Federal Budget 2026-27 · Presented 12 June
The stabilisation is real, the growth is assumed, and the balance is borrowed.
The federal government's own deficit is close to 5 percent of GDP. It reaches the 3.6 percent the IMF wants only after a provincial grant is counted in federal receipts and a further provincial surplus is assumed. This is a budget written in Islamabad that Islamabad cannot deliver on its own.
How the deficit reaches the IMF line · Rs trillion
The deficit bridge: balanced somewhere other than where it was written
The federal government runs a deficit of Rs7.0tr even after a Rs1.0tr provincial grant is counted in its receipts. The headline 3.6 percent appears only once the provinces are further assumed to run a combined surplus of Rs1.8tr, which is the bridge from the federal deficit to the consolidated one.
I Budget at a glance
The whole budget in one scan: last year's outturn beside next year's plan, coloured by what each line does to fiscal credibility. The reds are where the structure weakens, the amber band is the provincial dependence and the stretch targets, and the thin green line is the discipline. FY27 figures are budget estimates and targets.
| Indicator | FY26 revised | FY27 budget | Direction |
|---|---|---|---|
| GDP growth | 3.7% | 4.0% | Target, +0.3pp |
| Average inflation | ~7% | 8.2% | Budgeted higher |
| Consolidated deficit, % GDP | 3.0% | 3.6% | Wider |
| Federal deficit | Rs5.16tr | Rs7.02tr | Wider · 4.9% GDP |
| Primary surplus, % GDP | 2.5% | 2.0% | Thinner |
| FBR tax | Rs12.98tr | Rs15.26tr | +17.6%, steep |
| Interest bill | Rs6.94tr | Rs8.05tr | +16% |
| Defence | Rs2.59tr | Rs3.00tr | +15.9% |
| Federal PSDP | Rs0.82tr | Rs1.00tr | +22% |
| Subsidies | Rs1.16tr | Rs1.09tr | -5.7% |
| SBP profit | Rs2.43tr | Rs1.44tr | -40.9% |
| Petroleum levy | Rs1.50tr | Rs1.68tr | Heavier |
| Provincial grant | nil | Rs1.04tr | New reliance |
| Provincial surplus, assumed | Rs1.38tr | Rs1.79tr | +30%, assumed |
| BISP | Rs0.71tr | Rs0.84tr | +17% |
The official ledger
Budget 2026-27 at a glance · Rs billion
| Tax Revenue (FBR) - Federal Consolidated Fund | 15,264 |
| Non-Tax Revenue | 5,336 |
| a) Gross Revenue Receipts | 20,600 |
| b) Less Provincial Share | 8,848 |
| I. Net Revenue Receipts (a-b) | 11,751 |
| II. Non-Bank Borrowing (NSSs & Others) - Public Account | 2,034 |
| III. Net External Receipts - Fed. Consolidated Fund | 813 |
| IV. Bank Borrowing (T-Bills, PIBs, Sukuk) - Fed. Consolidated Fund | 4,012 |
| V. Privatisation Proceeds - Fed. Consolidated Fund | 161 |
| Total (II + III + IV + V) | 7,020 |
| TOTAL RESOURCES (I to V) | 18,771 |
| A. Current | 17,495 |
| Interest Payments | 8,054 |
| Pension | 1,169 |
| Defence Affairs & Services | 3,000 |
| Grants and Transfers | 2,680 |
| Subsidies | 1,091 |
| Running of Civil Govt. | 1,071 |
| Provision for Emergency and others | 430 |
| B. Development & Net Lending | 1,276 |
| Federal PSDP | 1,000 |
| Net Lending | 276 |
| TOTAL EXPENDITURES (A+B) | 18,771 |
Resources equal expenditures by construction. The Rs7,020bn financing block (II to V) is the federal deficit, the borrowed balance the centre cannot meet from its own revenue.
