Ethiopia Federal Budget 2025/26: Poverty‑Reducing Spending Drops While Overall Expenditure Swells
Published: June 2026
Overview
Ethiopia’s 2025/26 federal budget totals Br 1.92 trillion, a 34 % nominal increase over the previous year. Yet the portion earmarked for poverty‑reducing expenditure falls to a record 41 %, down from 46 % in 2024/25. The shift reflects a broader re‑allocation toward debt servicing, wage bills, and other recurrent costs, squeezing the share of funds directed to social programs and long‑term development.
Focus Keyword: Ethiopia federal budget 2025/26
H2: Why Poverty‑Reducing Expenditure Is Declining
H3: Definition and Historical Share
Cepheus Research & Analytics defines poverty‑reducing expenditure as the sum of:
- Federal economic and social sector spending
- Subsidies to regional states
- Allocations for the Sustainable Development Goals (SDGs)
Historically, this block accounted for 67 % of total spending in 2021/22, sliding to 59 % (2022/23), 57 % (2023/24), 46 % (2024/25), and now 41 % (2025/26) – well below the five‑year average of 54 %.
H3: Nominal Growth vs. Share Erosion
In absolute terms, poverty‑reducing outlays rise to Br 782.2 billion (up from Br 658.1 billion). However, because the overall budget expands faster, the percentage share shrinks, signalling a clear shift in fiscal priorities away from pro‑poor spending【https://www.worldbank.org/en/topic/poverty】.
H2: The New Budget Structure
| Category | Amount (Br) | % of Total Budget | % of GDP* |
|---|---|---|---|
| Recurrent Expenditure | 1 171.2 bn | 61 % | — |
| Debt Servicing | 463.4 bn | 24 % | — |
| Capital Expenditure | 420.8 bn | 22 % | 2.1 % |
| Regional Subsidies | 314.8 bn | 16 % | — |
| SDG Allocations | 14 bn | 1 % | — |
| Wage Bill | 287.3 bn | 15 % | 1.5 % |
| Poverty‑Reducing Total | 782.2 bn | 41 % | — |
*GDP figures are based on the Ministry of Finance’s projection of 8.9 % real growth for 2025/26.
H3: Debt Servicing Becomes Dominant
Debt repayments now represent the largest single line item, amounting to Br 463.4 billion (24 %). Of this, Br 300 billion is earmarked for external debt—highlighting the growing burden of foreign‑currency obligations【https://www.imf.org/en/Countries/ETH】.
H3: Capital Spending Hits Record Low
Capital investment, the engine of infrastructure and long‑term growth, falls to 2.1 % of GDP, far below the five‑year average of 5.4 % and the ten‑year average of 4.4 %. Cepheus describes this as the “lowest level on record.” The contraction suggests a pivot from new projects to covering recurrent costs, especially debt service.
H3: Wage Bill Surge
Civil‑servant salary reforms push the government wage bill to Br 287.3 billion, a 71 % jump from the prior year’s Br 168.2 billion. The wage bill now consumes 15 % of total spending and 1.5 % of GDP.
H3: SDG and Regional Subsidies
- SDG allocations remain flat at Br 14 billion, meaning no real growth after inflation.
- Regional subsidies rise modestly to Br 314.8 billion, still classified under poverty‑reducing spending.
H2: Revenue Strategy – How the Budget Is Funded
- Total revenue & grants: Br 1.51 trillion
- Deficit: Br 416.8 billion
H3: Tax Measures Driving Revenue Growth
The government plans to boost domestic receipts to Br 1.1 trillion through:
- Minimum Alternative Tax – targeting high‑earning individuals and corporations.
- Higher withholding income tax rates.
- 15 % VAT and excise tax on fuel.
- Property taxes across regions.
- Motor vehicle circulation tax.
Most of the projected increase stems from indirect and import‑related taxes, which may raise prices for consumers and increase compliance costs for SMEs【https://taxfoundation.org/et/】.
H3: Concerns Over Tax Base Narrowing
Cepheus warns that the revenue plan relies heavily on tax intensity in the formal sector rather than expanding the tax base. This could strain small and medium‑sized enterprises and dampen private‑sector growth.
H2: Economic Outlook Embedded in the Budget
| Indicator | Projection (2025/26) |
|---|---|
| Real GDP growth | 8.9 % |
| Industry growth | 13 % |
| Services growth | 7.5 % |
| Agriculture growth | 6.3 % |
| Inflation | 11.9 % (down from previous peaks) |
The robust growth assumptions are contingent on sustained investment and stable macro‑economic conditions. The shrinking capital‑expenditure share, however, raises questions about the feasibility of these projections.
H2: Implications for Poverty Reduction and Development
- Reduced fiscal space for social services: With only 41 % of the budget now earmarked for poverty‑reduction, key sectors such as education, health, and agricultural support face tighter funding.
- Higher debt burden: Growing debt service limits resources for productive investment, potentially slowing long‑term growth.
- Infrastructure slowdown: Low capital spending threatens progress on transport, energy, and water projects that are vital for poverty alleviation.
H2: What Stakeholders Should Watch
- Parliamentary debates on reallocating funds from recurrent to capital projects.
- International donor assessments of Ethiopia’s debt sustainability (e.g., World Bank, IMF).
- Private‑sector response to increased indirect taxes—especially in manufacturing and retail.
- Regional governments as they depend on federal subsidies for basic service delivery.
Conclusion
Ethiopia’s federal budget 2025/26 showcases a paradox: overall spending is expanding, yet the share devoted to poverty‑reducing programs is falling to its lowest level in recent years. While the government pursues fiscal consolidation and attempts to broaden the tax base, the growing dominance of debt servicing, wage bills, and recurrent expenses threatens the financing of long‑term development and social protection. Monitoring how policymakers rebalance these competing demands will be crucial for Ethiopia’s growth trajectory and its commitment to reducing poverty.
For further reading on Ethiopia’s fiscal policy and debt sustainability, visit the International Monetary Fund’s country page【https://www.imf.org/en/Countries/ETH】 and the World Bank’s Ethiopia overview【https://www.worldbank.org/en/country/ethiopia】.
