Provincial budgets are formulated under constraints sourced to the federal budget on two counts: how much of the budgeted taxes imposed by the Centre, collected by the Federal Board of Revenue (FBR), and placed in the divisible pool for distribution between the Centre and the four provinces under the 2010 agreed National Finance Commission (NFC) award are actually realised by the end of the fiscal year; and the provincial surplus budgeted by the Centre.
There is no penalty attached to failure to meet either of the two constraints - on any ministry or any institution under its administrative control, including the FBR, or on any province.
However, there are serious repercussions for FBR’s failure to meet the budgeted tax target on the general public through: (i) massive curtailment of the development outlay, which may be accompanied by; and (ii) the imposition of additional taxes (commonly referred to as a mini-budget).
It is extremely disturbing to note that the FBR shortfall for the first eleven months of 2024-25 has been quantified at one trillion rupees, while disbursement for the public sector development programme in the current year was a mere 40 percent of what was budgeted.
NFC award 2010 allocated 44 percent of the divisible pool taxes for federal and 56 percent for the four federation units in 2010-11 (the first year of the award) with the federal government to receive 42.5 percent and provinces 57.5 percent in the following year.
The budget for 2025-26 earmarks 43.5 for the federal government and 56.5 percent for the four provinces - the one percent discrepancy from the envisaged distribution for 2011-12 was assigned to Khyber Pakhtunkhwa government to meet the expenses of the war on terror after a consensus was reached.
Fifteen years later, the provinces’ share remains stagnant at 57.5 percent of the divisible pool, with the federal government’s share at 42.5 percent.
Provincial surplus became an item in the federal budget subsequent to the 2010 NFC award. It was to remain an item till such a time as the NFC award and those clauses of the eighteenth constitutional amendment that sought devolution of key social sector subjects, education, and health in particular as well as agriculture, became fully operational.
To this day, devolution remains incomplete as the provinces have reportedly not yet developed the capacity and nor has the federal government ended its budgetary allocations for these sectors. The result is a steady rise in the federal budget of the target provincial surplus which this year has been set at 1464 billion rupees.
Be that as it may, there has never been an instance when the agreed percentage to the provinces under the NFC award was not disbursed; however, the perennial issue has been budgeting unrealistic tax targets leading to a shortfall at the end of the fiscal year, which implies lower resources are received by provinces than were budgeted; while imposing taxes, particularly the petroleum levy which is a withholding tax on sale of petroleum and products to the general public, dishonestly itemised under other taxes that are not part of the divisible pool.
All four provinces rely heavily on taxes remitted by the federal government under their divisible pool share. In other words, any shortfall in tax collections from what was budgeted is keenly felt by the provinces.
Punjab’s reliance on federal transfers was a high of 76 percent in 2025-236 (4063 billion rupee federal transfers with a total outlay of 5335 billion rupees) and it noted arrears of 126 billion rupees in 2023-24, with a projected shortfall of 93.9 billion rupees in the outgoing year. Punjab inexplicably budgeted a surplus of a whopping 740 billion rupees, though its share in the federal budget was lower at 629.6 billion rupees.
Sindh’s reliance on federal transfers was relatively lower than Punjab’s at 61 percent in 2025-26 (a total of 2096 billion rupees with total outlay of 3450 billion rupees) and in 2024-25 received 104 billion rupees less than what was budgeted. The province has claimed that it was precisely for this reason that it has presented a 38 billion-rupee deficit budget for next fiscal year and not a surplus of 298 billion rupees, which was its share in the centre’s budgeted provincial surplus.
KPK has budgeted reliance on federal transfers to the tune of nearly 79 percent next fiscal year against almost 80 percent in the outgoing fiscal year (revised estimates show federal transfers of 1472 billion rupees against the outlay of 1834 billion rupees). The provincial surplus shown in the budget for next fiscal year is 157 billion rupees, which is lower than its share of 170.6 billion rupees.
Balochistan’s reliance on federal transfers is 78 percent next fiscal year and the province budgeted a surplus of 37 billion rupees which is lower than the 110.6 billion rupees - its share of the total provincial surplus budgeted by the Centre.
KPK took an unusual step and prepared a fiscal risk statement which itemised a range of issues that may impact on its revenue: (i) general economic risks associated with external factors as well as those associated with tensions with neighbouring countries. Thus, if the global economy suffers a downturn in growth, Pakistan would be impacted through lower exports, higher value of imports. Tensions with neighbouring countries, KPK is most susceptible to attacks from the Taliban, could also lower the growth rate relative to projections; (ii) specific fiscal risks associated with lower tax collections by the FBR than budgeted, leading to lower than budgeted total transfers to provinces. This was presented in a graph showing a variance from what was pledged at the time of the federal budget till the revised releases by the end of the fiscal year - negative 4 percent in two years - 2021-22 and 2022-23 - which widened to negative 19 percent in 2023-24 and declined to negative 8.79 percent in 2024-25; and (iii) structural or institutional risks associated with not only adjustment in domestic interest rates (which has been positive in the outgoing year) but also on foreign debt with a portion of the province’s foreign debt portfolio linked to variable international benchmarks such as the Secured Overnight Financing Rate (SOFR), Japanese Yen Tokyo Overnight Average Rate (TONA), and the Euro Interbank Offered Rate (EURIBOR). While recent trends indicate a slowdown or pause in global rate hikes, any future tightening by major central banks could increase the cost of debt servicing.
To conclude, one would urge the federal government to penalise the relevant ministry/institutions that fail to meet the budgeted targets, to begin operationalising the eighteenth constitutional amendment and for provinces to reduce their own reliance on federal transfers as a source of revenue and follow the KPK lead in preparing a fiscal risk statement.
Copyright Business Recorder, 2025