Government Budget 2025-26: Salary Increase, New Taxes, and What the Common Man Can Expect

The government budget for Pakistan’s fiscal year 2025-26, expected to be unveiled on June 10, 2025, is already making headlines due to its sweeping economic reforms and compliance with the International Monetary Fund (IMF). With a total outlay of PKR 16.9 trillion, the new budget is notably leaner than last year’s PKR 18.9 trillion. The focus? Balancing fiscal consolidation with economic recovery while fulfilling the stringent terms of a potential $6-8 billion IMF Extended Fund Facility (EFF).

Key Highlights of the 2025-26 Government Budget

Fiscal Policy in Line with IMF Conditions

One of the core elements of the government budget is its attempt to bring down the fiscal deficit to 5.9% of GDP, a significant drop from 7.4% last year. This aligns with IMF targets and reflects an aggressive approach towards reducing borrowing.

• Tax Revenue Target: A 40% hike is expected, bringing the collection goal to PKR 13 trillion. This includes a 48% surge in direct taxes and 35% in indirect taxes.
• Income Tax and Corporate Taxes: Higher income tax rates for salaried individuals and increased levies on exporters and corporates.
• IMF Conditions: Eleven new IMF directives are included, such as an increase in electricity tariffs (from PKR 3.41 to PKR 12 per unit), gas price hikes, and potential lifting of import bans on used cars.

Where the Money’s Going

• Debt Servicing: Reduced to PKR 8.5 trillion, thanks to lower interest rates (12%, down from 22%).
• Defence Spending: Proposed to rise to PKR 2.8 trillion, up from PKR 2.122 trillion.
• Public Sector Development Programme (PSDP): Increased by 47% to PKR 1.4 trillion, focusing on infrastructure and provincial uplift.
• Social Protection: Allocations continue but remain inadequate to fully support vulnerable populations.

Taxation Strategy: Who Pays the Price?

Despite an ambitious revenue target, only 5 million out of 240 million Pakistanis currently pay direct taxes. The budget seeks to broaden this base but relies heavily on regressive indirect taxes:

• Uniform 17% GST on services such as banking, telecom, and construction.
• Removal of tax exemptions for sectors like textiles and fertilizers.
• Tax Filing Reforms: A simpler tax system is expected by September 2025 to improve compliance.

Privatization and Structural Reforms

In line with IMF recommendations, the government budget 2025-26 pushes ahead with privatizing State-Owned Enterprises (SOEs) such as Pakistan International Airlines (PIA). Additionally, reforms in the energy sector aim to reduce fiscal leakage by aligning gas and electricity prices with actual costs.

Economic Outlook: Growth vs. Ground Realities

• GDP Growth: Projected at 2.6% for FY25, with moderate improvements expected in the coming years.
• Inflation: Forecasted to dip to 6% from last year’s 26%, but the tax-heavy structure might push it up again.
• Poverty Rate: Still alarmingly high at 42.3%, with over 10 million people at risk of falling deeper into poverty.

Government Budget Benefits for the Common People

Despite tough measures, there are a few silver linings in the 2025-26 government budget:

1. Lower Inflation Could Offer Some Relief

The drop in inflation could ease the cost of essentials like fuel and food, especially for urban lower-middle-income families.

2. Increased Infrastructure Spending

The 47% rise in PSDP could lead to better roads, clean water access, and public transportation in underserved areas.

3. Women’s Empowerment through Housing Projects

The Sindh Flood Emergency Housing Project, backed by the World Bank, has supported over 213,000 resilient housing units and created 770,000 housing grants, with 35% benefiting women.

4. Salary increase in Budget 2025-26 Pakistan

The budget may include modest wage increases and limited tax relief, potentially helping the salaried middle class tackle rising expenses.

Government Budget Disadvantages: A Heavy Burden for Many

The government budget also comes with a host of challenges, particularly for low- and middle-income families.

1. Rising Utility Costs

Massive hikes in electricity and gas tariffs will strain household budgets, especially in cities already facing high living costs.

2. Regressive Taxation

A greater reliance on indirect taxes means everyone pays the same rate, regardless of income. This disproportionately affects the lower class people.

3. Weak Social Spending

Despite promises, health and education allocations remain inadequate. With a 40% illiteracy rate and 61 child deaths per 1,000 live births, there’s a long road ahead.

4. Informal Sector Neglected

Around 70% of Pakistan’s workforce operates in the informal sector, yet social protection for this group remains virtually non-existent.

5. Erosion of Purchasing Power

A 48% increase in direct taxes and limited wage growth will reduce disposable income, leaving families with less to spend or save.

Broader Implications

The 2025-26 government budget is clearly tailored to meet IMF requirements, potentially restoring investor confidence and stabilizing the currency. However, the lack of long-term structural reforms — such as broadening the tax net or ensuring progressive taxation — means the burden falls squarely on those least able to bear it.

While the government budget 2025-26 may succeed in keeping Pakistan on track with the IMF and stabilizing macroeconomic indicators, it does so at a steep cost to the common citizen. For genuine, sustainable growth, the government must shift its focus from austerity to equity — by investing more in education, healthcare, and social protection, while working aggressively to broaden the tax base and support job creation.