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As the final approval for the FY2025–26 federal budget nears, the government is weighing critical fiscal adjustments to align with the International Monetary Fund’s (IMF) expectations. The options on the table: introduce Rs. 30 billion in new taxes or slash equivalent expenditures.
With IMF support hinging on meeting budgetary benchmarks, the federal government must finalize its fiscal math. Ongoing negotiations aim to ensure the budget remains within IMF-agreed targets before the National Assembly votes next week.
The latest concern arose after the government approved a 10% pay raise for public sector employees, which added nearly Rs. 30 billion to the expenditure side of the budget.
To help balance this hike, the Federal Board of Revenue (FBR) initially proposed revising the income tax rate for the lowest salaried slab (Rs. 600,000 to Rs. 1.2 million annually) from 5% to 2.5%. This rate was expected to generate around Rs. 9.5 billion in tax revenue.
However, Prime Minister Shehbaz Sharif has now called for greater relief for low-income earners by further reducing the rate to 1%. This directive reflects a political priority to protect lower-income groups while maintaining economic stability.
Key Tradeoff: Tax Hike or Spending Cuts?
With this move, the government now faces a tough decision. It must either introduce new revenue measures to cover the Rs. 30 billion gap or reconsider portions of the budget, which may include rolling back the salary hike or trimming other spending plans.
The government must strike a balance between fiscal discipline and social relief, especially under the watchful eye of the IMF.
With only days left before the budget is tabled for final approval in Parliament, discussions between the government and the IMF remain ongoing. The coming week will be pivotal in determining how the government meets its fiscal commitments while delivering on its public promises.