II The argument
A budget is read twice: once for what it gives, and once for who pays for it. On the first reading, the FY27 budget is generous in the places that make news. Four salaried tax brackets are cut, the surcharge on high earners is abolished, super tax on mid-sized firms is removed outright, and exporters, IT and property all get relief. On the second reading, the more revealing one, the generosity is not the federal government's to give. Its own books run a deficit of Rs7 trillion, close to 5 percent of GDP, even after a Rs1 trillion provincial grant is counted in the centre's receipts. The budget reaches the 3.6 percent the Fund requires only once the provinces are further assumed to run a combined surplus of Rs1.8 trillion. The balance is borrowed.
That is the budget's defining feature and its largest risk in one. The federal government has signed a national commitment to the IMF that it cannot honour out of its own revenue. Delivery rests on four provincial governments, none of which the centre controls, each expected to produce the surplus the framework assumes, an arrangement not yet operationalised through the provinces' own budgets and cash behaviour. It is being presented as room for relief. It is also a dependency, and a dependency is only as reliable as its least willing party.
A budget balanced somewhere other than where it was written.
The relief that this arrangement funds is real, and aimed where it will be felt. The salaried cuts are the headline. Super tax is wiped out for companies earning up to Rs500 million and trimmed from 10 to 8 percent above that, leaving banks, exploration-and-production firms and fertiliser makers as the only large payers held at the full rate. Property gets the deemed-income tax under Section 7E abolished and transfer taxes cut. Exporters keep their incentives. None of it is paid for by a broad new tax. It is paid for by the provinces, by a higher fuel levy, and by a central-bank dividend that is quietly disappearing.
The macroeconomic targets carry the same optimism as the framing. Real growth of 4 percent, up from the 3.7 percent just recorded. A primary surplus of 2 percent. Yet the budget pencils in average inflation of 8.2 percent, higher than the roughly 7 percent the government claims for this year. A government confident that energy prices will fall quickly would be less likely to budget for faster inflation. The more honest reading is that the budget is preparing for the higher fuel costs it spent the back half of FY26 absorbing. Pakistan's import slate is priced off the Dubai and Oman benchmarks rather than Brent, and on those benchmarks the regional crisis kept pressure on every litre the country lands.
So the reader is asked to believe three things at once: that growth will accelerate, that prices will rise faster than this year, and that the provinces will underwrite the gap. The first two can hold together only on a narrow path. The third is a coordination bet the centre has placed on partners it cannot command. This is a stabilisation budget wearing the language of a growth budget, and resting on a federalism it has not yet secured.
III The year behind it
The budget rests on the strongest growth in four years and a fiscal performance the government is right to call disciplined. The economy grew 3.7 percent, with large-scale manufacturing up 6.1 percent and services, nearly 58 percent of output, up 4.1 percent. Public debt fell to 68.5 percent of GDP from 75 percent in 2023, reserves rose by roughly half, and remittances are heading for a record near $41 billion. The repair is genuine.
Growth, % real GDP
Missed, then promised again
FY26 came in at 3.7 percent, the best in four years and still short of the 4.2 percent it had targeted. FY27 promises 4 percent.
Targets, FY26 vs FY27, %
The tell: both rising
Faster growth and faster inflation budgeted together. A government expecting cheap energy does not raise its inflation assumption.
FY26 sector growth, %
What did the heavy lifting
Manufacturing and services carried the year off a low base. Agriculture lagged after the floods.
Public debt, % of GDP
Coming down
Real progress on the ratio. The stock, near Rs83 trillion, is another matter.
The weakness is external. Merchandise exports fell 5.4 percent over July to April while imports rose 8.5 percent. The reserve build is financed by remittances, the Fund and deferred gas cargoes rather than earned through trade, which is the soft ground under the FY27 export target of $32.8 billion.
External account, $ billion
The soft spot: a trade gap, and a target that reverses the trend
Exports must climb toward the full-year FY27 goal in a year they actually fell; exports are shown July to April, a directional comparison. Imports already run at more than double exports.
