Budget Approval Clears Path as Federal and Provincial Governments Agree on Development Spending Cuts

Islamabad: The approval process for Pakistan’s upcoming federal budget has moved forward after the federal and provincial governments reached an agreement on cuts in the Public Sector Development Programme (PSDP), paving the way for the 2026–27 budget’s approval.

Following a meeting between the leadership of the Pakistan Muslim League-Nawaz (PML-N) and the Pakistan Peoples Party (PPP), it was decided that both federal and provincial development programs would undergo reductions.

President Asif Ali Zardari has approved convening a session of the National Assembly at 5:00 PM today, while the Senate will meet at 4:00 PM.

According to official sources, the federal government has reduced the proposed development budget by Rs126 billion. All provinces except Balochistan are also expected to cut their development expenditures, generating savings of around Rs500 billion, which will be used for strategically important projects.

Federal Minister for Planning Ahsan Iqbal confirmed the Rs126 billion cut from the Rs1,126 billion PSDP during a media interaction.

Sources further said the federal government had initially sought around Rs1,200 billion additional resources from provinces under the divisible pool, including Rs650 billion from Punjab, Rs300 billion from Sindh, Rs180 billion from Khyber Pakhtunkhwa, and Rs110 billion from Balochistan. However, Balochistan’s development programme will remain unchanged, with an estimated allocation of Rs308 billion, which is already Rs53 billion lower than the current fiscal year.

Overall, the federal government is aiming to allocate Rs8.2 trillion to provinces under the divisible pool, while the existing formula suggests Rs9.4 trillion.

Punjab has reportedly informed the federal government of its plan to spend Rs1,450 billion on development projects, though a Rs150 billion cut is now expected. Sindh’s development programme, initially estimated at Rs816 billion, is also likely to be reduced, while Khyber Pakhtunkhwa may freeze its Rs564 billion development plan.

An official source said that if provinces agree to provide Rs350 billion back to the federal government, the PSDP could be increased from Rs1 trillion to Rs1.4 trillion. The additional funds would be used for strategic projects, including water infrastructure such as Diamer-Bhasha, Mohmand, and Dasu dams, with remaining funds allocated to defence-related initiatives.

The International Monetary Fund (IMF) has reportedly agreed to defence spending of Rs2,665 billion, while the government intends to allocate Rs3,000 billion due to regional security concerns along the western border.

A meeting of the National Economic Council (NEC), chaired by Prime Minister Shehbaz Sharif, is being held today, where final decisions are expected. The meeting will be attended by all provincial chief ministers and the Prime Minister of Azad Jammu and Kashmir.

Following NEC approval, the Economic Survey will be presented tomorrow, after which the federal cabinet is expected to approve salary and pension increases for government employees, along with the budget document.

The federal government is also considering relief measures for the corporate sector, including a reduction in the minimum turnover tax rate by 1.25%, which could provide Rs65 billion in relief. Proposals to abolish the super tax on individuals earning up to Rs40 million annually and companies taxed at 8% are also under consideration, potentially offering Rs100 billion in relief. Exporters may receive an additional Rs80 billion package.

Economic growth is projected at 4% for the next fiscal year, with average inflation estimated at 8.2%. Salaries and pensions of government employees are expected to increase by 7% to 10%, though this may rise to 15% under political pressure.

New tax measures under consideration include capital gains tax on crypto trading profits, withdrawal of tax exemptions for former tribal areas, and the introduction of Rs220 billion in new taxes. A Climate Support Levy is expected to generate more than Rs90 billion in revenue.