Government to cut PSDP by 126 billion rupees, provinces cap spending, coalition consensus paves way for June 12 budget
ISLAMABAD:
The federal government has cut Rs 126 billion from the proposed development budget for the next financial year, while three provinces, except Balochistan, would freeze their incremental spending at current levels to create fiscal space worth around Rs 500 billion for strategically important initiatives.
The government may also allocate around Rs 3,000 billion for defense spending and has finalized a relief of Rs 50 billion for the salaried class, earning over Rs 183,400 per month for the financial year 2026-27.
An agreement to streamline development spending was reached between representatives of the Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N), the two main partners in the ruling coalition.
That would now pave the way for a much-delayed budget approval process to begin, people with knowledge of the discussions between the coalition partners told The Express PK Press Club.
When contacted, Planning Minister Ahsan Iqbal confirmed that the proposed size of the Public Sector Development Program (PSDP) of Rs1,126 billion has been reduced by Rs126 billion. The Finance Ministry has shared the revised indicative budget ceiling of Rs 1 trillion with the Planning Ministry, Iqbal said on Tuesday.
The government has reduced the proposed PSDP by Rs126 billion, or 11.2 per cent, from the size approved by the Annual Plan Coordination Committee (APCC) for the financial year 2026-27 earlier this month. For this financial year, the government has also reduced the development budget to Rs 820 billion and so far Rs 590 billion has been spent.
This is probably the first time that the federal PSDP has been gutted before arriving before the National Economic Council (NEC), which will finally be chaired on Wednesday (today) by Prime Minister Shehbaz Sharif.
The government had postponed the CEN meeting four times in order to develop a first agreement between stakeholders on the budget for next year. Tariq Fazal Chaudhry, Minister for Parliamentary Affairs, said on Tuesday that the summary of the budget session convening had been moved and the budget was now likely to be presented on Friday, June 12.
Ahsan Iqbal said the proposed PSDP worth Rs 1 trillion will be tabled before the NEC, adding that no new development programs will be included in the new financial year except the projects proposed by the Ministry of Defense and the Ministry of Interior. He said provincial governments would also adjust their proposed annual development plans to create additional fiscal space.
Another government official said provinces would spend over Rs 350 billion in their development budgets. According to the agreement, the size of the newly reduced PSDP by Rs 1,000 billion can again be increased to Rs 1,400 billion once the federating units agree to give more resources to the Centre.
The government had requested Rs 1.2 trillion from the provinces to meet its additional expenditure and provide tax relief. However, no immediate consensus could be reached to deduct money from the National Finance Commission (NFC) through a presidential order or to seek approval from the NEC. The IMF was also not comfortable with the NEC’s approval for additional spending.
The federal government wanted to allocate Rs335 billion for critical projects in the water sector like Diamer Basha Dam, Mohmand Dam and Dasu Dam. An additional Rs 335 billion was planned to be allocated for strategically important initiatives.
The IMF has budgeted 2.665 trillion rupees for defense spending for the next financial year, but the government wanted to sanction around 3 trillion rupees due to intensifying hostilities on the eastern and western borders.
A senior parliamentarian said provinces would freeze their development budgets at the level of this year’s actual spending. This will create some space for additional spending on strategic pro-nature initiatives and project financing in the water sector.
Earlier this month, Punjab informed the federal government that it would spend Rs 1.45 trillion on development in the next financial year, but the provincial government is now expected to reduce the spending package by over Rs 150 billion.
Sindh had also announced that it would spend Rs 816 billion on development projects in the next financial year, which would also decline in light of a new agreement among shareholders. Khyber-Pakhtunkhwa plans to spend Rs564 billion, but it may freeze its spending. Balochistan’s new development budget stands at Rs 308 billion, already Rs 53 billion less than this year.
The IMF will also have to be involved. The global lender has set a condition that the National Assembly will only approve the approved budget to ensure that the government does not deviate from the path of fiscal stabilization.
Payroll tax relief
The sources said the government may announce in the budget a relief of Rs 50 billion for the salaried class by lowering tax rates on monthly income above Rs 183,400, introducing a new slab and widening the ceiling which will attract the highest income tax rate.
The employees are hit hard by the measures taken by the government to increase the tax on petroleum to compensate for the FBR deficit and increase their tax burden over the last three years, which has taken their direct tax contributions to over Rs 600 billion, excluding the impact of the tax.
On a monthly income of up to Rs 267,000, the tax rate could be reduced from 5% to 20%. There are approximately 400,000 people in this bracket. On a monthly income of up to Rs 341,000, the rate could be reduced to 25% with 160,000 taxpayers in this bracket.
The government could fix a rate of 29% up to Rs 467,000 per month and could introduce a rate of 32% on monthly income up to Rs 583,000. For monthly income above Rs 583,000, i.e. Rs 7 million and above per year, the government wants to charge the maximum rate of 35% by significantly relaxing the cap.
