Reflections on provincial budgets FY27—I

In the wake of the 18th Constitutional Amend ment, the role of the provincial spending, and revenue decisions have become all the more important both for the provinces, but also for better rationalizing such decisions at the level of the Centre. For reaching these rationalized budgetary outcomes, especially in terms of sustainably sharing revenue, and expenditure related responsibilities, federal and federating units’ budgets need to reflect policy decisions that better cater to the overall economic needs, including much improved level of fiscal federalism as per the 18th Constitutional Amendment.

Having said that, such relationship needs to be rationalized much better than reflected in the federal budget FY2026-27, where there is not only duplication with regard to, for instance, education, health, and social protection. For instance, the social welfare BISP (Benazir Income Support Programme) still remains an expenditure item for the Centre, when otherwise it falls under the social welfare responsibility.

Moreover, the Centre needs to set better rationalized direction-changing concerns like shifting from pro-cyclical to counter-cyclical policy in terms of the overall approach of the federal budget, along with putting the tax burden in an equitable way by laying out a mission-oriented plan to move away from practicing consumption-based, regressive, indirect taxation to direct taxation for reaching overall stability, growth, distribution, resilience, enhancing consequences, and in a sustainable way at the level of the Centre, and setting the same tone for provinces so that there is a unified policy response, including through the budgetary process.

In doing so, expenditure and revenue decisions are taken so as to incentivize a non-neoliberal and non-austerity policy response which, given the serious misgivings of the neoliberal, austerity and pro-cyclical policy response over the years, including the highly successful experience of China, for instance, in not following ‘shock therapy’ policies, and instead adopted greater-role of the public sector – through introducing, for example, ‘dual track’ pricing mechanism, and large-scale role of the state-owned enterprises (SOEs) – and overall counter-cyclical policies used especially in terms of greening the economy and pro-actively, but duly cautiously, adopting artificial intelligence- (AI-) induced solutions for modernizing the economy should be emphasized in terms of policy focus.

Once again, just like the author reflected on the budget with regard to first of all whether federal budget’s approach is outcome-based or not, and whether priorities reflect major issues facing the country – like as pointed out in author’s recent article titled ‘Policy philosophy correction budget – I’ in Business Recorder (BR), which pointed out in this regard, ‘…water resource management, and security, energy sustainability, poverty, unemployment, and high interest payments… fiscal federalism needs to be fixed to better match responsibilities with regard to subjects shifted under the 18th Constitutional Amendment to the federating units, with the expenditure responsibilities they should incur from the transferred resources under the National Finance Commission (NFC) award for those devolved responsibilities. That would better rationalize expenditure side, and revenue raising needs of the centre, and federating units’ the same is reflected in the provincial budgets. It needs to be mentioned here that provinces after the 18th Constitutional Amendment hold all the more importance in terms of all these issues, except from interest-related expenditure since it is mainly a consequence of monetary policy orientation – which has wrongly adopted over-board monetary austerity policy in general since inflation has significant aggregate supply-side determination, and requires a more balanced aggregate demand- and supply-side policy emphasis –and extent of borrowing – external, and domestic – at the federal level.

In analysing provincial budgets, ‘white papers’ – which reflect the general direction of a particular budget regarding development priorities, revenue, and expenditure decisions – are generally generic in nature, failing to reflect the outcomes-based, prioritized directions that the budget intends to take. The general message is more focused on fiscal discipline rather than bringing growth enhancing measures that will also likely bring much-needed greater aggregate supply support to macroeconomic stability, which would, in turn, allow reaching much more sustainability to both stability and growth. Even after posting sub-optimal economic growth rate around the medium term or so, and given during this time austerity – aggregate demand squeezing – policies and procyclical policies called for reversal of such policies to adopt non-austerity, counter-cyclical policies. Yet, this is missing in general in provincial budgets in terms of enhancement of provincial revenues that broader tax base, lower tax rates in general, and overall improve the equitability aspect of taxes.

Moreover, provincial governments need to adopt a much more non-neoliberal role, which includes rolling out effective local governments through timely elections and carrying out provincial finance awards to adequately fund them.

Hence, the messages/statements in the ‘white papers’ of provinces lack specific objectives the provincial government has pursued in terms of concrete targets, indicating, in turn, that these were the main steps in terms of fiscal consolidation and this is how the budget intends to move in the direction of enhancing growth, inclusivity and lowering poverty, which together with inequality has seen a sharp rise over the medium-term due to practice of steep austerity policies. Moreover, the strategy must indicate how the public sector will co-create partnerships with the private sector and markets. Key gaps in governance and incentive structures—particularly concerning tax proposals and expenditure allocation—must be addressed to improve overall productive and allocative efficiencies. This improvement should be reflected in the prioritization of social spending and infrastructure enhancement, particularly regarding water management. Ultimately, this will build greater resilience against economic shocks while facilitating the transition to a greener economy.

Messages in the ‘white paper’ on Punjab’s budget for FY27, for instance, remain unable to indicate how revenue base of the province was enhanced, including why implementation of agricultural income tax – already agreed with International Monetary Fund (IMF) – has fared, and which expenditures were curtailed in terms of big ticket items, how the governance, and incentive structures were improved for better allocation and effective spending, and which areas of the provincial economy were prioritized, especially in terms of agriculture, water, industry, social sectors, and infrastructure, and how they overall gels to provide sustainable growth, and resilience. This is important given that the province has experienced two major floods in recent years, including one during the last fiscal year. Furthermore, water management requires special attention to better handle floods, especially in light of water-related threats from India.

It is strange that provincial revenue base, for instance, remains so much limited in terms of breadth and depth on one hand, while under the National Finance Commission (NFC) award, provinces receive close to sixty percent of the resources from federal divisible pool, and have tremendous potential for enhancing provinces’ own tax base, and increasing revenues through greater economic growth effort at the provincial level as well, yet there is surprisingly a general tone in ‘white papers’ virtually across the board highlighting difficult revenue situation and presenting it as a basis for keeping development expenditures at lower levels. In Punjab’s ‘white paper’, for instance, it is indicated that ‘While development expenditures have been drastically reduced in line with available fiscal resources, the Government remains fully committed to advancing Punjab’s long-term development agenda’, yet what is not made to understand – and that is a theme found in the ‘white papers’ across all provinces – as to why it should be so in the presence of high level of resources transferred to provinces from the divisible pool, and immense level of revenue potential lying virtually untapped at the level of provinces.

(To be continued)

Copyright Business Recorder, 2026