IV The arithmetic of dependence
Strip the budget to its skeleton. The FBR is to collect Rs15.264 trillion, the bulk of gross receipts of Rs20.6 trillion. After the constitutional transfer of Rs8.848 trillion to the provinces, the centre keeps net revenue of Rs11.751 trillion. Against that sit Rs18.771 trillion of spending, of which interest alone takes Rs8.054 trillion. The result is a federal deficit of Rs7 trillion, close to 5 percent of GDP.
The 3.6 percent headline is assembled through the provinces, in two stages. First, the federal deficit itself is already flattered by provincial money. The divisible-pool calculation is frozen at Rs13.35 trillion even though the FBR target is Rs15.264 trillion, creating fiscal space for the centre. Separately, the budget books Rs1.035 trillion as grants and receipts from the provinces under Article 164 of the Constitution, a long-standing provision now used in an unusual way and at unusual scale. The provinces are also assumed to repay Rs407 billion of loans. Even after all of that, the federal deficit is still Rs7 trillion. The second stage is the one that reaches the target: the provinces are assumed to run a combined cash surplus of Rs1.794 trillion, and that surplus is what carries the consolidated deficit down from the federal 4.9 percent to the headline 3.6. None of this is the centre's own money, and the surplus in particular is a forecast about provincial behaviour, not a federal lever.
The squeeze that creates the dependence · Rs trillion
Why there is nothing left to balance with
Interest costs roughly eight times the federal development programme. With the past and the military taking the first two claims, the centre has no room left to fund relief from its own revenue, which is why it turns to the provinces.
Federal fiscal arithmetic, Rs trillion
Gross receipts, the transfer out, the net
Gross revenue of Rs20.6tr, the Rs8.85tr provincial transfer removed, leaving Rs11.75tr the centre keeps against Rs18.8tr of spending.
Major federal spending lines, Rs trillion
How the federal rupee is spent
Interest dwarfs every other line. Development sits at the bottom.
V The quality of the relief
Look at what pays for the giveaway and the picture darkens. The State Bank's profit, the single largest item of non-tax revenue, is budgeted to collapse by 41 percent, from Rs2.43 trillion to Rs1.44 trillion, as interest rates fall. That hole is plugged in two ways: a brand-new Rs1.035 trillion grant from the provinces, and a Petroleum Development Levy pushed up to Rs1.677 trillion. The relief the salaried class can see is part-financed by a fuel levy that reaches the same households indirectly, and by a central-bank windfall that is running out.
Key non-tax lines, FY26 revised vs FY27 budget · Rs trillion
The mix is shifting: a windfall out, a levy and a province in
As the central-bank dividend shrinks, the budget leans on a higher fuel levy and a provincial grant that did not exist a year ago. The composition is less durable than the total suggests.
The relief reaches up the income scale, not down it. Four bands are cut and the 9 percent surcharge on income above Rs10 million is abolished, but the band where most filers sit, monthly income below roughly Rs183,000, is untouched.
Salaried income tax, marginal rate by band, %
Old rate against new rate
Every cut sits above Rs2.2m a year. Lower salaried filers below that line see no change.
Beyond the slabs, the household-facing package is modest but real. The cash-transfer programme rises 17 percent to Rs838 billion, government salaries and pensions go up 7 percent and the minimum wage 10 percent, and tax comes off sanitary products, contraceptives and cross-border card transactions. It is welcome, and small against the scale of the population it reaches.
The government calls this a no-new-taxes budget. The bill tells a different story for anyone outside the salaried bracket. Withholding on services rises to 7, 14 and 15 percent depending on category, with independent professionals at 15. Withholding on digitally-ordered goods jumps to 20 percent. A new 5 percent tax falls on social-media and influencer income, a new excise of 40 to 41 percent on large-engine and imported cars, and a new levy on petroleum solvents. The relief is concentrated in direct taxes the public can see; the extraction is spread across indirect and withholding lines it mostly cannot. No new taxes is the claim. Tighter enforcement, wider capture and a heavier fuel bill is the experience.
