Arshad Mahmood Awan
The World Bank’s recent report on fiscal federalism in Pakistan deserves a debate more serious than the one usually offered in political shorthand. Too often, discussions of the 18th Amendment and the National Finance Commission Award collapse into a simple contest over percentages, who gets how much, rather than a genuine reckoning with whether the system actually works. The post-2010 fiscal settlement was, without question, a meaningful shift in the country’s federal architecture. It widened provincial fiscal space, gave constitutional backing to devolution, and pulled Pakistan away from an overly centralised model of public finance. But the report also points to something harder to dismiss: the fiscal structure built after the 7th NFC Award remains half finished, unevenly applied, and only loosely connected to actual outcomes.
The logic behind the original arrangement was sound enough. If provinces were to take on major expenditure responsibilities, then a bigger share of the divisible pool needed to travel with those responsibilities. The 18th Amendment did away with the Concurrent Legislative List and handed a wide range of functions to the provinces. The 7th NFC Award then increased the provincial share of federal tax revenue and adjusted the distribution formula so it relied less exclusively on population. On paper, this was meant to bring expenditure authority closer to the level of government actually delivering services to citizens.
What followed on the ground told a different story. Provinces did gain a larger fiscal share, but the federal government never scaled back its own spending to match the functions it had handed over. The World Bank’s figures make the imbalance plain: provincial revenues, transfers included, climbed from under 4 percent of GDP to an average of 6.5 percent between 2010 and 2024, yet federal expenditure did not fall in any comparable way. The Centre gave up revenue space without ever restructuring its own spending obligations. Ministries, programmes and financial commitments in areas that were supposed to be devolved, or that overlap with provincial responsibility, were never seriously rationalised. What Pakistan is left with is a federal government still fiscally overstretched, even as it operates on a smaller revenue base after transfers.
This is not a problem that can be pinned on the NFC formula alone. It reflects an unfinished job on the administrative and expenditure side of devolution. No revenue-sharing arrangement, however generous, can fix blurred lines of responsibility. If the federation keeps financing work that should belong to the provinces, and provinces keep leaning on federal transfers instead of owning the fiscal responsibility that comes with devolved functions, the system will go on producing deficits, duplication and gaps in accountability. The real issue, then, is not the size of the provincial share. It is the missing link between function, financing and performance.
Provinces, for their part, have little reason to feel satisfied either. The extra fiscal room created by the 7th NFC has not translated into a matching improvement in service delivery, revenue collection or local accountability. The World Bank notes that a very large share of provincial spending has gone toward recurrent costs, above all salaries, pensions and administrative overheads, a pattern familiar to anyone who has watched Pakistan’s public finances over the years. New resources tend to get swallowed by the wage bill and politically protected spending long before they reach better schools, clinics, sanitation, agricultural extension or municipal infrastructure.
This weakens the very case for devolution. Provincial autonomy makes the strongest sense when being closer to citizens improves how policy is designed, delivered and held accountable. It makes far less sense when provincial governments start behaving like miniature versions of the centralised federal state, hoarding authority at the top while districts and local bodies remain starved of resources and discretion. People do not experience fiscal federalism through vertical shares of the divisible pool. They experience it through whether the local school has teachers, whether the clinic has medicine, whether the street gets cleaned. On that measure, the post-2010 settlement has fallen well short.
The revenue side of the ledger is no better. Provinces now control important tax bases, sales tax on services being the most significant, yet their own revenue effort remains modest. Agricultural income tax, urban property tax and other provincial instruments continue to underperform relative to their potential. Part of the explanation is political. The people and sectors provinces are meant to tax, landowners, property holders, urban elites, service providers, tend to carry real political weight. Accepting a protected share of federal transfers is simply easier than confronting these constituencies directly.
The result is a lopsided version of fiscal autonomy. Provinces are right to want constitutional protection for their share of resources, but autonomy cannot mean transfers alone. It has to include taxing provincial bases properly, making real expenditure choices, and accepting measurable responsibility for results. A province that depends heavily on federal transfers while leaving its own tax tools underused is not practising fiscal federalism in any mature sense. It is simply operating inside a transfer-dependent system that dulls both accountability and the incentive to reform.
Add to this the fragmentation of tax authority itself. Dividing tax bases between federal and provincial governments has left businesses dealing with compliance headaches, classification disputes and administrative confusion, particularly around sales tax on goods versus services. A federal system can certainly manage multiple tax authorities, but only when laws, definitions, procedures, data systems and dispute mechanisms are properly coordinated across them. Pakistan has not yet built that coordination.
The next NFC Award, then, should be approached less as a bargaining session over percentages and more as an opportunity to fix incentives. Article 160(3A) already rules out any reduction in the provincial share below the previous award, so a crude rollback is neither politically feasible nor constitutionally simple. In any case, a rollback would not touch the actual problem. What is needed instead is a redesigned formula, one that ties transfers to expenditure needs, revenue capacity, revenue effort, fiscal discipline and service delivery performance, alongside a local government financing system strong enough to carry devolution all the way down to the district, where citizens actually live and where public services are actually judged.
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