Over the past decade budgetary policies have emphasised a firm restraint on the growth of total expenditure and a restructuring of the profile of both current and development expenditure to deal with a high fiscal deficit in Pakistan. Regarding current expenditure, there has been an increasing emphasis on meeting fully the recurrent cost requirements of completed public investments and on the minimisation of the costly subsidY programmes. Development expenditure has been increasingly directed towards the priority sectors pertaining to physical and social infrastructure and to early completion of the on-going development projects. Effective public expenditure management places heavy demands on existing government institutions and has a much wider scope than the formulation and implementation of conventional expenditure budgets. The formulation of an appropriate macroeconomic framework, selection of projects on a sound basis, prqper designing of public sector investment programmes and appropriate linkages between planning and budgetary processes is as, if not more, important than the narrow focus on expenditure budgeting [Hussain (1979»). Notwithstanding the importance of these broader aspects of budgetary issues, this paper does not deal with such public expenditure management issues. Instead it concentrates on a description and an analysis of the formulation process of government expenditure budgeting. The conventional practice in Pakistan in the formulation of expenditure budgets is based on the ”bottom-up” demands of various government agencies. Feats regarding the adverse consequences of deficit financing with respect to macro instability have persuaded the government to impose constraints on total expenditure. Donor agencies, especially the International Monetary Fund, have been instrumental in the imposition of ‘top-down’ constraints on the ‘bottom-up’ demands.