Govt presents Rs 18.7 trillion budget; who gets relief and who foots the bill?

A loud, sustained ruckus surrounded Finance Minister Muhammad Aurangzeb as he rose to deliver the federal budget on June 12, two hours after the stipulated time. Members of the Pakistan Peoples Party, the government’s uneasy coalition partner, refused to enter the chamber, while opposition legislators filled the hall with accusations of theft and chants of dissent. Through the uproar, Aurangzeb pressed ahead with a speech built around the language of “relief measures”. The spectacle was marred with contradiction as the government presented a Rs18.77 trillion budget as an instrument of stability and relief from within a parliament already fractured over its terms.

Before reading out a single figure, Aurangzeb spent considerable time acknowledging coalition allies who were barely present, praising the prime minister and recounting Pakistan’s recent geopolitical gains. 

He presented the country’s improved international standing as the culmination of a sequence that began with Operation Bunyan-um-Marsoos during last year’s confrontation with India and reached its peak with Pakistan’s mediation between Iran and the United States during a dangerous regional escalation. On the same day as the budget speech, Prime Minister Shehbaz Sharif announced that Washington and Tehran had agreed on the final text of a peace deal and that Islamabad was working with both sides on the next steps. 

While the political noise is always a part of Pakistan’s federal budget, the numerical exercise itself promises to be a fairly interesting one. The budget also came with a finance bill 2026, containing a list of legislative changes required to make the newest figures work. 

Here is a breakdown of the budget itself.

An overview of the revenue and expenditure side:

The federal government has set the total size of the Budget 2026-27 at Rs18.771 trillion, with net federal revenue expected to cover less than two-thirds of expenditure and the remaining Rs7.020 trillion to be financed through domestic and external borrowing and privatisation proceeds.

On the revenue side, the Federal Board of Revenue has been assigned a tax collection target of Rs15.264 trillion, compared with Rs 14.131 trillion in the outgoing year, representing an increase of 8 %. Non-tax revenue has been projected at Rs5.336 trillion, against Rs 5.147 trillion previously, a change of 3.6%.

Together, tax and non-tax collections are expected to generate gross revenue receipts of Rs20.600 trillion. Of this amount, Rs8.848 trillion will be transferred to the provinces as their share of the divisible pool. After the provincial transfer, net revenue receipts available to the federal government will stand at Rs11.751 trillion, against Rs 11.07 trillion in FY26.

This means the federal government’s own net revenue will finance only around 62.6% of its Rs18.771 trillion expenditure plan. The remaining Rs7.020 trillion, or approximately 37.4% of the budget, will have to come from borrowing, external inflows and asset sales.

The government expects to raise Rs2.034 trillion through non-bank borrowing, including National Savings Schemes and other public-account sources. Meanwhile, net external receipts flowing into the Federal Consolidated Fund have been estimated at Rs813 billion, almost $3 billion. Although external financing remains part of the budget plan, it accounts for only around 11.6% of the total financing requirement, much lower than all the previous budgets.

The single largest source of deficit financing will be bank borrowing. This alone will provide more than 57% of the total Rs7.020 trillion financing requirement.

Privatisation proceeds have been projected at Rs161 billion. The combined, non-bank borrowing of Rs2.034 trillion, net external receipts of Rs813 billion, bank borrowing of Rs4.012 trillion and privatisation proceeds of Rs161 billion will produce Rs7.020 trillion in financing. 

When added to net federal revenue receipts of Rs11.751 trillion, total resources will reach Rs18.771 trillion, exactly matching planned expenditure.

Total borrowing minus the privatisation proceeds is estimated at Rs6.82 trillion slightly higher that the Rs 6.41 trillion borrowing of last year. 

On the expenditure side, current spending will dominate the budget at Rs17.495 trillion, compared with Rs 16.286 trillion in the previous year, an increase of 7.5%. Current expenditure will account for approximately 93.2% of the entire federal budget, leaving only Rs1.276 trillion for development and net lending.

Interest payments remain the largest expenditure head at Rs8.054 trillion. Debt servicing alone will consume roughly 42.9% of total federal expenditure and around 46% of all current spending.

The pension bill has been set at Rs1.169 trillion, against Rs 1.055 trillion last year. Defence affairs and services have been allocated Rs3.000 trillion, compared with Rs 2.5 trillion in the outgoing budget.

