The Punjab government has unveiled its budget for fiscal year 2026-27 at a time when provincial finances are increasingly intertwined with Pakistan’s broader fiscal commitments under the International Monetary Fund (IMF) programme. While the budget projects strong growth in revenue collection and maintains a sizeable development programme, it also raises important questions about the sustainability of its revenue assumptions, the fairness of its taxation strategy, and its ability to meet ambitious fiscal targets without compromising essential public spending.
At first glance, the budget appears ambitious. Punjab expects to generate Rs1.21 trillion from its own resources during the next fiscal year, a substantial increase from the revised estimate of Rs820 billion for the outgoing year. This represents an increase of nearly 48 percent and reflects the government’s confidence in improving revenue mobilization. However, a closer examination of the numbers suggests that much of the projected growth will come from indirect taxation rather than meaningful expansion of the tax base.
The largest contribution is expected from sales tax on services, which is projected to rise to Rs521 billion compared with Rs363.5 billion collected during the current fiscal year. This increase of approximately 43 percent reflects higher tax rates on a range of services, including information technology, transportation, and professional services. The government has also imposed a new tax on foreign exchange services and increased taxes on event management businesses. While these measures may boost revenue collection, they also raise concerns about their broader economic impact. Sales taxes are indirect taxes that are ultimately borne by consumers. Because lower-income households spend a greater proportion of their income on consumption, the burden of such taxes tends to fall more heavily on the poor than on wealthier segments of society. Consequently, the reliance on indirect taxation raises questions about equity and fairness within the provincial tax system.
Perhaps the most striking aspect of the budget is its treatment of agricultural income taxation. Despite repeated commitments to broaden the tax base and bring agriculture into the formal taxation framework, projected revenue from agricultural income tax remains modest. The Punjab government expects to collect only Rs12.5 billion from this source during the next fiscal year, compared with Rs3.99 billion collected during the outgoing year. Although the government has announced increases in agricultural tax rates, the expected revenue remains remarkably small given the size and importance of the agricultural sector in Punjab’s economy. Farmers owning more than 12.5 acres of land will face higher fixed-rate taxation, while taxes on irrigated and non-irrigated orchards will also increase. Nevertheless, the revised structure still falls far short of a system where agricultural income is taxed on the basis of actual earnings and treated similarly to other forms of income.
The limited revenue expected from agriculture is particularly noteworthy because Punjab remains the agricultural heartland of Pakistan. Large landowners continue to exercise significant political influence, and many observers argue that this has contributed to the reluctance of successive governments to impose meaningful taxation on agricultural income. The province’s track record also raises concerns. During the outgoing fiscal year, actual agricultural income tax collection amounted to only 38 percent of the budgeted target. Given this performance, there are legitimate doubts about whether even the revised target for next year can be achieved.
At the same time, the agricultural sector continues to receive substantial government support. The budget includes subsidies amounting to more than Rs10 billion for farmers, including subsidized diesel, fuel assistance programmes, and transport-related subsidies. While such measures may help support agricultural production, they further highlight the imbalance between the level of government support provided to the sector and its contribution to provincial revenues. These policies appear somewhat inconsistent with commitments made under the IMF programme, which emphasizes broadening the tax base and increasing revenue collection from agricultural income. The Fund has repeatedly encouraged provincial governments to strengthen agricultural taxation and expand the scope of the sales tax system. The modest revenue projections suggest that progress in this area remains limited.
The budget also anticipates a significant increase in non-tax revenues. These are expected to grow by approximately 19 percent, largely due to the expansion of Punjab’s Cash Management Fund. Established under the Punjab Public Financial Management Act, the fund manages liquidity and generates returns from surplus cash balances and investments. Its size has reportedly increased from Rs800 billion to Rs1.2 trillion, enabling the government to generate additional income without imposing new taxes. Additional non-tax revenue is expected from increased traffic fines, higher royalty payments, the release of arrears related to hydropower generation, and anticipated returns from the Punjab Pension Fund. While these sources may provide supplementary income, their sustainability over the long term remains uncertain.
One of the most notable features of the budget is the projected surplus of Rs910 billion. Remarkably, this figure exceeds the province’s projected tax revenues of Rs749 billion. The surplus is essential because it forms part of the broader fiscal framework agreed between the federal government and the provinces to help achieve Pakistan’s fiscal targets under the IMF programme. In effect, provincial governments are playing a critical role in supporting federal fiscal consolidation. Punjab’s willingness to generate such a large surplus reflects both its fiscal capacity and the pressures arising from national commitments to international lenders.
On the expenditure side, the budget allocates Rs3.29 trillion to current spending, while development expenditure is budgeted at Rs752 billion. Although development spending has increased in nominal terms, it still accounts for only around 13 percent of total expenditure. This reflects a broader trend across Pakistan’s public finances, where rising recurrent expenditures continue to limit the resources available for long-term development projects. Punjab’s development allocation also appears relatively modest when compared with its share under the National Finance Commission Award. This suggests that fiscal restraint and surplus generation have taken precedence over expanding development spending, largely to support broader fiscal objectives.
The budget also contains an important warning. Like the federal budget, it acknowledges that expenditure restraint may become necessary if revenue targets are not achieved. Lower-priority development projects could face cuts, while spending controls may be imposed to preserve fiscal stability. Such measures would not be unprecedented and could become necessary if economic conditions deteriorate or revenue collection falls short of expectations.
Ultimately, the Punjab budget reflects the difficult balancing act confronting policymakers. On one hand, the government seeks to maintain fiscal discipline, generate a substantial surplus, and support national economic objectives. On the other, it faces growing demands for development spending, social services, and economic support. The budget demonstrates a strong commitment to revenue mobilization, but much of this effort continues to rely on indirect taxation rather than meaningful broadening of the tax base. Agricultural taxation remains underdeveloped, while consumers bear a growing share of the fiscal burden through higher service taxes and fees.
As Punjab moves into the next fiscal year, the success of the budget will depend on whether its ambitious revenue targets can be achieved without undermining growth or increasing economic hardship. More importantly, lasting fiscal sustainability will require reforms that distribute the tax burden more equitably and ensure that all sectors contribute fairly to the province’s development. Without such reforms, the challenge of balancing fiscal responsibility with economic growth is likely to persist.