Pakistan budget raises defence spending, cuts development expenditure to meet IMF goals

Tariq Butt, Correspondent / Reuters

Pakistan proposed an ‌Rs18.8 trillion ($67.49 billion) budget on ‌Friday, raising defence spending, limiting development expenditure and setting a steep tax target as the government tries to keep its IMF programme on track without provoking political fallout at home.

Finance Minister Muhammad Aurangzeb unfolded the budget in the National Assembly amid intense opposition protest. The opposition lawmakers kept raising slogans and desk thumping as the minister delivered his budget speech.

Aurangzeb told parliament the government would allocate Rs3 ‌trillion for defence in the fiscal year starting July, up 18% from the outgoing year, while setting federal development ⁠spending at Rs1 trillion.

The defence increase followed talks with provinces over pooling fiscal space for security needs, with provincial development plans also cut back before the budget.

"Defence spending has been increased considerably to make the country invincible due to the uncertainty in the region," Aurangzeb said.

The incumbent government's third federal budget carries a total outlay of around Rs18.77 trillion ($67.49 billion), reflecting a moderate increase from Rs17.6 trillion in the previous year's budget, as policymakers attempt to maintain macroeconomic stability while navigating a challenging external environment marred by the Middle East crisis.

The budget shows how little room Pakistan has to manoeuvre as debt payments, defence and IMF targets take priority while development spending and middle-class incomes are squeezed.

The government set ​a tax revenue target of Rs15.26 trillion, up 8.2% from Rs14.13 trillion in the previous ‌fiscal year, even though the Federal Board of Revenue missed its target for the outgoing fiscal year.

The budget projects a federal deficit of Rs7.02 trillion, while the overall fiscal deficit is targeted at Rs5.23 trillion, or 3.6% ⁠of GDP, after a projected provincial surplus of Rs1.79 trillion.

Most of the revenue generation is expected to come from taxes and levies, including the petroleum levy, which are budgeted to generate Rs20.60 trillion.

A BUDGET UNDER PRESSURE

The budget, delayed by ​a week, comes ‌as Pakistan faces renewed inflationary pressure from the US-Israeli war on Iran, a conflict Islamabad has sought to ‌help end. The surge in oil prices sparked by the war has driven inflation back into double digits just as the economy had appeared to be finding its footing.

It targets economic growth of 4.0% and inflation of 8.2% for the coming fiscal ‌year, compared with ‌3.7% projected growth in fiscal year 2026 and 6.7% average ⁠inflation in the July-May period of the outgoing year.

The finance minister lauded the role of Pakistan's armed forces, saying that the defence sector has emerged as a source of earning valuable foreign exchange. He said that the strategic defence agreement between Pakistan and Saudi Arabia is a moment of pride.

"Pakistan will always steadfastly stand alongside KSA," said Aurangzeb.

The Federal Board of Revenue (FBR) receives a tax collection target of approximately Rs15.26 trillion for FY27, representing an increase of over 8% compared to Rs14.13 trillion in the outgoing fiscal year. Rs8,848 billion has been allocated for provinces from federal revenue.

Meanwhile, non-tax revenues are projected to exceed Rs5.34 trillion in FY27, supported by profits from the State Bank of Pakistan, petroleum levy collections, and proceeds from state-owned enterprises.

The government expects enhanced documentation, increased use of digital invoicing systems, and tighter monitoring of retail and wholesale sectors to contribute significantly towards achieving the target.

The government allocates around Rs1 trillion under the Public Sector Development Programme (PSDP), with priority areas including water infrastructure, transport connectivity, energy transmission projects, digital transformation, and climate resilience initiatives.

In light of evolving regional security dynamics and heightened geopolitical tensions, defence spending registers another increase. "Defence spending has been increased considerably to make the country invincible due to the uncertainty in the region," Aurangzeb said.

Islamabad is also seeking to keep a $7 ‌billion IMF programme on track after narrowly avoiding default in 2023. Pakistan has agreed to target a primary budget surplus of 2% of GDP, excluding debt-service payments, for the coming fiscal year.

That ⁠means the government must collect more than it spends before interest payments, leaving little room for ​tax cuts or new welfare measures.

Analysts say much of the adjustment is likely to fall on salaried workers and businesses already inside the tax net, as politically powerful sectors such as agriculture, retail ⁠and real estate remain difficult to tax.

Reuters