Expected Salary, Pension Increase of Govt Employees in Budget 2025-26

ISLAMABAD: Amid tight fiscal constraints imposed by the International Monetary Fund (IMF), the government is increasing the salaries and pensions of public sector employees by 5 percent to 7.5 percent in the upcoming budget.

The Pakistan Peoples Party (PPP), a key coalition partner, has urged the government to increase this figure to 10 percent during the announcement of the budget for the fiscal year 2025-26 or during its parliamentary approval. This proposal has also been shared with the IMF for consideration.

In addition, the government is reviewing proposals to provide additional benefits to the armed forces, including converting the potential risk allowance into a pensionable allowance.

However, no final decision has been taken on whether the armed forces will be included in the Defined Contributory Pension (DCP) scheme, which is expected to be implemented from July 1, 2025.

The DCP for civilian employees has already been implemented in the current fiscal year. The government plans to introduce further pension reforms in the upcoming budget, with some key measures already in place and more stringent measures likely to be introduced.

For civilian employees, a 30% disparity allowance is proposed for BS-1 to BS-16. Additionally, two ad hoc allowances that were earlier excluded from the basic pay are under consideration, one of which is likely to be merged into the basic pay structure.

The Ministry of Finance has prepared several scenarios to be presented to the federal cabinet headed by Prime Minister Shehbaz Sharif for final approval on June 10, 2025, ahead of the budget announcement. These proposals include a 5 to 7.5% increase in salaries, taking into account the decreasing inflationary pressures in the outgoing fiscal year. The fiscal impact of these adjustments has also been estimated and will be shared with the cabinet.

The total federal budget for 2025-26 is estimated at Rs17.5 trillion, down from Rs18.87 trillion in the previous year, mainly due to lower non-tax revenues, especially following the falling policy rates from the State Bank of Pakistan (SBP).

Non-tax revenue is expected to fall from Rs4.85 trillion to Rs3-3.5 trillion in the upcoming budget. On the expenditure side, debt service – the largest budget item – is expected to fall from Rs9.775 trillion in the previous budget’s initial estimates to Rs8.1 trillion in the new budget. The debt service cost by the end of June 2025 will be Rs8.7 trillion, according to revised estimates for the outgoing fiscal year.

On the revenue front, the Federal Board of Revenue (FBR) has been given a target of Rs14.14 trillion for the next fiscal year, compared to a revised estimate of Rs12.33 trillion for the current year.

Tariff rationalization on imports is expected, which could result in a revenue loss of Rs150 billion to Rs200 billion in the coming fiscal year. Sectors like steel, auto parts and tiles are likely to be hit the hardest, as they struggle with high costs.

Tile manufacturers, for example, have argued that electricity and other input costs put them at a 55 to 60 percent disadvantage compared to regional rivals.

The steel industry has also raised similar concerns, criticizing UK economist Stephen Dercon for allegedly failing to understand the complexities of Pakistan’s business environment. He argues that one-size-fits-all policies cannot work across sectors.

For salaried individuals, tax rate reductions are being considered in various income slabs. Freelancers earning income abroad may also be brought into the tax net, with the SBP helping to identify foreign transactions.

The government is exploring ways to promote digital payments while also considering taxes on income from digital services and social media platforms.

No change is expected in tax on electric vehicles, fertilisers, pesticides or bakery and confectionery items. However, GST on locally manufactured cars may increase from 12.5% ​​to the standard rate of 18%.

Tax exemptions for erstwhile FATA/PATA regions may be withdrawn, although lobbying efforts are underway to extend them by another year. A reduction in the GST rate to 12% for these regions is also being considered.

The government has proposed to reduce the withholding tax rate for sellers and buyers, but the IMF has not yet approved it. Meanwhile, it is ready to eliminate the Federal Excise Duty (FED) on property. Capital gains tax on shares and property may be increased, with adjustments for inflation.

For cigarettes and beverages, tax cuts are being considered in various categories, including related products.