current year) without a significant decline in the discount rate (from the current 11 percent to at least 7 percent) the current expenditure side of the budget for next fiscal year would raise the budget deficit to unsustainable levels.
This would be exacerbated by the foreign exchange reserve position that remains under stress — at 11721.9 million dollars on 13 June 2025 but with 16 billion-dollar rollovers from the friendly countries (minus loans from multilaterals and other bilaterals) this is extremely disturbing.
To conclude, the budget 2025-26 is sadly not backed by reforms that would have benefited either the existing taxpayers or the low income consumers and its ambitious projection of a 4.2 percent growth rate appears to be unrealistic, given the targets set for revenue and allocations for expenditure items.
Copyright Business Recorder, 2025