Budgetary outcomes of provincial govts

The four Provincial governments of Pakistan combined account for a sizeable part of the consolidated public expenditure along with the Federal Government. The year, 2025-26, saw a total public expenditure of Rs 23,087 billion, with the total expenditure by the Provincial governments at Rs 8,627 billion. If, however, the debt servicing by the Federal government of Rs 6,947 billion is excluded, then the share of the Provincial governments in the costs of provision nationally of services rises to 53.4 percent.

Therefore, it needs to be appreciated that the budgetary performance of the Provincial governments is crucial from the viewpoint of provision and quality of basic services like education, health, irrigation, road networks, water supply, and sanitation.

The fiscal year, 2025-26, is also a year of significance. This is the year when the consolidated budget deficit of the Federal and Provincial governments was brought down to a record low level of 2.6 percent of the GDP, from a relatively high level of 5.4 percent of the GDP in 2024-25. The question is what was the magnitude of the contribution of the Provincial governments to this quantum reduction in the budget deficit?

The analysis is undertaken of the budgetary outcome initially of the four Provincial governments combined, followed by an assessment of the performance of each Provincial government.

The four Provincial governments have jointly put up a relatively good performance in tax revenue mobilization in 2025-26. Own tax revenues have shown a big increase of 23.5 percent. This is substantially better than the growth in federal tax revenues of only 10 percent. The consequence is that the provincial tax-to-GDP ratio has finally approached 1 percent of the GDP, from close to 0.8 percent of the GDP in 2024-25.

However, the provincial tax system remains too dependent on one revenue source: the sales tax on services. It contributed over 64 percent to the total provincial tax revenues in 2025-26. Other potentially progressive and high-yielding taxes like the agricultural income tax, capital value tax on property and the urban immovable property tax remain grossly underdeveloped.

The IMF Programme projections indicate that in 2026-27 Provincial tax revenues should reach 1.4 percent of the GDP. This will facilitate the expansion in coverage and improvement in quality of basic services.

The non-tax revenue component of revenues of the Provincial governments remains small at Rs 471 billion in 2025-26. However, the good news is that over 50 percent growth has been shown in these revenues by the four Provincial governments combined in 2025-26. There are still significant potential additional revenues from irrigation charges and highway tolls.

Overall, the year 2025-26 has witnessed some reduction in the dependence of Provincial governments on federal NFC transfers, grants and loans. The share of total federal transfers in provincial revenues has come down from 86 percent to under 84 percent. This process must continue in coming years.

Turning to the expenditure side, there is another positive outcome. The share of development expenditure in total expenditure of the four Provincial governments combined has increased from 27.5 percent to over 31 percent. There has been some containment of the growth rate in current expenditure to under 7 percent, while development expenditure has been increased by almost 23 percent.

The consequence of the relatively fast growth in provincial revenues and containment of current expenditure increase is a quantum jump of over 57 percent in the overall cash surplus of the four Provincial governments combined. It stands at 1.3 percent of the GDP in 2025-26 as compared to 0.8 percent of the GDP in 2024-25. This has made a significant contribution to the reduction in the consolidated budget deficit. However, bulk of the improvement has been due to a quantum decline in the federal budget deficit.

We now look at the salient features of the performance on the fiscal front by each Provincial government.

The primary feature of the performance by the Government of Punjab is a quantum jump in the cash surplus from Rs 348 billion in 2024-25 to Rs 914 billion in 2025-26, implying a growth rate of over 162 percent. This has been achieved primarily by a restriction in current expenditure increase to 8 percent and a jump in own revenues by 35 percent. Effectively, 63 percent of the overall Provincial cash surplus has been generated by the Government of Punjab.

The Government of Sindh has shown an increase of 25 percent in own-revenues. In fact, currently, it has the highest level of tax revenues from provincial taxes at Rs 593 billion, as compared to Rs 496 billion by the Government of Punjab.

The growth in current expenditure has been limited to only 6 percent and funds diverted to development spending, which increased by 28 percent by the end of 2025-26. Overall, there has been an increase in the cash surplus of the Government of Sindh by 24 percent.

The performance of the Government of Khyber-Pakhtunkhwa has been somewhat limited. Provincial tax revenues have declined by 1 percent. An even bigger fall is observed in federal grants and loans of 11 percent and only 2 percent increase in NFC transfers. It is not clear why the NFC transfer to Khyber-Pakhtunkhwa has such low growth rate when overall the increase is 12 percent.

The same policy of restricting current expenditure growth to only 2 percent, coupled with a big jump in development spending of 35 percent, has been followed. Overall, there has been a drop of 7 percent in the cash surplus.

The same problem is observed in the budgetary process of the Government of Balochistan with a big drop in federal grants and loans by 32 percent and only 2 percent increase in NFC transfers. There has been moderate growth in own-revenues and in both current and development expenditure. The end result is a big contraction in the cash surplus of 82 percent.

The outcome in 2025-26 reveals that the gap in the fiscal performance between the two larger Provincial governments of Punjab and Sindh and the two smaller Provincial governments of Khyber-Pakhtunkhwa and Balochistan is widening. This implies that regional inequalities could increase further in Pakistan.

We come now to the financial implications of the proposal under discussion of more provincial governments. The first observation is that with the labour-intensive nature of services provided by these governments, the employee-related expenses are already relatively large at 2312 billion rupees in 2015-26, as compared to Rs 1033 billion by the federal government. This has seldom been highlighted before.

Further, the total payments on employee retirement benefits of the four Provincial governments combined are as much as Rs 1141 billion. This is higher than the cost of pensions to the federal government of Rs 1001 billion.

Consequently, if more Provincial governments are established then there is the risk of an exponential jump in current expenditures on running of government operations and down the road on pensions. This will increase the risk simultaneously of a cut in national development spending and a return to larger consolidated budget deficits.

Copyright Business Recorder, 2026