VI Energy and the oil question
The fuel levy is doing quiet heavy lifting, and it depends on the oil price behaving. The government's account is that the regional crisis and the risk to the Strait of Hormuz drove a spike in international fuel prices, which it cushioned with a quarterly subsidy of about Rs128 billion before moving to targeted relief. Because Pakistan's crude and product import economics are tied more to Dubai and Oman pricing than to Brent, the relevant gauge is the Platts complex, where pressure persisted. A Rs1.677 trillion levy target assumes both steady volumes and prices that do not force the government back into cushioning mode.
On the power sector the government claims circular debt held flat, a new Rs252 billion containment head, and a subsidy bill cut to about Rs830 billion with payments to independent power producers budgeted at nil. These are the government's figures, and the larger reform claims belong in the column as claims rather than as audited outcomes.
VII What else is in the budget
The federal development programme is Rs1 trillion, and the argument of this budget is how little that is against an interest bill eight times larger. Where it does go is concentrated in transport, energy and water.
Major federal PSDP allocations, Rs billion
What the Rs1tr development programme buys
Transport takes the largest share, anchored by the N-25 Karachi to Chaman corridor at Rs100bn. The M-6 motorway draws Rs30bn and the ML-1 railway section Rs25bn.
The deemed-income tax on immovable property is abolished, and transfer taxes are cut on both sides, to 2.75 percent for sellers, a clear push to revive construction.
A Rs300 billion pool of collateral-free digital credit for 750,000 smallholders, plus a Rs7.1 billion farm-storage facility.
Power distribution and generation companies, banks, insurers and airports stay on the agenda, after the PIA stake was sold in December.
The subsidy bill is cut to Rs1.09 trillion, with producer payments budgeted at nil and a new Rs252 billion head to contain circular debt.
The deficit is funded increasingly through Islamic instruments, with Sukuk the largest single channel, alongside planned Panda and Eurobond issuance abroad.
Military pensions are carried separately under the Rs1.169tr pensions line, so the true cost of the military runs above the Rs3tr defence headline.
VIII Where the budget steers capital
Read as a set of incentives rather than a set of numbers, the budget points capital in a clear direction. This is the decision-relevant map, in policy terms rather than tickers.
IX The security overture
The first part of the speech was foreign policy and defence, not economics, and the framing is itself the story. The government's account, presented here as its account rather than as established fact, runs through the May 2025 conflict, a claimed mediating role in the regional crisis, a strategic understanding with Saudi Arabia and defence cooperation reframed as a potential export earner. Each belongs in the edition as the government's framing, attributed and unadopted.
What is not in dispute is the consequence. Defence rises 15.9 percent to Rs3 trillion, three times the entire federal development programme. The figures still record where the money went, and a reader is entitled to weigh Rs3 trillion for defence against Rs1 trillion for everything the federal state will build next year, with the difference made up by the provinces.
X Sector read-through
The budget does not simply give relief or take it away. It steers activity toward documented producers, export earners and local assembly, and raises the cost of operating outside the formal system. This is the policy transmission map, not a stock call.
The property package is one of the clearest sector supports. Section 7E deemed-income tax on immovable property is abolished, seller-side advance tax is cut to 2.75 percent and buyer-side tax is cut to 1.25 percent. The Rs71 billion PM Apna Ghar allocation adds subsidised housing finance. The signal is to lower transaction friction and restart construction-linked activity.
Construction materials benefit from the larger national development programme, property-tax relief and subsidised housing finance. Cement gets a demand tailwind from public works and real-estate revival. Steel gets the same demand support, but also a documentation squeeze as sales-tax collection shifts toward electricity-based monitoring for melters, re-rollers and composite units, with refunds linked to digital integration.
