Economic Blueprint for 2025-2026: Progress or Inflation Upheaval?
In Pakistan, each year's budget paper serves as a blueprint for the government's economic priorities and development approach, especially when the nation is navigating a precarious economic crisis with the specter of mounting debt, galloping inflation, and a looming water catastrophe. This year's budget, proposed for the fiscal year 2025-2026, will significantly impact Pakistan, determining its course for the future. In this column, we delve into a comparative analysis of the current budget with the previous two - 2023-2024 and 2024-2025 -, taking a closer look at how each social class might be affected.
A Peek at the Budget: Then and Now
While the budget for 2023-2024 stood at a total of PKR 14.5 trillion, the government upped the ante in 2024-2025 to PKR 16 trillion. Fast forward to 2025-2026, the proposed budget is a staggering PKR 18.5 trillion, with a tax collection target of PKR 12 trillion. However, the fiscal deficit is expected to rise again to 7.2 percent in 2025-2026, contrary to the slight reductions seen in the previous budgets.
Weighing the Scales: Social Classes
Lower-income Residents: Though PKR 400 billion has been allocated for the Ehsaas Program – an uptick from PKR 360 billion last year – subsidies have been slashed by 18 percent. The increase in electricity and gas prices could prove detrimental for this class.
The Middle Class: New income tax slabs have been introduced for salaried individuals, making life tougher for those earning more than PKR 80,000 per month. There's little reprieve for educational expenses.
The Rich: Tax on luxury items, large houses, and expensive vehicles has risen, but the investor class remains largely unscathed due to negligible increases in capital gains tax.
The New Tax Crop: How It Affects
A rise in Federal Excise Duty (FED) for cigarettes, sugar, and soft drinks, a 2 percent increase in income tax for those earning above PKR 1.5 million, the imposition of 35 percent withholding tax on non-filers, and a fixed tax scheme for small traders – these tax measures indirectly impact the lower and middle classes while leaving the wealthy comparatively untouched.
The Widening Trade Deficit: A Concerning Trend
The government anticipates a trade deficit of $28 billion for 2025-2026, higher than $25 billion in 2024-2025. The deficit's increase is due to slow export growth and surging imports. Amplified taxation instead of relief on industrial raw materials may exacerbate the situation.
The IMF's Footprint: Boon or Bane?
Pakistan is under an International Monetary Fund (IMF) program worth $3 billion, leading to several tough measures in the current budget, including energy subsidy cuts, electricity tariff hikes, and the implementation of an automated revenue collection system. However, critics claim these mandates could hamper local industries and public welfare projects.
A Rising Tide of Unemployment and Poverty
The proportion of citizens living below the poverty line is projected to rise to 39 percent this fiscal year, moving from 36 percent in 2024. Diminishing job opportunities, increased burden on small and medium enterprises, and rising inflation may swell unemployment rates.
A Budget in Crisis: Fuel, Electricity, and Water Bills
A PKR 20 per liter increase in petroleum levy is imminent in the wake of the budget, accompanied by a 15 percent uptick in electricity base tariffs. PKR 85 billion has been earmarked to address the water emergency, involving the construction of dams, rainwater storage, and water recycling projects.
Development Expenditure versus Non-development Outlays
The development budget for 2025-2026 amounts to PKR 1.4 trillion, a leap from PKR 1.15 trillion in 2024-2025. Despite this increase, non-development expenditures continue to dominate, ballooning to PKR 6.5 trillion. While 60 percent of the development budget is allocated at the federal level, the remaining 40 percent is for the provinces. Ineffective monitoring mechanisms limit the budget's impact at the grassroots level.
Courting Foreign Investment
The government is courting foreign investment through special economic zones and relaxed digital taxes. However, political instability and uncertain judicial conditions remain major hurdles for potential investors.
Other Pivotal Budgetary Matters
PKR 60 billion has been allocated to tackle climate change, while tax exemptions for the IT sector and PKR 50 billion for youth skills development programs are among other key aspects of this year's budget.
Closing Notes and Recommendations
While the budget offers a roadmap for the economy, it reveals several glaring gaps when assessed against ground realities: limitations in direct tax expansion allow the wealthy to dodge the bulk of the burden, while the poor and middle class grapple with additional hardships. Transparency, effective monitoring, and an expanded tax net are indispensable for addressing the gaps and creating a sustainable and fair economy. Pruning corruption and bolstering local industries and agriculture are essential for the nation's long-term growth and prosperity. To restore public trust, the government must present a transparent, balanced, and fair budget.
- The comparative analysis of the budgets for the fiscal years 2023-2024, 2024-2025, and the proposed 2025-2026 reveals a rising fiscal deficit expected to reach 7.2 percent in the latter year.
- The increase in electricity and gas prices, coupled with the slashing of subsidies, could result in adverse effects for lower-income residents in Pakistan.
- The introduction of new income tax slabs for salaried individuals earning more than PKR 80,000 makes life tougher for the middle class, with little reprieve for educational expenses.
- The rise in Federal Excise Duty (FED) for certain items and a 2 percent increase in income tax for those earning above PKR 1.5 million, combined with a 35 percent withholding tax on non-filers, indirectly impacts the lower and middle classes while leaving the wealthy relatively unscathed.
- The anticipated trade deficit of $28 billion for 2025-2026, due to slow export growth and surging imports, raises concerns over the escalating situation, as amplified taxation may exacerbate the situation.
- The implementation of tough measures, including energy subsidy cuts, electricity tariff hikes, and a digital revenue collection system, under the International Monetary Fund (IMF) program, could potentially hamper local industries and public welfare projects.
- To create a sustainable and fair economy, transparency, effective monitoring, and an expanded tax net are crucial, as they can help address the gaps between the wealthy and the poor and middle classes. Bolstering local industries, agriculture, and pruning corruption are vital steps for the nation's long-term growth and prosperity, in addition to restoring public trust through presenting a transparent and balanced budget.
