EDITORIAL: While the inaugural session of the National Finance Commission (NFC) had to be postponed due to the floods ravaging large parts of the country, their aftermath is certain to shape negotiations when it finally convenes, with both federal and provincial priorities profoundly altered by the calamity, with all its concomitant human miseries.
It must be remembered, however, that the NFC award spans five years, and while it should address immediate needs of rehabilitation, it must also remain responsive to evolving governance, economic and social challenges.
The current NFC formula — last set in 2010 after the 18th Amendment’s passage had greatly expanded provincial autonomy and the share of national resources flowing to the federating units — allocates 57.5 percent of federal tax revenues to the provinces, with the remainder retained by the federal government.
Recent news reports now suggest that the Centre may seek to reopen the fiscal compact, which has long been a point of friction with the provinces. The federal government contends that its fiscal space has been eroded over the past 15 years by mounting debt and rising defence needs, with its 42.5 percent share under the NFC award no longer sufficient to sustain federal functions.
Fuelling this debate further is the provinces’ poor use of the enlarged allocations, which have failed to reduce regional disparities and improve governance. Having failed to build the requisite institutional capacity and political will to spend resources productively, they have channelled much of these into current expenditures for bloated bureaucracies and politically-driven projects instead of urgent development needs.
Nor have they built robust revenue streams of their own, remaining largely reliant on federal transfers, and thereby squandering the autonomy and financial space granted under the 18th Amendment.
The federal government, too, bears responsibility, having retained ministries for subjects devolved to the provinces under the 18th Amendment. This duplication or overlapping has inflated expenditures and, financed largely through borrowing, worsened the Centre’s debt burden.
However, many observers argue that simply eliminating this duplication, as well as curbing other avoidable current expenditures and expanding the tax base would still fall short of fixing structural imbalance in the division of national resources.
Several remedies have been proposed, including amending the Constitution to reduce the provinces’ share in the NFC award, something which is barred under the existing framework. Such a move, however, would only stoke friction in an already polarised polity.
It must also be remembered that the 18th Amendment emerged in a context of a strong Centre dominating governance, and the devolution of powers and resources was intended as both a democratic correction and a way to strengthen the federation. The task here must be to find solutions that protect these gains while rectifying distortions in resource distribution.
One proposal has been for provinces to shoulder part of the country’s defence burden, while another stresses the necessity for the Centre to dismantle ministries in devolved sectors and move away from funding provincial projects. Provinces must also be required to broaden their own revenue base by bringing undertaxed sectors firmly into the tax net.
Crucially, the 18th Amendment must be implemented in its true spirit through genuinely empowering local governments, as centralised provincial control has undermined service delivery in areas like education, health and poverty alleviation.
A robust local government system could meet both; grassroots development needs while also easing fiscal pressures on the Centre. NFC’s vertical distribution could then be addressed by revisiting the population-heavy horizontal formula, giving greater weightage to provincial tax efforts and the empowerment of local governments.
Ultimately, policymakers must ensure that whatever solutions emerge are not only perceived as equitable by the federating units, but also deliver true fairness in practice. At the same time, provinces must also acknowledge that their imprudent spending and weak efforts at generating tax revenues are untenable, and require urgent course correction.
Copyright Business Recorder, 2025
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