On 12 June Pakistan’s Finance Minister Muhammad Aurangzeb unveiled the country’s Federal budget for the Fiscal Year (FY) 2024-2025, a day after the Ministry of Finance came out with the Economic Survey Report for the outgoing year 2023-2024. The Federal Budget which Pakistani analysts are closely studying have given mixed reactions on the prospects of the current financial budget. The budget is being called ambitious, however, the revenue targets for the fiscal year 2024-2025 were in line with the analysts' expectations.^[1] Meanwhile, another section of analysts believes that with the expected real GDP growth rate at around 3.6 percent, the budget is anything but aggressive and avoids bold initiatives — therefore, it can be deemed to be cautious in its approach.^[2] However in general, analysts are optimistic about the budget considering the latter could strengthen the case for a new bailout deal with the International Monetary Fund (IMF) scheduled this month.

Considering these presumptions, the following article will briefly discuss the different parameters of the federal budget, highlighting its strengths and weaknesses considering Pakistan’s socio-economic scenario.

Pakistan’s Federal Budget 2024-2025: An Overview

Finance Minister Muhammad Aurangzeb presented Pakistan’s Federal budget for the fiscal year 2024-25 on the floor of the National Assembly on 12 June 2024 amidst opposition parties registering their protest.^[3] The finance minister unveiled a budget of Rs. 18.877 trillion for the current year with a 30% increase from the previous year's budget.^[4] While describing the budget in the National Assembly Aurangzeb called it as balanced, with resources matching expenditures at Rs 18.877 trillion.^[5] Some of the key highlights from the Federal Budget 2024-2025 are as follows (the data below is taken from the official website of the Finance Division, Government of Pakistan)-

• The Economic growth target is fixed at 3.6% for fiscal year 2024-25^[6]
• Inflation in the FY 2024-2025 is seen at 12%^[7]
• Rs18.9 trillion is the total outlay of the budget for FY 2025
• Pensions of government employees are to be increased by 15%
• A 25% increase in the salaries of Grades 1 to 16 and a 20% in Grades 17 to 22
• Rs 37,000 per month is proposed as the minimum wage in the private sector, up from Rs 32,000 last year.
• Increase in the allocation of Benazir Income Support Programme (BISP) from Rs 466 billion to Rs 592 billion, subsidy allocation of Rs 65 billion for utility stores corporation, Rs10 billion kept for Ramzan package
• Rs 103.781 billion is allotted for Education Affairs and Services in the federal budget for 2024-25 after less than one percent (0.9 percent) from the outgoing FY^[8]
• The GST exemption which was granted to the FATA/PATA region is to be removed
• Rs 2.122 trillion in the budget is allocated for Defence affairs and services for the FY 2024-25 marking a substantial increase of 15-17 percent compared to last year’s budget on the defence sector.^[9]

Apart from these key highlights, the government's budget document showed that the latter mentions bringing the public debt-to-GDP ratio to sustainable levels and prioritizing improvements in Pakistan's balance of payments position. Pakistan has projected a sharp drop in its fiscal deficit for the new financial year to 5.9% of GDP, from an upwardly revised estimate of 7.4%.^[10] One of the main reasons for anticipating a drop in the fiscal deficit is part of Pakistan’s negotiations with the IMF, which discusses a loan of $6-8 billion.^[11] Further, the budget also proposes significant increases in both direct and indirect taxes, with direct taxes expected to rise by 48% and indirect taxes by 35%.^[12] Moreover, the most significant part of this budget is that the government has also increased income tax rates for salaried individuals in the budget as it sets an ambitious tax collection target for the current FY. As mentioned in one of Pakistan’s daily newspapers The Express Tribune, for those earning between Rs 600,000 and Rs1.2 million annually, the income tax rate has been set at 5%.^[13] Further, for annual incomes between Rs1.2 million and Rs 2.2 million, the tax rate has been increased to 15%, and incomes between Rs 2.2 million and Rs 3.2 million annually will be taxed at 25%.^[14] In addition, for those earning between Rs 3.2 million and Rs 4.1 million annually, the tax rate has been set at 30%, while an income tax rate of 35% will be applied to annual salaries exceeding Rs 4.1 million.^[15] The federal budget forecasts a 37.8 pc rise in tax revenue, to increase the tax-to-GDP ratio to 10.4 pc, and income taxes are expected to rise by about 48 pc.^[16] However, both these targets are being regarded as overly ambitious and almost unattainable by economic analysts.

In terms of numbers, the budget offers a positive economic outlook, expecting 3.6 percent growth for 2024-25 by keeping the inflation rate around 12 percent.^[17] Moreover, it needs to be mentioned here that significant allocations in the budget include the three important sectors of defence with Rs 2015 billion, pensions receiving Rs 1014 billion, and the power sector subsidies allotted with Rs 1363 billion.^[18]

Despite an ambitious target, the budget has been criticized by people in Pakistan considering the current socio-economic scenario in the country. Therefore, the following section will highlight those factors which the economic analysts believe can delay achieving most of the above-mentioned expected financial goals.

