ISLAMABAD: The federal government has slashed next fiscal year's proposed development budget by Rs126 billion, while three provinces, except Balochistan, will freeze their uplift expenses at current levels to create around Rs500 billion worth of fiscal space for strategically important initiatives.
Budget Adjustments and Defense Spending
The government may also allocate about Rs3 trillion for defense spending and has finalized Rs50 billion relief for the salaried class earning over Rs183,400 a month for fiscal year 2026-27. The understanding to rationalize development spending was reached between representatives of the Pakistan Peoples Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N), the two major partners in the ruling coalition. This paves the way for the start of the much-delayed budget approval process, according to sources privy to discussions between the coalition partners.
PSDP Reduction Details
Planning Minister Ahsan Iqbal confirmed that the proposed size of the Public Sector Development Programme (PSDP) of Rs1.126 trillion has been reduced by Rs126 billion. The Finance Ministry has shared the revised indicative budget ceiling of Rs1 trillion with the Planning Ministry. The government cut the proposed PSDP by 11.2% compared to the size approved by the Annual Plan Coordination Committee (APCC) for fiscal year 2026-27. For the current fiscal year, the development budget was slashed to Rs820 billion, with Rs590 billion spent so far. This is likely the first time the federal PSDP has been reduced before being presented to the National Economic Council (NEC), which will be chaired by Prime Minister Shehbaz Sharif on Wednesday.
Budget Session and Provincial Contributions
Minister for Parliamentary Affairs Tariq Fazal Chaudhry stated that the budget session summary has been moved, and the budget will likely be presented on Friday, June 12. Ahsan Iqbal added that no new development schemes will be included except those proposed by the Ministry of Defense and Ministry of Interior. Provincial governments will also adjust their annual development plans to create additional fiscal space, with provinces sparing over Rs350 billion from their development budgets. The reduced Rs1 trillion PSDP could increase to Rs1.4 trillion if federating units agree to give more resources to the Centre.
Strategic Initiatives and Defense Budget
The government sought Rs1.2 trillion from provinces for additional expenses and tax relief, but no immediate consensus was reached on deducting money from the National Finance Commission (NFC) or seeking NEC approval. The IMF was uncomfortable with NEC approval for additional spending. The federal government planned to allocate Rs335 billion for water sector projects like Diamer Basha Dam, Mohmand Dam, and Dasu Dam, with another Rs335 billion for strategically important initiatives. The IMF reflected Rs2.665 trillion for defense spending, but the government aims for around Rs3 trillion due to increased hostilities on borders.
Provincial Development Budgets
A senior parliamentarian said provinces would freeze development budgets at this year's actual spending, creating space for strategic initiatives and water projects. Punjab initially planned Rs1.45 trillion for development but may lower it by over Rs150 billion. Sindh's Rs816 billion plan may also decrease. Khyber-Pakhtunkhwa's Rs564 billion plan may freeze, while Balochistan's new budget of Rs308 billion is already Rs53 billion less than this year. The IMF must be consulted, as it requires the National Assembly to approve only its endorsed budget to maintain fiscal stabilization.
Salary Tax Relief
The government may announce Rs50 billion relief for the salaried class by lowering tax rates on monthly income over Rs183,400, introducing a new slab, and expanding the highest income tax rate ceiling. Salaried persons have been adversely hit by increased petroleum levy and tax burden over three years, with direct tax contributions exceeding Rs600 billion. On monthly income up to Rs267,000, the tax rate might be reduced by 5% to 20%, benefiting about 400,000 people. On income up to Rs341,000, the rate might drop to 25% for 160,000 taxpayers. The government may set a 29% rate on up to Rs467,000, a 32% rate on up to Rs583,000, and a maximum rate of 35% on income over Rs583,000 (Rs7 million annually), significantly relaxing the ceiling.
