Budget FY26: Govt plans 10% raise in salaries, 7% in pensions

• Government tables Rs17.57 trillion FY26 budget.
• Suggests 20% hike in defence spending to Rs2.5 tr.
• Projects 4.2% economic growth in upcoming fiscal year.

ISLAMABAD: In its bid to provide relief to the inflation-weary masses, the federal government has proposed a 10% hike in the salaries of government employees along with a 7% increase in the pension of retirees.

The proposal for the salary hike was unveiled by Federal Finance Minister Muhammad Aurangzeb during his National Assembly budget speech for the Fiscal Year 2025-26 and, if approved, will be applicable to federal government employees from Grade 1 to 22.

Furthermore, the monthly allowance for differently abled employees was proposed to increase to Rs6,000 from the current Rs4,000 — reflecting an increase of Rs2,000.

Expressing his views on the assembly floor, during a session being chaired by NA Speaker Ayaz Sadiq, the finance minister said the federal budget was being presented at an "extremely important and historic moment".

The minister highlighted that economic stability has been achieved through structural reforms, noting, "several measures have been implemented to improve the economy." The finance minister credited recent policy actions for bringing "economic stabilisation through reform measures".

The salary and pension hike proposed in the FY26 budget comes alongside the suggestion of across-the-board cuts in income tax rates for the salaried class.

The biggest relief targets those making between Rs600,000 and Rs1.2 million a year. Their tax rate will drop sharply from 5% to just 2.5%, meaning someone earning Rs1.2 million would pay only Rs6,000 in tax, down from Rs30,000.

Taxpayers earning up to Rs2.2 million annually will also benefit, with the minimum rate reduced from 15% to 11%. The finance minister said similar cuts are being proposed for higher income brackets as well.

For those earning between Rs2.2 million and Rs3.2 million, the tax rate is expected to fall from 25% to 23%.

The Rs17.57 trillion ($62 billion) budget for the upcoming fiscal year tabled by the government reflects a 7% decrease in overall spending, but on the other hand, features a 20% hike in defence expenses — which is to be taken against the backdrop of the country’s recent armed conflict with neighbouring India.

The Centre has presented a budget that allocated Rs2.55 trillion ($9 billion) for defence spending in FY26, compared to Rs2.12 trillion in the fiscal year ending this month.

Furthermore., there’s a projection of 4.2% economic growth in 2025-26, saying it has steadied the economy, which had looked at risk of defaulting on its debts as recently as 2023. Growth this fiscal year is likely to be 2.7%, against an initial target of 3.6% set in the budget last year.