Assessment of the Key Economic Policies of the Federal Budget 2024

Soon after the federal budget was presented in Pakistan’s parliament in June, several Pakistani newspapers have been writing about the implications of the anticipated economic goals by the finance minister on the socio-economic lives of the common man in the country. It has been stated that in the current budget, the taxed are being taxed again, just like the previous years, while the untaxed remain untaxed.^[19] Meanwhile, the Finance Minister has emphasized that there is a need to expand Pakistan's tax base as a strategy to prevent overburdening existing taxpayers.^[20] However, critics believe that in terms of the taxation of the budget though it aims to deepen the existing taxpayer base, there is little effort to expand the tax net to include entities and individuals currently outside it.^[21] In addition, experts think that inadequate steps have been taken to tap into the undocumented economy, and the focus still remains on generating higher tax revenues by increasing rates on the existing taxpayers, which will significantly increase the tax burden on the salaried class, particularly affecting mid-management and technical professionals, adding to the financial strain caused by inflation and reduced take-home pay.^[22] The agricultural sector, which contributes 20 percent of the GDP, pays less than 1pc of the total income tax in contrast to the salaried class already paying 200pc more in taxes than exporters and retailers.^[23] Similarly, the real estate sector, with an unpaid potential of Rs 500bn, and the wholesale and retail businesses, with an unpaid potential of Rs 234bn, are largely untaxed or undertaxed.^[24] Moreover, the budget includes an increase in sales tax and excise duty on essential goods and services, which will directly impact the cost of living for ordinary citizens.^[25] Therefore, it is being widely discussed by economic analysts that the substantial hike in tax rates for middle and lower-income individuals, coupled with decreasing purchasing power, is likely to make it more difficult to retain talent and may accelerate the brain drain from Pakistan.^[26] Beyond the issue of taxation in the budget issues like inflation is a major concern.^[27] According to Pakistani experts, the budget has failed to introduce substantial measures to curb inflation, which is a significant worry for the lower and middle classes after a significant rise in prices for necessities such as food, fuel, and utilities—affecting many households.^[28]

Based on all the above calculations, it is being argued that the current government in Pakistan like their predecessors is only prioritizing short-term measures to tackle the lapses in the economy while failing to implement more effective long-term structural reforms.^[29] Further, Pakistan's central bank has also warned of potentially inflationary consequences of the budget, agreeing that limited progress in structural reforms to broaden the tax base means increased revenue can only come from tax increases.^[30]

Amidst criticism, the federal budget for 2024-2025 gives some hope to Pakistan which is trying to secure IMF support for a loan of 6-8 billion dollars. Thus, the Pakistani economic analysts view the budget to be broadly in line with the IMF guidelines.

Pakistan’s Federal Budget: Meeting the IMF Expectations

Soon after the federal budget was presented on the floor of the parliament, the Fitch Ratings lauds the former for strengthening prospects for an IMF deal. They mentioned that though it is uncertain whether fiscal targets will be hit, but even assuming only partial implementation of the budget, the fiscal deficit will narrow and should reduce external pressures, albeit at a cost to growth.^[31] Abid Qaiyum Suleri, a social policy analyst mentions that, “this budget is not for economic stability, this is to show the IMF the government's resort and commitment that it can bring economic policy reforms…It's basically one agenda point to start negotiations with the IMF programme for the next extended fund.”^[32] Pakistan which has set a challenging tax revenue target of 13 trillion rupees ($46.66 billion) for the year starting July 1, a near 40% jump from the current year, in its national budget looked to strengthen the case for a new bailout deal with the International Monetary Fund (IMF).^[33] In an interview with the Arab News, Muhammed Sohail, the chief executive officer of Topline Securities on the federal budget and its IMF loan goals clearly mentions that the new taxation measures might help Pakistan to reach closer to the primary and fiscal deficit estimates, even though no major reforms were seen on the exports, energy and other sectors.^[34] Pakistan which is currently engaged in talks with the IMF for a longer, larger programme as it seeks permanent macroeconomic stability, the current budget is likely to support Pakistan’s ongoing negotiations with the IMF for a new EFF that will be crucial for the government to unlock financing from IMF and other bilateral and multilateral partners to meet its external financing needs.^[35]

Conclusion

The federal budget has set an ambitious tax collection target for the Fiscal Year 2024-2025 with a growth of 3.6 percent anticipated for the current FY. The budget which is being criticized on the grounds of high taxation targets offers some hope for macro-economic stability. With aims to privatize loss-making state-owned entities, the budget does not appear to be friendly to the poorest sections amid the soaring cost of essential goods.^[36] No doubt the budget which is taxation heavy will further lead to frustration among the common man. Weeks after the release of the budget Jamaat-e-Islami (JI) on 01 July announced a protest to begin in Islamabad from July 12 against high taxes and exorbitant electricity tariff after they launched its “Haq Do Awam Ko” (give rights to the masses) movement via a post on social media platform X, with JI emir Hafiz Naeemur Rehman slated to lead the rally.^[37] In a situation where the budget has induced more fears than economic security, the success of this budget will depend on the state’s efforts in addressing challenges related to the common man’s fears on taxation, inflation and economic stability.

