The government may also allocate Rs 3 trillion for defense spending and has finalized a relief of Rs 50 billion for the salaried class.
The federal government has cut Rs 126 billion from the proposed development budget for the next fiscal 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 and the Pakistan Muslim League-N, coalition partners since 2022.
That would now clear the way for the much-delayed budget approval process to begin, people familiar with the discussions between the coalition partners said. The Express PK Press Club.
When contacted, Planning Minister Ahsan Iqbal confirmed that the proposed size of the public sector development program of Rs 1,126 billion had been reduced by Rs 126 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.
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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 by Prime Minister Shehbaz Sharif.
The government had postponed the CEN meeting four times in order to develop an initial agreement between stakeholders on the budget for the next financial year.
Parliamentary Affairs Minister Tariq Fazal Chaudhry said the summary of the budget session convening had been moved and the budget was now likely to be presented on Friday.
Iqbal said the proposed PSDP worth Rs1 trillion would be submitted to the NEC, saying no new development programs would be included in the new financial year except the projects proposed by the Ministry of Defense and the Ministry of Interior.
The minister 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 Rs1,000 billion can again be increased to Rs1,400 billion once the federating units agree to give more resources to the centre.
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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 through a presidential decree or to seek approval from the NEC. The IMF was also uncomfortable with the NEC’s approval of 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 earmarked 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 been informed 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 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.
Tax relief for employees
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.
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The salaried workers are badly hit by the government’s reckless measures to increase the tax on petroleum to compensate for the FBR deficit and increase their tax burden over the last three years, resulting in direct tax contribution to over Rs600 billion, apart from 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 Rs341,000, 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.
Business assistance
The government may also reduce the minimum turnover tax rate to 1.25 per cent, subject to fiscal space, which could bring relief of around Rs 65 billion. There is also a proposal to abolish the super tax on annual personal income of up to Rs 400 million and reduce the top super tax rate for businesses to 8% to provide a relief of Rs 100 billion.
The government also wants to provide Rs 80 billion in assistance to exporters and has shared the final amount with the IMF.
