EDITORIAL: The World Bank’s report on fiscal federalism in Pakistan should prompt a more serious debate on the 18th Amendment and the National Finance Commission Award than the one usually conducted in political shorthand. The post-2010 fiscal settlement did mark a meaningful shift in Pakistan’s federal structure.
It expanded provincial fiscal space, gave constitutional weight to devolution, and moved the country away from an excessively centralised model of public finance. Yet the report also underlines a problem that has become harder to ignore: the fiscal architecture created after the 7th NFC Award remains incomplete, unevenly implemented and infirmly tied to outcomes.
The original compact rested on a defensible proposition. If important expenditure functions were to be devolved to provinces, then a larger share of divisible pool resources had to move with those functions. The 18th Amendment abolished the Concurrent Legislative List and placed a wide range of responsibilities within the provincial domain. The 7th NFC Award increased the provincial share in federal tax revenues and revised the horizontal distribution formula by reducing the exclusive reliance on population. In principle, therefore, the shift was meant to align expenditure responsibility with the level of government closer to the service-delivery function.
Implementation followed a less coherent path. Provinces received a larger fiscal share, but the federation did not reduce its expenditure footprint in line with the transfer of functions. The World Bank’s finding that provincial revenues, including transfers, rose from less than 4 percent of GDP to an average of 6.5 percent over 2010-2024 while federal expenditure did not decline commensurately captures the central imbalance. The Centre ceded revenue space without undertaking a corresponding restructuring of its own expenditure obligations. Ministries, programmes and fiscal commitments in devolved or overlapping areas were not rationalised with requisite seriousness. The result has been a federal government that remains fiscally overextended while commanding a smaller post-transfer revenue base.
That imbalance cannot be blamed on the NFC alone. It reflects the failure to complete the administrative and expenditure side of devolution. A revenue-sharing arrangement, however generous or restrictive, cannot by itself repair blurred functional assignments. If the federation continues to finance activities that properly belong to provinces, and provinces continue to depend heavily on federal transfers without assuming full fiscal responsibility for devolved functions, the system will keep producing deficits, duplication and accountability gaps. The issue is therefore not simply the size of the provincial share. It is the absence of a hard link between functions, financing and performance.
Provincial governments also have little reason to be complacent. The larger fiscal space made available after the 7th NFC has not been matched by a commensurate improvement in service delivery, revenue mobilisation or local accountability. The World Bank’s observation that a very large share of expenditure has been absorbed by recurrent costs, particularly salaries, pensions and administrative spending, points to a familiar weakness in Pakistan’s public finance system. Incremental resources tend to be captured by the wage bill and politically protected expenditure long before they translate into better schools, clinics, municipal services, agricultural extension, sanitation systems or local infrastructure.
This pattern weakens the development case for devolution. The argument for provincial autonomy is strongest when proximity improves policy design, implementation and accountability. It becomes weaker when the provincial state behaves like a smaller version of the centralised federal state, retaining fiscal authority at the top while districts and local bodies remain dependent on discretion. Citizens do not judge fiscal federalism through vertical shares in the divisible pool. They judge it through the quality of everyday public services. On that measure, the post-2010 settlement has not delivered enough.
The revenue side remains equally problematic. Provinces have gained greater authority over important tax bases, particularly sales tax on services, but provincial own-source revenue effort remains limited. Agriculture income taxation, urban immovable property taxation and other provincial revenue instruments continue to perform below their potential. Political economy explains part of the failure. The bases that provinces are expected to tax often include influential local constituencies: landowners, property holders, urban elites and service-sector interests. A protected share of federal revenue is politically easier than a serious provincial taxation effort.
This weakness creates a lopsided form of fiscal autonomy. Provinces rightly insist on constitutional protection for their fiscal share, but autonomy cannot only mean receiving transfers from the federation. It must also involve taxing provincial bases, managing expenditure choices and accepting measurable responsibility for outcomes. A province that depends overwhelmingly on federal transfers while underusing its own tax instruments is not practicing mature fiscal federalism. It is operating within a transfer-dependent structure that limits both accountability and incentive for reform.
The fragmentation of tax authority has added another layer of difficulty. With tax bases divided across federal and provincial jurisdictions, businesses face compliance costs, classification disputes and administrative complexity. The issue has become particularly visible in sales tax on goods and services, where jurisdictional separation has often complicated rather than simplified taxation. A federal structure can accommodate multiple tax authorities, but only if laws, procedures, definitions, data systems and dispute-resolution mechanisms are properly coordinated. Pakistan has yet to build that level of administrative coherence.
The next NFC Award should therefore be framed less as a conventional fight over shares and more as a reform of incentives. Article 160(3A) restricts any reduction in the provincial share below the previous award, making a crude rollback politically and constitutionally difficult. More importantly, such a rollback would not address the underlying weakness. The more useful approach is to redesign the formula and accompanying fiscal framework so that transfers reflect expenditure needs, revenue capacity, revenue effort, fiscal discipline and service-delivery performance.
That will require better measurement. The current debate is still too dependent on aggregate claims about who receives how much. It needs to move toward clearer evidence on who is responsible for which function, how much each tier spends on that function, what outcomes are being achieved, and whether financing is reaching the level at which services are actually delivered. Without such information, NFC negotiations risk becoming another exercise in bargaining rather than reform. Pakistan needs a fiscal federalism framework that can distinguish between genuine need and habitual dependence, between equalisation and entitlement, and between autonomy and insulation from accountability.
Local government is central to this discussion. The 18th Amendment recognised the need for elected local governments, but the fiscal architecture below the provincial tier remains weak. Provincial Finance Commissions have not become regular, binding and credible instruments of fiscal distribution. Districts and local bodies remain exposed to provincial discretion, delayed transfers, weak own-source revenue powers and unstable institutional arrangements. In practice, devolution has too often stopped at the provincial capital.
A functional Provincial Finance Commission system should distribute resources to districts and local governments through transparent formula based on multiple criteria. Population, poverty, area, density, revenue capacity, service-delivery gaps and backwardness should all have a place in such formula. Performance indicators may also be useful, provided they are designed carefully and do not punish poorer districts for historical deprivation. The objective should be to create predictable local fiscal space while preserving incentives for better administration. Without such a framework, provincial governments will continue to receive the benefits of devolution while withholding its logic from the tier closest to citizens.
The federal government must also confront its own part of the problem. Complaints about the NFC are not credible if the centre continues to maintain expenditure in areas that have been devolved. Rationalising federal ministries, programmes and development schemes in transferred subjects is a necessary part of fiscal repair. The Centre should concentrate on genuinely federal responsibilities: macroeconomic stability, defence, foreign affairs, inter-provincial coordination, national infrastructure, regulatory standards and equalisation support. Continuing to operate parallel structures in provincial domains only deepens the imbalance that the federation now seeks to correct.
Short-term arrangements, such as provincial cash surpluses or reverse transfers, may help meet fiscal targets under stabilisation programmes, but they cannot substitute for structural reform. Pakistan has often relied on accounting adjustments to manage fiscal stress while postponing the institutional corrections that created the stress in the first place. The same risk applies here. If the next NFC discussion is reduced to extracting temporary fiscal relief for the federation, the larger reform opportunity will be lost.
The 18th Amendment and the 7th NFC Award were intended to move Pakistan toward a more balanced federation, but a federation cannot function on transfers alone. Money must be linked to responsibility. Responsibility must be linked to authority. Authority must be linked to accountability. Pakistan has strengthened the first link far more than the others. The World Bank report should therefore be treated as an opening for serious NFC reform, not as ammunition for another sterile contest between the federation and the provinces.
Copyright Business Recorder, 2026