On June 10, Finance Minister Muhammad Aurangzeb presented the budget of 2025-26 in the National Assembly against a backdrop of soaring nationalism after the recent Pakistan-India skirmish. Against its grim background, the budget aims at a tricky balance: aggressive fiscal consolidation in line with IMF requirements, a little bit of middle-class tax relief, and an economic shift to growth. The stock market reacted with great gusto-PSX touched a new all-time high of over 124,000, as investors showed optimism in its core. However, is there more than a morale boost behind the figures?

At a glance, the FY26 budget is contrastingly different from the expansionary budget of last year. The gross expenditure has been cut by approximately 7 percent to Rs 17.573 trillion as compared to Rs 18.9 trillion. The fiscal deficit has now been limited to 3.9 percent of GDP it was 5.9 percent previously), and a primary surplus is estimated at 2.4 percent. This contractionary movement is a condition dominated by the IMF and is aimed at regaining macro stability.

In contrast, the previous year’s budget was severely criticized due to imposing heavy new taxes on consumers, including 18 percent GST on all agricultural produce of immediate need, rental income, seeds, and tractors. Despite the increased revenue, it put pressure on households and could not trigger sustainable growth. The budget 2025 appears to do an about-turn with a sense of relief, especially for the salary earners, but nonetheless squeezes the national financial machinery.

In an attempt to cushion the austerity measures, the government came up with a middle-income (Rs 600,000-1.2m) half-rate income tax band,........

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