The federal and provincial budgets for 2025-26 have generally been approved by the respective legislative fora. Therefore, it is possible to get an overall perspective of the likely outlook for public finances in 2025-26.

The targets on revenues, expenditures and surpluses/deficits by the federal and the four provincial governments tend to impart a high degree of optimism about the likely financial outcome in the coming financial year.

The consolidated budget deficit of the federal and provincial governments combined is targeted at Rs 6,501 billion in 2025-26. This will actually be lower even in absolute terms in relation to the deficit in 2024-25 of Rs 7,444 billion. The decline is even more pronounced as a percentage of the GDP, at 3.9 percent of the GDP as compared to 5.6 percent of the GDP in 2024-25.

Achieving a deficit of below 4 percent of the GDP will be an outstanding achievement. The last time we saw a deficit of below 4 percent of the GDP was as far back as 2003-04. In the intervening years, there have been years like 2018-19 when it approached even 8 percent of the GDP. For the first time the limit imposed by the Fiscal Responsibility and Debt Limitation Act of a maximum budget deficit target of up to 4 percent of the GDP is being adhered to.

The targeted budget deficit of 3.9 percent of the GDP is based on a federal deficit of 5.0 percent of the GDP and a provincial cash surplus of 1.1 percent of the GDP. The corresponding magnitudes for 2024-25 were respectively 6.5 percent of the GDP and 0.9 percent of the GDP. Therefore, bulk of the improvement in the state of public finances in 2025-26 is expected to come from a quantum reduction in the federal budget deficit by as much as 1.5 percent of the GDP.

These expectations are even more optimistic than the IMF. The Staff Report of the IMF of the 17th of May 2025, following the successful first review, envisages a consolidated budget deficit of 5.1 percent of the GDP in 2025-26 and a primary surplus of 1.6 percent of the GDP. The federal Ministry of Finance must be duly commended for aiming to even exceed the........

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