Pakistan’s federal budget for 2025-26 arrives at a crucial inflection point in the country’s economic and political trajectory. Coming on the heels of a narrow escape from default, an IMF deal, and repeated fiscal pressures, the new budget reflects both a survivalist mindset and a hesitant embrace of reform. With a total outlay of Rs 17.57 trillion, the government has reduced overall expenditures by 7% compared to the previous year, a move aimed at curbing the fiscal deficit and appeasing multilateral creditors.

The burden of adjustment, once again, falls on the weakest shoulders.

Even this ostensibly contractionary approach contains elements of strategic prioritization, most notably the 20% increase in defence spending and the enhanced allocation for interest payments, which together consume nearly half the federal budget. This pattern is not new, but its continuity in the face of an economic crisis signals where the state’s real priorities lie.

What the budget purports to achieve is fiscal consolidation without strangling growth. The Federal Board of Revenue (FBR) has been given an ambitious revenue target of Rs 14.13 trillion, representing an 18.7% increase. Achieving this will be no small feat, especially in an environment where tax compliance remains chronically low and powerful sectors, agriculture, real estate, and the informal economy, remain under-taxed.

The government has made noises about widening the tax base, introducing digital reforms in tax collection, and targeting non-filers. History suggests that administrative reform in Pakistan is often more rhetorical than real. Without enforcement, these measures will not deliver the kind of revenue needed to meet either IMF conditionalities or domestic development needs.

Pakistan’s fiscal reform is still largely externally driven.

One of the more contentious aspects of the budget is the imposition of new indirect taxes and levies. The introduction of an 18% sales tax on solar panels, increased petroleum levies, and higher excise duties on imported luxury items signals a continued reliance on regressive taxation. While the government may argue that these steps are necessary for raising revenue, they disproportionately affect the poor and middle classes. The burden of adjustment, once again, falls on the weakest shoulders. At a time when real wages remain stagnant, these measures could intensify public discontent and reduce consumer spending, further slowing down economic recovery.

Defence spending, which has increased to Rs 2.55 trillion, deserves critical scrutiny. The justification provided is the worsening regional security environment, especially following recent border skirmishes and tensions with India. Rupee not spent on education, healthcare, or climate resilience, sectors in which Pakistan lags significantly behind regional peers. With public sector development reduced to just Rs 1 trillion, the imbalance between guns and growth is more visible than ever. This reflects a national security state logic that persists irrespective of the economic context.

That said, the budget does show some signs of structural rethinking. The reduction of the super tax on corporations and relief in property-related withholding taxes signal an attempt to create a business-friendly environment. Similarly, the emphasis on achieving a primary surplus of 2.4% of GDP, backed by cuts in subsidies and rationalization of government expenditure, demonstrates a willingness to align with macroeconomic orthodoxy. These moves may well improve Pakistan’s credibility with the IMF and global markets, enabling access to external financing and possibly stabilizing the exchange rate.

It is a budget of necessity, not imagination.

But therein lies the paradox. Pakistan’s fiscal reform is still largely externally driven. The IMF remains both the carrot and the stick. While such oversight is essential to instill discipline, it also means that domestic political consensus on reforms is minimal. Any slippage, whether due to political instability, natural disasters, or electoral pressures, could unravel the fragile gains. The upcoming fiscal year will therefore test not just the budgetary projections but also the political will to implement difficult reforms.

Pakistan’s 2025-26 budget is more about crisis management than an economic vision. It is a budget of necessity, not imagination. While it nods to reform, it is constrained by security concerns, structural weaknesses, and a narrow political calculus. Unless the government undertakes deep, sustained reforms to make taxation equitable, investment attractive, and spending transparent, the cycle of debt, bailout, and stagnation will continue. The numbers may add up on paper, but the real test lies in implementation, and in whether the state can shift its priorities from security to sustainability.

Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.