Arshad Mahmood Awan
The inaugural discussions on the 11th National Finance Commission (NFC) Award have revealed three major takeaways that are likely to define the federal-provincial fiscal landscape in the coming years. First, the federal government has presented an ambitious revenue mobilisation plan aimed at increasing consolidated revenues by over 5 percent of GDP over the next three years. This plan envisions the Federal Board of Revenue (FBR) raising its tax collection by 3 to 3.5 percentage points, lifting the overall tax-to-GDP ratio to 13 percent. Meanwhile, the provinces are expected to improve their own revenue collection from the current 0.28 percent to 3 percent of GDP, primarily through more effective taxation of services, property, and farm income. This push for higher revenues reflects the centre’s growing fiscal pressures and its desire to regain financial stability amid rising expenditure demands.
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The second key takeaway relates to the provinces’ stance on expenditure disclosure. During the discussions, the provinces refused to share detailed data on their spending on legal and technical grounds. Sindh, in particular, argued that the NFC is a forum for determining the vertical and horizontal division of tax resources, not a mechanism for the federal government to dictate provincial spending. Implicitly, the provinces have also signaled opposition to proposals suggesting that they contribute to federal programs such as the Benazir Income Support Programme (BISP) and the Higher Education Commission (HEC). This position underscores the ongoing tension between the centre and provinces over fiscal autonomy and constitutional safeguards enshrined in previous NFC Awards.
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The third major point emerging from the first NFC meeting concerns Khyber Pakhtunkhwa’s (KP) request for an increased share from the federal divisible pool. The demand follows the merger of the former Federally Administered Tribal Areas (FATA) with KP, which has substantially raised the province’s fiscal requirements. In response, a working group has been established to evaluate the merger’s impact on the provincial budget and to determine additional financial needs under the 11th Award. While there was no discussion of reducing other provinces’ shares, the centre took the opportunity to highlight its long-standing fiscal constraints. Since the finalisation of the seventh NFC Award, which reduced the federal share around 15 years ago, the average annual federal fiscal deficit has increased from 4 percent to nearly 7 percent of GDP, according to government figures.
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The timing of these discussions is politically sensitive. The 11th NFC talks are occurring amid efforts by the federal government to challenge the constitutional protections granted to provinces under the NFC framework. Reports indicate the centre is exploring mechanisms to regain control over areas such as population management and education, potentially through a proposed 27th Amendment. These moves reflect a broader attempt to reverse aspects of the seventh NFC Award, which had shifted significant financial and administrative powers to the provinces. The centre’s position suggests that while it is participating in the NFC process, it continues to seek avenues to expand its fiscal and policy control.
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In practice, the federal government has already resorted to indirect taxation to supplement its revenues. Levies on petroleum products, gas, and other items outside the divisible pool have been used to meet spending requirements without sharing proceeds with the provinces. However, these measures have proven insufficient to cover the centre’s growing expenditures. As a result, the government is now aiming to increase revenue through the divisible pool itself, either by raising the federal share or by transferring significant spending responsibilities to the provinces. This strategy reflects a delicate balancing act, where the centre seeks greater fiscal space without outright reducing provincial entitlements.
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Despite the cordial atmosphere of the maiden NFC meeting, there is no guarantee that disagreements will not escalate in subsequent rounds. The provinces are determined to maintain their constitutional rights, while the centre is clearly motivated to address its fiscal squeeze and assert greater control over nationwide expenditures. Future negotiations are likely to involve intense debate over revenue targets, expenditure responsibilities, and the allocation formula, particularly in light of KP’s additional requirements after the FATA merger.
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Analysts note that the outcome of these discussions will have broader implications for Pakistan’s fiscal federalism. If the centre succeeds in increasing its share or shifting expenditure obligations to provinces, the NFC framework could undergo a fundamental transformation, potentially undermining the financial autonomy of the federating units. Conversely, a strong provincial stance could reinforce constitutional safeguards and prevent any unilateral moves by the federal government. The 11th NFC Award, therefore, is not just a technical exercise in revenue sharing but a critical test of centre-province relations in Pakistan’s federation.
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The discussions also highlight the growing importance of revenue mobilisation and fiscal prudence in Pakistan’s governance. Both the centre and provinces face mounting expenditure pressures, including social welfare programs, education, and infrastructure development. Successful implementation of the proposed measures, including enhanced provincial taxation and federal revenue drives, will be crucial in stabilising the fiscal situation. Moreover, transparency in provincial expenditures and careful negotiation on divisible pool allocations will remain central to achieving a sustainable fiscal balance.
In conclusion, the first round of the 11th NFC Award talks has set the stage for complex negotiations over revenue, expenditure, and fiscal authority. The federal government is pursuing ambitious revenue targets while highlighting its fiscal constraints, the provinces are asserting their constitutional rights, and KP seeks additional support after the FATA merger. The outcomes will have far-reaching implications for Pakistan’s fiscal federalism and governance, making the 11th NFC Award a critical juncture in the country’s fiscal and political evolution.
