In its announced Rs17.573 trillion federal budget for FY 2025–26, Pakistan has increased defence spending by 20% while slashing overall expenditures.
Salaries and pensions have been raised by 10%, but nearly 46% of the budget—Rs8.207 trillion—will go toward interest payments on public debt. The government projects a fiscal deficit of 3.9% of GDP, targets 7.5% inflation, and sets an ambitious 4.2% growth rate amid mounting economic pressures.
Minister for Finance and Revenue Muhammad Aurangzeb presented the federal budget for fiscal year 2025–26 with a total outlay of Rs17.57 trillion, setting a 4.2% GDP growth target and announcing relief measures for the salaried class while overall federal expenditure being slashed by 7%.
The budget session, chaired by NA Speaker Sardar Ayaz Sadiq, was marred by opposition’s protest, with lawmakers chanting slogans against the Pakistan Muslim League-Nawaz (PML-N) government.
Starting his speech, Aurangzeb said he was honoured to present second budget for the incumbent government. He thanked Prime Minister Shehbaz Sharif, Bilawal Bhutto-Zardari, Khalid Maqbool Siddiqui and others for their support in the budget.
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Pakistan will raise defence spending by a steep 20% after a military clash with its old enemy India last month, but will slash overall federal expenditure for fiscal 2025-26 by a hefty 7% to 17.57 trillion rupees ($62 billion).
The budget presented on Tuesday by Prime Minister Shehbaz Sharif‘s government allocated 2.55 trillion rupees ($9 billion) to defence in July-June 2025-26, up from 2.12 trillion.
It projected a deficit of 3.9% of GDP against the 5.9% targeted for 2024-25. Inflation was projected at 7.5% and growth at 4.2%.
The South Asian nation wants to kickstart growth while boosting its defences after the worst fighting with its neighbour in nearly three decades – which it has cast as a victory – and meeting the strictures of an International Monetary Fund finance programme.
“After defeating India in a conventional war, now we have to surpass it in the economic field,” Sharif said in a statement.
Pakistan must also contend with the uncertainty of new import tariffs being imposed by the United States, its biggest export market.
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For the coming year, Pakistan’s government allocated 742 billion Pakistani rupees ($2.63 billion) to military pensions, taking the entire defence budget to 3.292 trillion Pakistani rupees ($11.67 billion). That included 704 billion Pakistani rupees ($2.5 billion) in spending on equipment and other physical assets.
India’s defence spending in its 2025–26 (April-March) fiscal year was set at $78.7 billion, up 9.5%, including pensions and $21 billion earmarked for equipment. It has indicated that it too will boost defence spending further.
Sharif’s government has projected 4.2% economic growth in 2025-26, saying it has steadied the economy, which looked at risk of defaulting on its debts as recently as 2023. Growth this fiscal year is likely to be 2.7%, against the budgeted target of 3.6%.
Pakistan’s growth lags far behind the region. In 2024, South Asian countries grew by an average of 5.8% and the Asian Development Bank expects 6.0% in 2025.
Finance Minister Muhammad Aurangzeb said the government intended to complete the privatisation of Pakistan International Airlines a request of the IMF.
Growth should be aided by a sharp drop in the cost of borrowing, the government says, after a succession of interest rate cuts. But economists warn that monetary policy alone may not be enough, with fiscal constraints and IMF-mandated reforms still weighing on investment.
Aurangzeb said that the budget was the start of a strategy to boost exports, increase foreign currency reserves to avoid the balance of payments crises of the past, and create a more competitive economy.
“In short, our budget strategy is to change the economy’s DNA by bringing basic changes,” he said.
