Blatant capitulation

Post-2019 Pakistani budgets exhibit a blatant capitulation to Inter-national Mo-netary Fund (IMF) conditions — upfront, harsh, and anti-growth; but with some small scraps extended to industry and even smaller scraps for the general public.

This year too, the budget seeks to raise taxes, relies on a lower policy rate to reduce its mark-up but does not reduce its indebtedness (external or domestic) and retains the 93 percent allocation for current expenditure as in 2025-26.

The pro-poor growth element of the budget is limited to Benazir Income Support Programme - 838 billion rupees next year as pledged to the IMF, against 706 billion rupees in the outgoing year, a good programme but inadequate to meet the 44 percent poverty levels estimated by using calorific value, and various Prime Minister schemes (Youth Business Loan, Kamyaab Jawan programme, etc.)

The pro-rich taxes are evident in the reduction in property tax (withholding tax for purchasers reduced from 2.5 to 1.5 percent and on sellers from 5.5 to 2.7 percent) abolishment of super tax for those with income from 15 to 50 crore rupees; however, those with incomes above 50 crores would pay the reduced super tax of 8 percent from 10 percent and CVT would no longer be levied on overseas assets – decisions that are expected to fuel economic activity and encourage filers, but time will tell if these salutary objectives will be met this time around.

In addition, subsidies have been doubled next year for industries and production — from 12.193 billion rupees last year to 37 billion rupees next year — with arrears to Utility Stores Corporation at 23.2 billion rupees. It is unclear whether this has been approved by the Fund as it opposes incentives to specific industries as “distortionary”. And to encourage exporters, the government has reduced export tax from 2 to 1.2 percent.

FBR taxes have been budgeted to rise by 17.4 percent next year from the revised estimates of 2025-26, a target that is unrealistic given that the FBR is struggling to meet the downward revised target for the outgoing year of 12,983 billion rupees against the budgeted target of 14,131 billion rupees (with 11,900 FBR collections in 2024-25). Sales tax, whose incidence on the poor is greater than on the rich, will remain the major source of FBR revenue – 4.92 trillion rupees under the head of indirect taxes. And around 75 to 80 percent of income tax collections are from withholding tax levied in the sales tax mode — a practice that continues though the Auditor General recommended to the FBR to abandon it. And, as noted in the IMF third review documents, the GST compliance efficiency has declined in Pakistan from 27.4 to 22.8 percent, which no doubt is the reason behind the decision to levy sales tax on 21 additional items on the basis of printed retail price.

The budget also envisages a tax on the income from social media though it is unclear as to how the government will assess the exact income from this source and deemed income from immovable property has been removed, a long-standing demand.

Petroleum levy, another form of sales tax but not shared with the provinces, is expected to generate the highest non-tax revenue of 1.676 trillion rupees next year against 1.498 trillion rupees in the current year taking a front seat to State Bank of Pakistan profits budgeted at 1.436 trillion rupees.

The expectation of a federal budget that would raise federal revenue at the expense of provinces who, after numerous pre-budget discussions, had reportedly agreed to take the same amount from the divisible pool as in the outgoing year, thereby foregoing their share as per the prevailing National Finance Commission award has been deferred till next year, so revealed the Finance Minister in his budget speech. Thus, the provincial share of the divisible pool taxes was retained in the budget documents at 56.5 percent while with the addition of grants and transfers it soared to nearly 58 percent.

The provincial surplus was raised to 1794 billion rupees for next year against the revised surplus of 1379 billion rupees in 2025-26 – a rise of 415 billion rupees in total terms and 29.3 in percentage terms; while total allocation for provincial annual development budgets was reduced from 2.869 trillion rupees budgeted in the outgoing year to 2.224 trillion rupees next year - a decline of 629 billion rupees in total terms and 22 in percentage terms. In effect, the provincial share has been reduced by 1.044 trillion rupees.

Current expenditure is projected to rise to 17,495,417- million rupees – a rise of 2.5 trillion rupees, and 16.5 in percentage terms — with all components budgeted to receive higher allocations. In the outgoing year the revised estimates indicate an almost one trillion-rupee lower outlay for mark-up than was budgeted attributable to lower policy rate as well as rescheduling debt – from short-term higher interest payments to longer-term lower payments. However, next fiscal year the government expects mark-up to account for 8.05 trillion rupees, against 6.93 trillion rupees in the outgoing year, with a marked increase in reliance on borrowing — external sources 783 billion rupees and domestic financing of 6.04 trillion rupees.

Pension outlay remains unsustainable at 1.169 trillion rupees against 1.955 trillion rupees last fiscal year, though a pension fund is to generate 10 billion rupees against 4.3 billion rupees in 2025-26, a pittance to say the least, defence has been raised from 2.588 trillion rupees last year to 3 trillion rupees next year, but the entire raise is earmarked for operational expenses, while running of civilian government has been budgeted 5 billion rupees more than in the outgoing years - an amount inadequate to pay for the 7 percent pay rise for those whose wages are paid at the taxpayers’expense.

Subsidies have been reduced by 66 billion rupees while subsidies to the power sector were reduced by around 60 billion rupees but remained the highest as in previous years at 830 billion rupees. The payment to Independent Power Producers (IPPs) was as per revised estimates of this year at 200 billion rupees (budgeted 95 billion rupees) however there is no such provision for next year which raises questions about dues of over 560 billion rupees to the Chinese IPPs who have refused to renegotiate the terms of the agreement.

The budget envisages a reduction in primary surplus (total FBR revenues budgeted at 15.264 trillion rupees exceed the budgeted 9.441 trillion rupees non interest expenditures) projecting a budgeted primary surplus of 2 percent however fiscal deficit as percentage of GDP is projected at 3.6 percent for next year (a rise of 0.6 percent from the outgoing year) – its achievement subjected to meeting the over ambitious revenue target and keeping within the budget expenditures.

Copyright Business Recorder, 2026