Exporters get direct relief. The Export Development Surcharge is abolished, the minimum tax is reduced to 1.25 percent from 2 percent, and the Export Facilitation Scheme window is extended to 18 months from 9 months. This is meant to ease cash flow and improve export margins, but the test is whether it reverses the FY26 export decline.
IT gets policy continuity rather than a new fiscal push. The 0.25 percent final-tax regime for IT and IT-enabled services is extended to tax year 2029. The value is certainty: lower tax friction, better reinvestment room and a clearer runway for services-export growth.
The budget pushes FMCG deeper into formal taxation. More products enter the Third Schedule, fixing GST at printed retail price and closing room for under-invoicing. Documented branded producers gain against informal channels; the cost is upward pressure on consumer prices.
Autos get a split signal. The budget raises FED on large-engine and imported vehicles to 40–41 percent and applies value-based FED to imported high-value EVs, while keeping duty concessions on EV parts and cutting GST on imported trucks to 1 percent. The direction is to discourage high-end import demand and protect space for local assembly.
OMCs sit inside the fuel-levy bet. The PDL target rises to Rs1.7 trillion and a new Rs80-per-litre FED lands on petroleum solvents. The sector depends on stable prices: if oil rises too far, the state faces a choice between levy collection and consumer cushioning.
Refineries get a targeted measure: GST is exempted on machinery imported for upgrading existing capacity. The relief lowers the cost of improving product quality without extending a broad sector subsidy.
The budget gives targeted relief to medicines by exempting customs duty on active pharmaceutical ingredients for cancer-related drugs. The measure is narrow, but directionally important: it lowers import-cost pressure on critical medicine inputs rather than giving a blanket pharmaceutical-sector concession.
Banks are left outside the main super-tax relief. The 10 percent super tax remains unchanged for banks, while cross-border card withholding is reduced to 0.5 percent from 5 percent and housing finance gets support through PM Apna Ghar. The direct tax picture is neutral; the positives are second-round effects from housing, formalisation and financial intermediation.
Fertiliser and exploration-and-production companies are also excluded from the super-tax cut, keeping their 10 percent rate unchanged. That means the broad corporate relief does not fully apply to these strategic/high-profit sectors. The budget keeps them as revenue anchors rather than relief beneficiaries.
The budget tightens the tax net around services and digital channels. Withholding on services rises to 7 percent for listed services, 14 percent for other services and 15 percent for independent professionals. Withholding on digitally ordered goods and services rises to 20 percent at the point of order, and social-media/influencer income routed through banking channels faces 5 percent WHT. The direction is clear: more collection at source, less room outside the documented system.
XI Markets
The index entered budget day at 169,703.60 and closed Friday at 172,399.90. With no headline broad-based tax rise, a super-tax cut and property relief, the desks read it as friendly, and the rally is mainly positioning rather than a settled verdict. Even after it, the index sits some 9 percent below its January record. The cleaner test comes once investors weigh how much of the balance depends on the provinces delivering.
XII The verdict
The federal deficit is close to 5 percent of GDP and reaches the 3.6 percent target only through a provincial surplus and grant the centre does not control and must still see materialise through provincial budgets and cash behaviour. It is the budget's defining feature and its largest single risk.
The central-bank dividend, the biggest non-tax line, falls 41 percent. The gap is filled by a higher fuel levy and a new provincial grant. The mix is less durable than the headline total.
The salaried see rate cuts; everyone else meets higher withholding on services and digital commerce, new vehicle and solvent excise, and fresh levies. The burden moved, it did not lift.
Faster growth and faster inflation budgeted together hold only on a narrow path: production-led recovery and a contained energy shock. The budget assumes that path rather than showing it.
A $32.8 billion goal follows a year exports fell 5.4 percent. The external account, not the fiscal account, is where the budget is most exposed.
Falling to 68.5 percent of GDP is genuine progress, yet the interest bill alone is eight times the federal development programme. This is stabilisation, not solvency, and it is why the centre had to borrow its balance.
XIII What to watch