Subsidies in the 2026-27 Budget: Who Gets the 1,091 Billion?
Where Pakistan's subsidy money goes, and why much of it is untargeted
By the ISN Media desk • June 2026 • Approx. 7-min read
Subsidies are one of the largest transfers in Pakistan's budget, and one of the most contested. This explainer sets out the 2026-27 subsidy bill, where it goes, who benefits, and why international lenders press for it to be reduced. The figures are Budget Estimates from the Government of Pakistan, in billions of rupees. It sits under the pillar BISP, subsidies and the politics of cash support.
How much does Pakistan spend on subsidies in 2026-27?
Pakistan's 2026-27 subsidy bill is about Rs 1,091 billion, or 5.8 percent of the budget, a fall of about 8 percent on the year. A large share has historically gone to the power sector, to hold down electricity tariffs and to manage the unpaid bills that accumulate there as circular debt. Unlike targeted cash support, much of the subsidy bill is untargeted, flowing through prices, so it reaches every consumer of the subsidised good, including the well-off.
That is the figure and its character. The detail follows.
What a subsidy is, and how it differs from cash support
A subsidy lowers the price of a good or service below its cost, with the government making up the difference. A cash transfer, by contrast, gives money directly to a chosen recipient. The distinction matters for who benefits.
Targeted cash, such as the Benazir Income Support Programme, reaches a named poor family identified through a means test. An untargeted price subsidy reaches everyone who consumes the subsidised good. Because wealthier households often consume more, of electricity, for example, an untargeted subsidy can deliver as much benefit to the well-off as to the poor, or more. This is the central criticism of broad subsidies, and the reason economists distinguish them sharply from targeted transfers.
Where the subsidy money goes
A large part of Pakistan's subsidy bill has historically gone to the power sector. Subsidies there hold down the tariffs households and businesses pay, and help manage the gap between what it costs to supply electricity and what consumers are charged, a gap connected to the accumulation of circular debt. Other subsidies support areas such as fuel, food staples and certain industries at various times.
Because power-sector subsidies sit on top of electricity bills, they are politically difficult to cut: reducing them raises the bills that households and businesses already find punishing. The connection between subsidies and the wider energy crisis is examined in our colleagues' work on what is circular debt in Pakistan and capacity payments explained.
Why the bill fell this year
The subsidy bill was cut about 8 percent in 2026-27, part of the same pattern in which discretionary lines were trimmed to help contain the deficit. The reduction also reflects the long-standing pressure from the International Monetary Fund to move away from broad, untargeted subsidies. The direction of travel in this budget, cash support rising while subsidies fall, is exactly the shift the IMF favours: from untargeted price support that reaches everyone toward targeted cash that reaches the poor.
The argument over subsidies
The case against broad subsidies is that they are inefficient and regressive: they cost a great deal, much of the benefit reaches households that do not need it, and they distort prices. On this view, replacing untargeted subsidies with targeted cash delivers more help to the poor for less money.
The case for caution is that subsidies, whatever their inefficiency, hold down the prices of essentials that households already struggle to afford, and that cutting them too quickly, especially on electricity and fuel, imposes immediate hardship and can fuel inflation. The practical debate is therefore less about whether to reform subsidies than about the pace and sequencing of doing so, and about ensuring that targeted support expands as broad subsidies contract.
Subsidies and the wider budget
Set in the context of the whole budget, subsidies at about Rs 1,091 billion are one of several large transfers, alongside grants and cash support of about Rs 2,680 billion and pensions of about Rs 1,169 billion. Together these transfers, plus interest and defence, leave limited room for development and the social sectors, which is the structural constraint examined in where every rupee goes. Subsidy reform is one of the levers most often cited for creating fiscal space, precisely because so much of the current bill is untargeted.
Beyond power: fuel, food and industry
While the power sector has historically absorbed the largest share, subsidies appear in several other areas at various times. Fuel subsidies hold down the price of petrol and diesel, and have been used, then withdrawn under fiscal pressure, in recent years. Food subsidies support the price of staples such as wheat flour, often through provincial mechanisms and at times of high inflation. Certain industries and exporters have received support through subsidised credit or energy tariffs intended to keep them competitive.
Each of these shares the basic feature of a price subsidy: it lowers a cost for a broad group rather than targeting a chosen recipient. And each raises the same question, whether the benefit is well-directed at those who need it, or spread across consumers regardless of means. The mix shifts from year to year with prices and policy priorities, but the structural issue, broad price support versus targeted transfers, persists.
The sequencing problem
The hardest part of subsidy reform is sequencing. Economists broadly agree that untargeted subsidies are inefficient and that targeted cash is a better instrument, but the order and pace of change matter enormously. Cutting a broad subsidy raises the price of an essential immediately, while the expansion of targeted support to compensate the poor takes time to reach them. If the cut comes first and the compensation lags, the poorest are hit hardest in the interval.
This is why reform programmes, including those agreed with the IMF, increasingly pair subsidy reduction with the expansion of cash support, and why the direction of this budget, subsidies down while cash support rises, reflects that approach. The debate is less about the destination than about managing the transition without imposing avoidable hardship.
Frequently asked questions
How much does Pakistan spend on subsidies in 2026-27? About Rs 1,091 billion, or 5.8 percent of the budget, down about 8 percent on the year. A large share has historically gone to the power sector.
Who benefits from Pakistan's subsidies? Much of the subsidy bill is untargeted, flowing through prices, so it reaches every consumer of the subsidised good, including the well-off who often consume more. This is the central criticism of broad subsidies.
How do subsidies differ from cash support? A subsidy lowers the price of a good for everyone who buys it; cash support gives money directly to a chosen poor family. Targeted cash reaches the poor more precisely than an untargeted price subsidy.
Why did the subsidy bill fall this year? It was cut about 8 percent as the government trimmed discretionary spending to contain the deficit, and in line with long-standing IMF pressure to move from broad subsidies toward targeted cash.
Why are power subsidies hard to cut? Because they sit on top of electricity bills that households and businesses already find punishing. Reducing them raises those bills directly, which makes the cuts politically and economically difficult.
What is the argument for keeping subsidies? That they hold down the prices of essentials households struggle to afford, and that cutting them too quickly imposes immediate hardship and can fuel inflation. The debate is largely about the pace of reform, not whether to reform.
Besides power, what else does Pakistan subsidise? Fuel subsidies on petrol and diesel, food subsidies on staples such as wheat flour, and support to certain industries and exporters through subsidised credit or energy tariffs, used and withdrawn at various times under fiscal pressure.
Why is the order of subsidy reform important? Because cutting a broad subsidy raises an essential's price immediately, while expanding targeted cash to compensate the poor takes time. If the cut comes first and compensation lags, the poorest are hit hardest in between, which is why reform pairs subsidy cuts with rising cash support.
How are subsidies connected to circular debt? Power-sector subsidies help manage the gap between what it costs to supply electricity and what consumers are charged. That gap is linked to the accumulation of circular debt, the unpaid bills inside the power system, explained in what is circular debt in Pakistan.
Sources and notes
- Government of Pakistan, Federal Budget 2026-27: subsidy and transfer figures are Budget Estimates in billions of rupees, rounded for readability.
- The link between power subsidies and circular debt, and the IMF's position on subsidy reform, reflect public records and published programme documents.
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