Sajjad Munir

Pakistan’s fiscal policies, particularly those regarding the distribution of national resources, have long been a subject of debate. Recently, Minister for Finance Muhammad Aurangzeb made a significant proposal during a meeting on the National Health and Population Policy for 2025-34. He advocated for reducing the weightage of population in the National Finance Commission (NFC) award, which currently stands at an overwhelming 82 percent. This allocation leaves just 18 percent to account for other critical factors such as area, poverty, and revenue generation capacity. The proposal sheds light on the inherent imbalance in the distribution of resources and underscores the pressing need for fiscal reform that addresses not only the economic but also the environmental and social challenges the country faces.

The NFC award plays a pivotal role in determining how resources from the divisible pool of taxes are distributed between Pakistan’s federal government and its provinces. At present, a staggering 82 percent of the allocation is based on population alone, leaving only 18 percent for other crucial factors such as backwardness (poverty), revenue generation, and area. The result is a fiscal imbalance that disproportionately benefits the more populous provinces while exacerbating the difficulties faced by smaller or less developed regions.

The problem becomes more apparent when we consider the fact that Pakistan’s population continues to grow at an unsustainable rate. This rapid growth places immense pressure on the country’s already overstretched healthcare, education, and infrastructure systems. The growing population not only strains the capacity of public services but also makes it increasingly difficult for the government to adequately meet the basic needs of its citizens, including access to food, shelter, clean water, and energy. Additionally, a larger population contributes to ecological degradation, increases the risks of large-scale natural disasters, and exacerbates issues related to law and order.

By assigning a disproportionate weightage to population, the current NFC framework exacerbates these challenges. Pakistan’s rising population becomes both a cause and effect of the country’s growing fiscal woes. The current system rewards population size without taking into account the ability of provinces to manage the resources effectively. As the population increases, the already fragile system becomes more vulnerable to economic, social, and environmental stress.

The weightage system in the NFC award, which favors population, was solidified during the Seventh NFC Award in December 2009. This award was the product of intense negotiations between Pakistan’s two major political parties: the Pakistan People’s Party (PPP) at the center and the Pakistan Muslim League-Nawaz (PML-N) in Punjab. After considerable debate, the parties agreed to reduce the population share from 100 percent to 82 percent. The remaining allocation was split between backwardness (10.3 percent), revenue generation (5 percent), and inverse population density (2.7 percent). This formula was controversial and is still contested by various political and economic stakeholders.

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Subsequent finance ministers, including Ishaq Dar, who was involved in negotiating the Seventh NFC Award, have criticized the distribution framework. They argue that the population-centric allocation has severely hindered the federal government’s ability to meet its annual expenditures, leading to a significant increase in the country’s debt burden. However, this critique overlooks a crucial aspect: the passage of the 18th Constitutional Amendment in 2010, which devolved various subjects, including education and healthcare, to the provinces. This decentralization process, intended to give provinces more autonomy, has not been fully realized, and provinces still do not have full control over these essential sectors. This discrepancy has created a situation where the federal government continues to bear a disproportionate share of the financial burden, despite the promise of devolved responsibilities.

Given the demographic pressures Pakistan faces, a recalibration of the NFC award’s allocation is urgently needed. The proposal to reduce the weightage of population in the NFC award is a step in the right direction. A more balanced approach would take into account not only population size but also factors such as the economic capacity of the provinces, their levels of poverty, and their ability to generate revenue. By shifting some of the weight away from population, this new formula would allow the government to better allocate resources where they are most needed, rather than simply rewarding population size.

For instance, provinces that struggle with poverty and have a smaller tax base should receive more support to help them build their infrastructure and improve the standard of living for their citizens. Meanwhile, larger, wealthier provinces should be held more accountable for their own revenue generation and expenditure management. This approach would incentivize provinces to improve their fiscal management and create more sustainable economic systems.

Furthermore, this shift would help address environmental and ecological concerns. As larger provinces consume more resources due to their size and population, the environmental impact of their activities increases. By factoring in environmental sustainability and disaster preparedness into the NFC formula, Pakistan could take proactive steps to mitigate the effects of climate change and safeguard its future.

The devolution process, initiated through the 18th Constitutional Amendment, remains incomplete. Although various sectors such as education, healthcare, and agriculture were devolved to the provinces, they still do not have full control over these critical areas. This incomplete devolution has led to an inefficient allocation of resources, with the federal government continuing to bear the burden of managing devolved sectors.

The ongoing International Monetary Fund (IMF) program, which aims to reduce the federal workforce and streamline ministries, presents an opportunity to accelerate the devolution process. However, this is a challenging task. While some progress has been made in reducing the size of the federal bureaucracy, powerful labor unions and political resistance from within the federal government make it difficult to achieve significant change.

Moreover, the federal government’s rising expenditures have been a major source of concern. In the 2024-25 budget, current expenditures were increased by a staggering 21 percent from the previous year, despite the country’s narrow fiscal space. This rise in spending, particularly on defense and debt servicing, has led to a growing fiscal deficit. In an effort to bypass the divisible pool, the federal government has also introduced taxes such as the petroleum levy, which are technically outside the scope of the NFC award but still contribute to the overall fiscal imbalance.

The key to addressing Pakistan’s fiscal challenges lies in improving the devolution process and holding provinces more accountable for their revenue generation and expenditure management. Provinces must be encouraged to generate their own revenue through effective tax collection mechanisms and encouraged to invest in sustainable development practices. The federal government’s role should be limited to defense and debt servicing, with the latter gradually decreasing as borrowing is reduced.

To make this system work, the federal government must demonstrate fiscal discipline and commit to reducing unnecessary expenditures. The rise in current expenditures, which outpaces the country’s fiscal capacity, must be reined in to ensure long-term economic stability. Additionally, there must be a stronger focus on effective governance and transparency at the provincial level, where resource allocation and implementation often falter.

Accordingly, Pakistan’s fiscal system, particularly the NFC award, is in dire need of reform. Reducing the weightage of population in the award formula is a necessary step toward achieving a more balanced and equitable distribution of resources. This reform should go hand in hand with the completion of the devolution process, which will empower provinces to manage their own resources effectively.

Moreover, Pakistan must adopt a more sustainable approach to fiscal responsibility, where the federal government reduces its expenditures and focuses on its core functions. By aligning the NFC award with the economic realities of the country, Pakistan can create a more efficient and equitable fiscal system that addresses the challenges of population growth, poverty, environmental degradation, and fiscal imbalances. Only then can the country build a foundation for long-term economic prosperity and stability.