Grants and transfers will receive Rs2.680 trillion. Subsidies have been budgeted at Rs1.091 trillion, while the cost of running the civil government has been set at Rs1.071 trillion.

Development expenditure and net lending together have been fixed at Rs1.276 trillion, representing only around 6.8% of the total federal spending envelope. Within this amount, the federal Public Sector Development Programme has been allocated Rs1.000 trillion, against the same Rs 1 trillion last year.

The budget therefore presents a familiar fiscal structure as current obligations consume nearly the entire spending envelope, interest payments remain the largest single claim on resources, and the federal government has borrowed heavily to bridge the gap between net revenue of Rs11.751 trillion and expenditure of Rs18.771 trillion. 

However, the mix of these has shifted as the government plans to open up newer revenue measures, reducing some of the previous ones while also doubling down on others.

Relief measures 

The budget speech was full of the word “relief”, as the government unveiled various features that claim to offer relief to the people. Some unique kinds of reliefs also open up newer avenues for revenue collection. Following are some of the salient relief measures announced in the budget and the corresponding finance bill.

The government introduced an income tax cut for individuals earning above Rs183,000 per month, a move long demanded from the government. While the tax cut was nominal, it was received well by the salaried class.

The finance bill also reduced withholding tax on foreign debit and credit card transactions from 5% to 0.5%, aiming to integrate into a global economy. Similarly the Final Tax Regime for information technology and freelance exporters was extended for three years until FY30

The salaries and pensions of government employees were also increased by 7% owing to 6% inflation. In the same breath, the minimum wage was proposed to increase by 10%.

The Benazir Income Support Programme budget was also increased by 17% to Rs838 billion, with coverage expanding to 12 million families. Moreover, Rs71 billion allocated for the Prime Minister’s Apna Ghar housing scheme, offering a 5% mortgage facility.

One of the key relief features was that taxes on sanitary pads and contraceptives were completely withdrawn.

New Revenue Measures

The finance bill 2026 was earmarked with unique changes in the revenue measures that the government expects to collect, and with it come ambitious targets of tax revenue that Pakistan almost always falls short of.

When offering relief, the government has to offset it with newer measures. Following is a list of some of those salient measures. 

• Rs650 billion was introduced in “enforcement measures” to support the tax collection target, marking a stricter regime against tax avoiders

• A higher Federal Excise Duty on luxury imported electric and internal-combustion vehicles was introduced.

• Imported electric vehicles valued at Rs20 million to Rs30 million will now face 30% Federal Excise Duty, rising to 40% above Rs30 million.

• Internal-combustion vehicles between 2,000cc and 3,000cc will face 70% Federal Excise Duty, rising to 81% above 3,000cc.

• Naphtha and solvent oil were brought into the tax net through the imposition of levies

• Sales tax will be charged on printed retail prices for 21 new categories of goods, expected to generate Rs50 billion. This also means a higher percentage of that tax will be transferred onto the consumer

• Commercial importers will face income tax of 3% to 6.5%, alongside 18% sales tax and an additional 3% sales tax

• Independent professional services, including doctors, lawyers, will now be taxed at 15% flat.

• Terminal and port services will face a 12% tax rate.

• Other service categories will face a 14% tax rate.

• Courier, logistics, hotel, transport, air cargo, car rental, human resources outsourcing and oil-drilling services will also face a 7% tax rate.

Other details

In its calculations the government has targeted the gross domestic product growth target set at 4%, with average inflation projected at 8.2%

A new National Artificial Intelligence Ecosystem Development Programme has also been listed as a flagship $1 billion initiative, aimed at making Pakistan competitive in the technology race.

Aurangzeb also said that the federal and provincial governments had agreed on a mechanism to jointly meet “some national imperatives”.

Under this arrangement, the federal and provincial governments together will receive a share from the Federal Divisible Pool in accordance with the National Finance Commission (NFC) Award as per the constitution.

“The federal government’s expected revenue receipts for FY 2026-27 from the Federal Board of Revenue are projected at Rs15,264 billion. Under this arrangement, for strategic national purposes a minimum of Rs13,350 billion has been kept protected.”, he explained.

“From a minimum of Rs13,350 billion up to Rs15,264 billion, the amount to be received [by the provinces] will be given back to the federal government as grants under Article 164 of the Constitution for the completion of strategic national requirements. This arrangement will come into effect for FY 2026-27 and for the fiscal years,” the finance minister said.