Budget shake-up: development spending cut as tax relief planned

Pakistan’s federal government has reduced its proposed development budget for the next fiscal year by Rs126 billion while working with provincial governments to create nearly Rs500 billion in fiscal space for strategic projects, defence needs, and tax relief measures.

According to officials familiar with budget discussions, the proposed Public Sector Development Programme (PSDP) for fiscal year 2026-27 has been revised downward from Rs1.126 trillion to Rs1 trillion. 

Planning Minister Ahsan Iqbal confirmed the reduction, saying the revised allocation will be presented before the National Economic Council (NEC), which is expected to meet under Prime Minister Shehbaz Sharif.

The move follows consultations between coalition partners, the Pakistan Muslim League-N (PML-N) and the Pakistan Peoples Party (PPP), aimed at easing fiscal pressures while maintaining key development priorities. Provinces, except Balochistan, are expected to keep development spending close to current levels, potentially freeing up more than Rs350 billion for federal requirements.

Officials said the government plans to channel additional resources toward critical water infrastructure projects, including Diamer-Bhasha, Mohmand, and Dasu dams, while also increasing defence spending amid regional security concerns. Defence allocations could approach Rs3 trillion in the upcoming budget.

The government is also considering relief measures for salaried individuals, including lower tax rates, revised income slabs, and adjustments to the highest tax bracket. The proposed package is estimated to provide around Rs50 billion in relief.

Businesses may also benefit through reductions in minimum turnover tax and changes to the super tax regime, while exporters could receive incentives worth up to Rs80 billion.

The budget proposals remain subject to consultations with the International Monetary Fund (IMF), which has stressed the importance of maintaining Pakistan’s fiscal stabilisation targets before giving final approval.