As Pakistan prepares to unveil its federal government budget for fiscal year 2025-26, a prominent tax advisory and consultancy firm, Tola Associates, has proposed a significant increase in the defence budget to Rs2.8 trillion. This represents a substantial 32% increase compared to the last fiscal year, primarily attributed to what the firm describes as a “war-like situation” with neighboring India.
The proposal was put forth in Tola Associates’ recently released report, titled ‘Budget 2025-26: A Rare Catalyst for Course Correction’.
“The budgeted defence expenditure stood at Rs2,122 billion for FY25 while the actual expenditure till March 2025 was Rs1,424 billion. [However], due to the ongoing war situation with the neighboring country, defence spending may increase by up to 50% in the Q4FY25,” the report detailed. The firm noted that in the previous three years, defence expenditure in the last quarter consistently accounted for 36% of the annual total defence expenditure made throughout the fiscal year.
“Given the current regional tensions and the need to ensure Pakistan’s defence preparedness, we estimate total defense spending to reach Rs2.4 trillion by June 2025,” the report further stated.
Moreover, Tola Associates specifically proposed to enhance the defence budget to Rs2.8 trillion in FY26, reflecting the 32% increase when compared with the outgoing fiscal year’s budget. This proposed hike is justified “due to the war situation with the neighboring country and the new recruitment of army personnel.”
Budget as a Catalyst for Course Correction
In its report, Tola Associates emphasized that the upcoming budget presents a crucial opportunity for national course correction. “It is a rare catalyst to realign the direction of our economy,” the firm asserted, suggesting that the budget’s central theme should focus on creating a delicate balance between economic stability and sustainable growth.
“Therefore, economic and fiscal reforms should be framed in a manner that puts the economy on a path of steady growth,” the report added, stressing the need for well-structured policy decisions.
Tola Associates estimates the overall budget expenditure for FY26 to be around Rs17.2 trillion, which is notably lower than the Rs18.9 trillion originally budgeted by the government in FY25. This anticipated decline in expenditure comes amid an expected reduction in mark-up payments on national debt, which are likely to decrease to Rs7.5 trillion in FY26, compared to Rs9.8 trillion originally budgeted for FY25.
The tax advisory firm also estimated the federal development budget (PSDP/public sector development programme) at Rs950 billion for FY26, a figure significantly lower than the Rs1.4 trillion budgeted in FY25.
Regarding revenue collection, the report estimated the FBR’s revenue collection at Rs13.5 trillion for FY26. “As per our estimates, if the FBR collects around 11.9 trillion in FY25, given our inflation estimates at 10.0% and estimated GDP growth at 3% in the upcoming FY26, then the FBR might collect only Rs13.5 trillion worth of tax revenue,” the report concluded, providing a cautious outlook on tax collection targets.