Endnotes

^[1] https://www.reuters.com/world/asia-pacific/pakistan-unveil-budget-with-eye-winning-new-imf-bailout-2024-06-12/#:~:text=Total%20spending%20was%2018.87%20trillion,the%20government's%20budget%20document%20showed
^[2] https://www.dawn.com/news/1839500
^[3] https://www.dawn.com/news/1839494
^[4] https://tribune.com.pk/story/2471229/govt-set-to-unveil-budget-2024-25-aimed-at-securing-new-imf-bailout
^[5] https://www.brecorder.com/news/40308143
^[6] https://www.finance.gov.pk/budget/Budget_2024_25/Budget_in_Brief.pdf
^[7] Ibid
^[8] https://www.brecorder.com/news/40308204
^[9] https://www.finance.gov.pk/budget/Budget_2024_25/Budget_in_Brief.pdf
^[10] https://www.finance.gov.pk/budget/Budget_2024_25/Budget_in_Brief.pdf.
https://www.reuters.com/world/asia-pacific/pakistan-unveil-budget-with-eye-winning-new-imf-bailout-2024-06-12/
^[11] https://www.finance.gov.pk/budget/Budget_2024_25/Budget_in_Brief.pdf.
https://www.reuters.com/markets/asia/pakistans-tax-heavy-budget-likely-land-imf-bailout-stoke-tensions-2024-06-14/
^[12] https://www.finance.gov.pk/budget/Budget_2024_25/Budget_in_Brief.pdf. https://www.freiheit.org/pakistan/pakistans-budget-2024-25-promises-policies#:~:text=The%20Finance%20Bill%202024%2D25,and%20indirect%20taxes%20by%2035%25.
^[13] https://tribune.com.pk/story/2471229/govt-set-to-unveil-budget-2024-25-aimed-at-securing-new-imf-bailout
^[14] Ibid
^[15] Ibid
^[16] https://www.dawn.com/news/1839500#:~:text=The%20taxed%20are%20being%20taxed,the%20cost%20of%20doing%20business.
^[17] https://www.dawn.com/news/1839483
^[18] https://tribune.com.pk/story/2471229/govt-set-to-unveil-budget-2024-25-aimed-at-securing-new-imf-bailout
^[19] https://www.dawn.com/news/1839500#:~:text=The%20taxed%20are%20being%20taxed,the%20cost%20of%20doing%20business
^[20] https://www.dw.com/en/will-pakistans-new-budget-help-the-countrys-poorest/a-69353725
^[21] Ibid
^[22] https://www.dawn.com/news/1843118/taxes-fy25-missing-the-mark-once-again
^[23] https://www.dawn.com/news/1843118/taxes-fy25-missing-the-mark-once-again
^[24] Ibid
^[25] https://tribune.com.pk/story/2475459/socio-economic-implications-of-budget
^[26] https://tribune.com.pk/story/2475459/socio-economic-implications-of-budget
^[27] https://www.dawn.com/news/1843118/taxes-fy25-missing-the-mark-once-again
^[28] https://www.dawn.com/news/1842939/bearing-the-brunt-of-ineptitude
^[29] https://www.dw.com/en/pakistan-parliament-passes-tax-heavy-budget-to-appease-imf/a-69507786
^[30] Ibid
^[31] https://www.fitchratings.com/research/sovereigns/pakistan-budget-targets-deficit-reduction-supporting-imf-prospects-18-06-2024
^[32] https://www.dw.com/en/will-pakistans-new-budget-help-the-countrys-poorest/a-69353725#:~:text=%22The%20budget%20will%20not%20bring,by%20successive%20governments%20in%20Pakistan.
^[33] https://www.reuters.com/world/asia-pacific/pakistan-unveil-budget-with-eye-winning-new-imf-bailout-2024-06-12/
^[34] https://www.arabnews.com/node/2534186/business-economy
^[35] https://www.brecorder.com/news/40308469
^[36] https://www.dw.com/en/will-pakistans-new-budget-help-the-countrys-poorest/a-69353725
^[37] https://tribune.com.pk/story/2475812/tax-hikes-set-off-wave-of-protests-nationwide

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