Zafar Iqbal
The Budget Impasse: A Constitutional Crisis in the Making
Budget delays are nothing unusual in Pakistan. Competing lobbies, rival priorities, and the perennial struggle to balance a shrinking fiscal pie have long made the annual budget exercise a messy and drawn-out affair. But the current impasse is different in kind, not merely in degree. It signals a constitutional and political crisis that the federal government is struggling to contain, even as it remains reluctant to acknowledge the real nature of the problem.
The immediate cause is not hard to identify. Islamabad wants the provinces to freeze their share from the federal tax divisible pool under the National Finance Commission award. Any provincial receipts exceeding the current year’s level would be returned to the centre. This demand is not a replacement for the Rs1.95 trillion cash surplus that provinces are already required to generate under the National Fiscal Pact. It comes on top of that obligation. The provinces, unsurprisingly, are resisting. And they are right to do so.
The reason the centre finds itself in this desperate position is not some structural flaw in the NFC award. It is the federal government’s own failure to expand the tax net and grow revenues from a broader base. Pakistan is also operating under the IMF programme’s strict conditionalities, which require it to maintain a primary surplus and keep expenditures tightly controlled. But when defence spending remains untouched and civil service perks remain intact, the government is left with only one lever to pull: squeeze the provinces. That is precisely what it is doing.
The federal government’s broader narrative, that the existing NFC award is the primary driver of its fiscal distress, does not hold water. The divisible pool, from which provinces receive their constitutionally mandated share, does not include the petroleum levy or the many other surcharges and special levies that the centre collects outside this pool. GST on petroleum products was deliberately replaced by a levy for this exact reason: so that it would not have to be shared. By steadily expanding the domain of non-shareable levies over the years, the centre has grown its own independent fiscal base while publicly lamenting what it calls an unfair NFC distribution. This is not a fiscal grievance. It is a fiscal strategy dressed up as one.
The burden being placed on the provinces is also distorting provincial development. Their requirement to generate cash surpluses to help Islamabad meet IMF targets is compressing provincial development budgets at a time when public services and infrastructure desperately need investment. Pakistan’s debt crisis was not caused by higher provincial transfers. It was caused by chronic under-taxation, reckless devaluation, and serial borrowing over decades. None of these failures have anything to do with how the divisible pool is distributed between the federal government and the provinces.
It is only fair to acknowledge, however, that the revenue failure is not the centre’s alone. Large segments of the Pakistani economy remain effectively outside the tax system. Agriculture, retail, real estate, and influential professional groups such as lawyers and doctors contribute only a negligible fraction of their genuine tax potential. This is a deep structural problem. Squeezing existing taxpayers harder or clawing back provincial resources will not resolve it. No revision of the NFC formula, however politically convenient it may be to propose one, can substitute for the hard work of broadening the tax base.
What is truly at stake, though, goes beyond provincial shares or budget arithmetic. The seventh NFC award and the Eighteenth Amendment together represent one of Pakistan’s most significant constitutional achievements. They are not merely a financial arrangement between levels of government. They embody a hard-won political consensus about the nature of the federation, the autonomy of federating units, and the relationship between the centre and the provinces. That consensus took years to build. Dismantling it, even gradually and under the cover of fiscal necessity, will have consequences that outlast this government, this budget season, and this IMF programme.
A federation that systematically undermines provincial autonomy to cover for its own fiscal mismanagement is not strengthening itself. It is hollowing itself out. The provinces of Pakistan are not subordinate administrative units of the federal government. They are constitutional partners in the federation. Treating them as revenue sources to be tapped whenever Islamabad overspends is not governance. It is an abdication of governance.
The federal government faces a genuine choice. It can confront the structural issues holding back economic growth and tax compliance, and do the difficult political work of bringing untaxed sectors into the net. Or it can continue on its current path: squeezing compliant taxpayers, undermining provincial finances, and offering the IMF the appearance of fiscal discipline while storing up deeper institutional damage for the future. One path is hard but necessary. The other is convenient but corrosive.
History will not be kind to a government that chose to weaken the constitutional foundations of the federation rather than fix the underlying causes of its fiscal weakness. The budget impasse must be resolved. But it must be resolved on constitutional grounds, not by pressuring provinces into surrendering rights they hold under a legitimate NFC award. That is the line that must not be crossed.
(The writer is a governance analyst and founder of Republic Policy Think Tank. republicpolicy.com)
