Proposal to Hike Defence Budget Amid Regional Tensions

As Pakistan prepares to reveal its federal budget for the fiscal year 2025-26, Tola Associates, a consultancy specializing in tax matters, has suggested increasing the defense budget to Rs2.8 trillion. This adjustment would represent a 32% surge compared to the previous fiscal year, citing a “war-like situation” with neighboring India.

The recommendation was detailed in the firm’s report, ‘Budget 2025-26 a rare catalyst for course correction’, which was made public on Saturday.

The report stated, “The budgeted defense expenditure was Rs2,122 billion for FY25, while the actual expenditure until March 2025 amounted to Rs1,424 billion. [However], because of the existing conflict situation with the neighboring country, defense spending may climb by as much as 50% in Q4FY25.”

The firm highlighted that over the past three years, defense expenditure in the final quarter constituted 36% of the total annual defense expenditure for the entire fiscal year.

“Considering the ongoing regional tensions and the imperative to guarantee Pakistan’s defense preparedness, we anticipate total defense spending to reach Rs2.4 trillion by June 2025.”

Furthermore, the firm proposed elevating the defense budget to Rs2.8 trillion in FY26, marking a 32% increase relative to the current FY’s budget. This adjustment is attributed to the “war situation with the neighboring country and the new recruitment of army personnel”.

Tola conveyed in its report that the forthcoming budget offers a substantial chance for course correction.

“It presents a unique catalyst to re-align the trajectory of our economy.” The firm added that the central theme of the upcoming budget should prioritize striking a balance between stability and economic advancement.

“Consequently, economic and fiscal overhauls should be structured in a manner that sets the economy on a path of consistent expansion.”

Tola projects the budget expenditure for FY26 to be approximately Rs17.2 trillion, a decrease from the Rs18.9 trillion allocated by the government in FY25.

This anticipated decline in expenditure is due to an expected reduction in markup payments, which are projected to fall to Rs7.5 trillion in FY26, compared to the initially budgeted Rs9.8 trillion for FY25.

The tax advisory foresees the federal development budget (PSDP) at Rs950 billion for FY26, significantly lower than the Rs1.4 trillion earmarked in FY25.

The report estimates FBR revenue collection at Rs13.5 trillion for FY26.

“According to our assessments, if the FBR collects approximately 11.9 trillion in FY25, considering our inflation estimates at 10.0% and an estimated GDP growth of 3% in the coming FY26, the FBR might only accumulate around Rs13.5 trillion in tax revenue.