Pakistan's government jacked up defense spending and government employees' pensions in a new budget June 3 that set a deficit of 4 percent of GDP.
The budget for the fiscal year 2011-2012 starting July 1 came as pressure mounts on Pakistan to launch a military offensive in the restive North Waziristan region, known as the hub of Taliban and Al Qaeda linked militants.
It earmarked 495 billion rupees ($5.7 billion) for defense, an 11 percent increase on the current year.
"We stand by our valiant men, who are laying down their lives to safeguard our country," finance minister Abdul Hafeez Shaikh told parliament. "The country has constantly been suffering because of the existing security situation," but the government was determined to improve the economy and provide security to the people, he said.
More than 4,410 people have been killed across Pakistan in bomb blasts and suicide attacks blamed in Taliban- and Al-Qaeda-linked militants since July 2007.
The Pakistani Taliban has claimed responsibility for a string of recent attacks against government security forces and has vowed to launch even larger ones to avenge the killing of Osama bin Laden, shot dead in a U.S. raid last month.
The total budget for the next year was fixed at 2,504 billion rupees ($29.1 billion), with a budget deficit of 850 billion rupees ($9.9 billion), or four percent of gross domestic product (GDP), Shaikh said.
The budget also provides rises of up to 20 percent in government employees' pensions and promises to bring at least 2.3 million new taxpayers into the tax net.
Pakistan has long defied Western pressure to end giant tax-dodging in a country where barely 1 percent of the population pays at all, as a corrupt bureaucracy starves energy, health and education of desperately needed funds.
The International Monetary Fund last year halted a $11.3 billion assistance package over a lack of progress on reforms, principally on tax.
In the wake of catastrophic 2010 floods that cost the economy $10 billion, Washington donated hundreds of millions of dollars and demanded that Pakistan's rich, whose lifestyles outstrip many in the West, step up to the plate.
Shaikh said Pakistani exports grew by 28 percent, an unprecedented rate, during the current fiscal year.
"We also hope that our remittances will reach a level of $12 billion by close of this year," he said, adding: "Our foreign currency reserves have reached $17.3 billion."
He said that the government had achieved some macrostability, checked inflation and begun to impact the growth rate.
Local newspaper The News reported this week that Pakistan had decided to launch a "careful and meticulous" military offensive in North Waziristan after a recent visit by U.S. Secretary of State Hillary Clinton to Islamabad.
But Lt. Gen. Asif Yasin Malik, the corps commander supervising all military operations in Khyber Pakhtunkhwa province, told reporters on June 1, "We will undertake operation in North Waziristan when we want to."