Pakistan proposed an 18.77 trillion rupiah ($67.49 billion) budget on Friday, increasing defense spending, limiting development spending and setting a high tax target as the government tries to keep the International Monetary Fund program on track without sparking political fallout at home.
Finance Minister Muhammad Aurangzeb told Parliament that the government would allocate three trillion rupees to defense in the fiscal year starting in July, an 18% increase from the previous year, while setting federal spending on development at one trillion rupees.
The defense increase followed talks with provinces about pooling fiscal space to meet security needs, with regional development plans also scaled back ahead of the budget.
“Defense expenditure has been increased significantly to make the country invincible due to the uncertainty in the region,” Aurangzeb said.
The budget shows how little room Pakistan has for manoeuvre, with debt payments, defense and International Monetary Fund targets taking priority while development spending and middle-class incomes are cut.
The government set a tax revenue target of 15.26 trillion rupiah, up 8.2% from 14.13 trillion rupiah in the previous fiscal year, although the Federal Board of Revenue missed its target for the outgoing fiscal year.
The budget projects a federal deficit of 7.02 trillion rupiah, while the overall fiscal deficit targets 5.23 trillion rupiah, or 3.6% of GDP, after an expected regional surplus of 1.79 trillion rupiah.
Most of the revenue generation is expected to come from taxes and fees, including the oil tax, which is expected to generate a budgeted Rs 20.60 trillion.
Budget under pressure
The budget, which was delayed by a week, comes as Pakistan faces renewed inflationary pressures due to the US-Israel war on Iran, a conflict that Islamabad has sought to help end. The rise in oil prices sparked by the war sent inflation back into the double digits just as the economy appeared to be regaining its balance.
It targets 4.0% economic growth and 8.2% inflation for the next fiscal year, compared to an expected growth of 3.7% in fiscal 2026 and average inflation of 6.7% in the July-May period of the outgoing year.
Islamabad is also seeking to keep a $7 billion International Monetary Fund program on track after avoiding a default in 2023. Pakistan has agreed to target a primary budget surplus of 2% of GDP, excluding debt service payments, for the next fiscal year.
This means that the government must collect more than it spends before paying benefits, leaving little room to cut taxes or take new welfare measures.
Analysts say much of the adjustment is likely to fall on salaried workers and companies already inside the tax net, as politically powerful sectors such as agriculture, retail and real estate remain difficult to tax.
