The Next NFC Debate

August 11, 2026 (MLN): Pakistan has spent years debating how national tax revenues should be divided between the federation and the provinces. But perhaps we have been asking the wrong question. The real issue is not who gets a larger share under the National Finance Commission (NFC) Award.

The real issue is whether Pakistan's system of fiscal federalism is helping the country achieve stronger economic growth, healthier public finances and better public services.

This debate has gained fresh momentum following the World Bank's recent report on Pakistan's fiscal federalism.

The report acknowledges that the 7th NFC Award was a landmark reform that strengthened provincial autonomy after the 18th Constitutional Amendment. At the same time, it argues that Pakistan's fiscal framework now needs to evolve to respond to a very different set of economic realities than those that existed when the Award was introduced (World Bank, Reimagining Fiscal Federalism for Better Service Delivery and Economic Growth in Pakistan, 2026).

The 7th NFC Award was undoubtedly one of the most significant fiscal reforms in Pakistan's history.

By increasing the provincial share in the divisible pool from 46.5 percent to 57.5 percent, it fundamentally reshaped the country's fiscal architecture. It also broadened the distribution formula beyond population to include poverty, revenue generation and inverse population density, making the allocation of resources more balanced and equitable (7th NFC Award, 2009).

The reform achieved exactly what it was intended to achieve. Provinces were given greater financial autonomy and greater constitutional responsibility for delivering education, healthcare, agriculture, local government and several other public services.

But sixteen years is a long time in economic policymaking. Pakistan today is confronting an entirely different economic landscape. The country has faced repeated balance of payments crises, multiple IMF programs, devastating floods, rising debt servicing costs, persistent energy sector losses and prolonged periods of weak economic growth.

According to the Pakistan Economic Survey 2025–26, debt servicing has become the single largest component of federal expenditure, leaving increasingly limited fiscal space for development spending (Pakistan Economic Survey 2025–26).

These developments do not diminish the importance of the 7th NFC Award. They simply underline the fact that every major reform must evolve with changing economic realities. Fiscal federalism cannot remain static while the economy around it continues to change. Unfortunately, much of today's debate remains confined to percentages.

Should the federation receive a larger share? Should provinces retain the existing 57.5 percent allocation? These are legitimate questions, but they are not the questions that will determine Pakistan's economic future.

The more important question is this: What should Pakistan expect from its fiscal federal system? Should it merely divide revenues between different tiers of government? Or should it also strengthen fiscal sustainability, improve public services, encourage provincial tax reforms and support long-term economic growth? That is where the next NFC debate should begin.

The Limits of Revenue Sharing

The first generation of Pakistan's fiscal federalism was about decentralization. The second generation must be about performance.

The original purpose of decentralization was to bring government closer to the people. Provinces were expected to understand local priorities better than the federal government and therefore deliver public services more effectively.

The transfer of greater financial resources was meant to improve governance, not simply expand provincial budgets. To a considerable extent, the financial decentralization objective was achieved.

According to the World Bank, provincial revenues and expenditure increased from less than 4 percent of GDP before the 7th NFC Award to an average of around 6.5 percent of GDP during 2010–2024, giving provinces significantly greater fiscal capacity (World Bank, 2026).

Yet decentralization is not an end in itself. It is successful only if it produces better outcomes for citizens. This is where the debate becomes more complex. Despite receiving substantially larger fiscal transfers over the past decade and a half, Pakistan continues to struggle with weak learning outcomes, uneven healthcare services, inadequate municipal infrastructure, water shortages and slow improvements in human development.

According to the UNDP Human Development Report 2025, Pakistan continues to rank well below many comparable economies on key human development indicators despite higher public spending (UNDP Human Development Report 2025).

This does not imply that provinces alone are responsible for these shortcomings. Population growth, macroeconomic instability, climate disasters and institutional weaknesses have all affected development outcomes. Nevertheless, taxpayers have every right to ask a simple question.

What has Pakistan achieved with the additional fiscal space created by the 7th NFC Award?

Surprisingly, this question receives far less attention than discussions about revenue sharing. The World Bank's findings make this question even more relevant. While provincial expenditure has increased significantly since the 7th NFC Award, more than 80 percent of provincial expenditure in FY2023 was devoted to recurrent spending, including salaries, pensions and operating costs, leaving relatively limited fiscal space for development and service improvements (World Bank, 2026).

At the same time, another important trend has received little public attention. Despite greater fiscal decentralization, the share of local governments in total public spending has declined from around 10 percent in 2005 to below 5 percent in 2024, raising fresh questions about whether resources are reaching the level of government closest to citizens (World Bank, 2026). These figures do not argue against fiscal decentralization. They argue for making decentralization more effective.

The World Bank also highlights another structural issue that deserves much wider public debate. While provinces have received a substantially larger share of nationally collected taxes, the expenditure responsibilities of the federal government have not declined proportionately. Defence, debt servicing, national security, higher education, major infrastructure, disaster response and several national programs continue to remain federal responsibilities (World Bank, 2026). As a result, Pakistan faces what economists describe as a vertical fiscal imbalance.

Simply put, the federal government continues to finance many of the country's largest expenditure obligations while retaining a comparatively smaller share of nationally collected revenues. As debt servicing continues to rise, this structural mismatch has become increasingly difficult to sustain.

This should not be interpreted as an argument for weakening provincial autonomy. Rather, it is an argument for modernizing Pakistan's fiscal federalism so that both the federation and the provinces share responsibility for maintaining fiscal sustainability.

Another equally important issue is provincial revenue mobilization. Fiscal federalism rests on two equally important principles: greater autonomy and greater responsibility. While provinces now receive 57.5 percent of the divisible pool, their own-source revenues remain modest relative to the scale of transfers they receive.

Agriculture contributes more than one-fifth of Pakistan's GDP, yet agricultural income taxation remains significantly below its potential. Urban property taxation also remains underdeveloped by international standards (World Bank, 2026). The objective should not be to reduce provincial resources.

The objective should be to strengthen provincial financial independence. A province that finances a larger share of its own expenditure becomes more accountable to its own citizens, less dependent on Islamabad and better positioned to invest in infrastructure, education, healthcare and economic development. The next NFC debate should therefore move beyond the question of how much provinces receive and begin asking how provinces can generate greater economic value from the resources they already receive.

Why Performance Must Matters

Equally important is the issue of accountability. For too long, public debate has measured the success of the NFC Award by one indicator alone: how much money is transferred to the provinces. Yet money is only an input. The real measure of success is what that money delivers.

• Have children learned more in public schools?
• Have public hospitals improved patient outcomes?
• Has access to safe drinking water expanded?
• Are cities becoming cleaner, more efficient and more liveable?
• Has agricultural productivity increased?
• