Government cuts PSDP by Rs126bn, provinces curb spending, coalition consensus paves way for June 12 budget
ISLAMABAD:
The federal government has cut next fiscal year’s proposed development budget by Rs126 billion, while three provinces, except Balochistan, would freeze their incremental spending at current levels to create about Rs500 billion worth of fiscal space for strategically important initiatives.
The government can also allocate about Rs 3 trillion for defense spending and has finalized Rs 50 billion relief for the salaried class and earns over Rs183,400 a month for the financial year 2026-27.
The understanding to rationalize development expenditure has been reached between the representatives of Pakistan Peoples Party (PPP) and Pakistan Muslim League-Nawaz (PML-N), the two major partners in the ruling coalition.
This would now pave the way for the start of a much-delayed budget approval process, people familiar with discussions between the coalition partners told The Express Pakinomist.
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 Rs1 trillion with the Planning Ministry, Iqbal said on Tuesday.
The government has cut the proposed PSDP by Rs126 billion or 11.2% compared to the amount 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 cut the development budget to Rs820 billion and so far Rs590 billion has been spent.
This is probably the first time that the federal PSDP has been slashed before it lands before the National Economic Council (NEC), which would now finally be chaired by Prime Minister Shehbaz Sharif on Wednesday (today).
The government had postponed the NEC meeting four times to develop an initial understanding among the stakeholders on the next financial year’s budget. Tariq Fazal Chaudhry, the minister for parliamentary affairs, said on Tuesday that the summary to convene the budget meeting has been moved and the budget is now likely to be presented on Friday, June 12.
Ahsan Iqbal said that the proposed PSDP worth Rs1 trillion will be submitted to the NEC, adding that no new development plan will be included in the new financial year except the projects proposed by the Ministry of Defense and the Ministry of Interior. He said the provincial governments would also adjust their proposed annual development plans to create additional fiscal space.
Another official said the provinces would save over Rs 350 billion from their development budgets. According to the understanding, the recently reduced Rs1 trillion PSDP size can again be increased to Rs1.4 trillion once the federating units agree to provide more resources to the Centre.
The government had demanded Rs 1.2 trillion from the provinces to cover its extra expenditure and provide tax breaks. However, no immediate consensus could be reached on either drawing money from the National Finance Commission (NFC) through a presidential order or seeking NEC approval. The IMF was also not happy with the NEC nod for additional spending.
The federal government wanted to allocate Rs335 billion for water sector critical projects like Diamer Basha Dam, Mohmand Dam and Dasu Dam. An additional Rs 335 billion was planned to be provided for the strategically important initiatives.
The IMF has reflected Rs 2.665 trillion for defense expenditure for the next financial year, but the government wanted to sanction about Rs 3 trillion due to increased hostilities on the eastern and western borders.
A senior parliamentarian said the provinces would freeze their development budgets at this year’s actual spending. This will create room for additional expenditure on strategic nature initiatives and financing of water sector projects.
Punjab had earlier this month informed the federal government that it would spend Rs1.45 trillion on development in the next fiscal year, but the provincial government is now expected to lower the spending cap by over Rs150 billion.
Sindh had also informed to spend Rs816 billion on development schemes in the next financial year, which would also fall in light of new understanding among shareholders. Khyber-Pakhtunkhwa plans to spend Rs 564 billion, but it may freeze spending. Balochistan’s new development budget is Rs308 billion, which is already Rs53 billion less than this year.
The IMF must also be included. The global lender has set a condition that the National Assembly will only approve its approved budget to ensure that the government does not leave the fiscal stabilization path.
Payroll tax relief
The sources said the government may announce relief of Rs50 billion for the salaried class in the budget by lowering tax rates on monthly income above Rs183,400, introducing a new slab and widening the ceiling that will attract the highest income tax rate.
The wage earners have been adversely affected by the government’s move to raise oil tax to offset FBR shortfall and increase their tax burden over the past three years, resulting in their direct tax contribution to over Rs600 billion excluding the impact of the tax.
At a monthly income of up to Rs.267,000. the tax rate can be reduced by 5% to 20%. There are about 400,000 people who fall into this bracket. On monthly income up to Rs 341,000, the rate can be reduced to 25% with 160,000 taxpayers in this bracket.
The government can fix a rate of 29% up to Rs 467,000. per month and can impose a rate of 32% on monthly income up to Rs 583,000. For the monthly income above Rs583,000, Rs7 million plus annually, the government wants to charge the maximum rate of 35% by relaxing the cap significantly.
