Government to cut PSDP by Rp126 billion, provinces to limit spending and coalition consensus paves way for June 12 budget
ISLAMABAD:
The federal government has cut the proposed development budget for the next fiscal year by Rs 126 billion, while three provinces except Balochistan would freeze their surge expenditure at current levels to create around Rs 500 billion of fiscal space for strategically important initiatives.
The government can also allocate around Rs 3 trillion for defense spending and has finalized a relief of Rs 50 billion for the salaried class, earning over Rs 183,400 a month by fiscal year 2026-27.
Representatives of the Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N), the two main partners in the ruling coalition, reached an agreement to rationalize development spending.
This would now pave the way for the start of the much-delayed budget approval process, people aware of the discussions between the coalition partners told The Express PAkGazette.
When contacted, Planning Minister Ahsan Iqbal confirmed that the proposed size of the Public Sector Development Program (PSDP) of Rs 1,126 trillion has 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 cut the proposed PSDP by Rs 126 billion or 11.2% compared to the size approved by the Annual Plan Coordination Committee (APCC) for fiscal year 2026-27 earlier this month. For this fiscal year, the government has also cut the development budget to Rs 820 billion and Rs 590 billion has been spent so far.
It is probably the first time that the federal PSDP has been cut before reaching the National Economic Council (NEC), which would now finally be chaired by Prime Minister Shehbaz Sharif on Wednesday (today).
The government had postponed the CNE meeting four times to develop an initial understanding among stakeholders on the next fiscal year’s budget. Tariq Fazal Chaudhry, Parliamentary Affairs Minister, said on Tuesday that the summary for convening the budget session had been moved and the budget would now likely be presented on Friday, June 12.
Ahsan Iqbal said that the proposed PSDP worth Rs 1 trillion will be presented to the NEC and added that no new development plan will be included in the new fiscal year except those 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 save more than 350 billion rupees from their development budgets. According to the understanding, the recently reduced PSDP size of Rs 1 trillion can be increased again to Rs 1.4 trillion once the federating units agree to give more resources to the Centre.
The government had demanded Rs 1.2 trillion from the provinces to cover their additional expenses 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 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 Rs 335 billion for critical water sector projects like Diamer Basha Dam, Mohmand Dam and Dasu Dam. Another additional Rs 335 billion had been planned to be donated for initiatives of strategic importance.
The IMF has planned 2.665 trillion rupees for defense spending for the next fiscal year, but the government wanted to sanction around 3 trillion rupees due to increased hostilities on the eastern and western borders.
A senior MP said provinces would freeze their development budgets at this year’s actual spending. This will create some room for additional spending on strategic natural initiatives and funding of water sector projects.
Punjab had earlier this month informed the federal government that it would spend Rs 1.45 trillion on development in the next fiscal year, but the provincial government is now expected to reduce the spending budget by more than Rs 150 billion.
Sindh had also reported that it would spend Rs 816 billion on development plans in the next fiscal year, an amount that would also decrease in light of a new understanding among shareholders. Khyber-Pakhtunkhwa plans to spend 564 billion rupees, but could freeze spending. Balochistan’s new development budget is Rs 308 billion, which is already Rs 53 billion less than this year.
The IMF will also have to be taken into account. The global lender has placed a condition that the National Assembly will approve only its approved budget to ensure that the government does not abandon the path of fiscal stabilization.
Wage tax relief
Sources said the government could announce a relief of Rs 50 billion for the salaried class in the budget by reducing tax rates on monthly income above Rs 183,400, introducing a new slab and widening the ceiling that will attract the highest income tax rate.
Salaried people are hurt by the government’s moves to increase petroleum tax to make up for the FBR shortfall and increase their tax burden in the last three years, which has resulted in their direct tax contributions to over Rs 600 billion, excluding the impact of the tax.
For a monthly income of up to Rs 267,000, the tax rate could be reduced by 5% to 20%. There are around 400,000 people in this group. For monthly income up to Rs 341,000, the rate could be reduced to 25% with 160,000 taxpayers in this group.
The government may set a 29% rate on up to Rs 467,000 per month and could introduce a 32% rate on monthly income of up to Rs 583,000. For monthly incomes of more than Rs 583,000, more than Rs 7 million a year, the government wants to charge the maximum rate of 35%, relaxing the ceiling significantly.
