Agha Sanaullah: Fiscal federalism forms the bedrock of governance in any federation, determining how financial resources are raised, shared, and spent to foster balanced development and social equity. In Pakistan, this relationship is constitutionally mediated through the National Finance Commission (NFC) Award, a mechanism designed to rectify both vertical imbalances between the federal and provincial governments and horizontal disparities among the provinces themselves. While the NFC Award represents a vital instrument for devolution and provincial autonomy, a critical examination reveals that its promise of equitable resource distribution is persistently undermined by deeper, systemic flaws in the country’s fiscal governance.
The NFC Award has, over successive iterations, progressively increased the provincial share in national revenues, thereby strengthening fiscal decentralization. This shift has the potential to improve public service delivery by bringing resources closer to the people. However, the effectiveness of these transfers is contingent upon a healthy national fiscal environment—a condition Pakistan has rarely met. The nation’s fiscal narrative is characterized by structural weaknesses that choke the system at its source. A chronically narrow tax base, heavy reliance on regressive indirect taxation, and inefficient revenue mobilization by the Federal Board of Revenue (FBR) mean that the total pool of resources available for distribution is perpetually insufficient. Consequently, even a well-intentioned NFC Award framework operates within a system of scarcity, limiting its capacity to achieve genuine equity.
“Hidden Deficits” and Contingent Liabilities
Beyond revenue inadequacy, the expenditure side of the fiscal equation presents an equally formidable challenge. A significant portion of the federal budget is consumed by non-development expenditure, most notably debt servicing and defense. This leaves limited fiscal space for development spending, which is crucial for long-term economic growth and for addressing regional inequalities. The paper notes that the fiscal year 2024–25 saw a nine-year low in the consolidated budget deficit, partly due to provincial surpluses. However, this superficial stability masks the underlying reality that the cost of servicing past debt continues to crowd out investments in the human and physical infrastructure needed to level the playing field among provinces.
A major contribution of the research is its identification of “hidden deficits” and contingent liabilities as critical yet often overlooked sources of fiscal stress. Beyond the conventional budget deficit, factors such as off-budget expenditures, subsidies to loss-making public sector enterprises, and implicit guarantees for future
Cycle of Short-Term Fixes Rather Than Long-Term Solutions
obligations create a precarious financial reality. This lack of transparency in accounting for risks—from natural calamities to the collapse of state-owned corporations—exposes the federation to unpredictable fiscal shocks. The failure to consolidate and disclose these contingent liabilities means that the true scale of fiscal vulnerability is rarely debated in parliament or understood by the public, perpetuating a cycle of short-term fixes rather than long-term solutions.
To break this cycle, the paper argues for a fundamental shift from one-dimensional, crisis-driven fiscal management to a multi-dimensional, institutionally anchored approach. It recommends a suite of reforms that move beyond the NFC Award itself to strengthen the entire fiscal ecosystem. Key among these are the establishment of an Independent Fiscal Council (IFC) to provide unbiased analysis of fiscal policy and budget assumptions, thus reducing political discretion and enhancing evidence-based decision-making. Furthermore, it calls for strengthening the Medium-Term Budgetary Framework by linking it to Public Service Agreements (PSAs) that tie resource allocation to measurable outcomes, ensuring that provincial transfers under the NFC Award translate into tangible improvements in education, health, and infrastructure.
In conclusion, the National Finance Commission Award is an essential but insufficient instrument for achieving fiscal equity in Pakistan. Its effectiveness is inextricably linked to the overall health of the nation’s public finances. As the research paper demonstrates, persistent issues such as a narrow tax base, unsustainable debt service, and opaque contingent liabilities undermine the very resources that the NFC Award is meant to distribute equitably. Moving forward, the focus must broaden from negotiating provincial shares to implementing deep-rooted institutional reforms. By enhancing revenue mobilization, ensuring fiscal transparency, and prudently managing debt and liabilities, Pakistan can create an environment where the NFC Award can fulfill its constitutional promise—fostering a resilient, balanced, and truly equitable federation.
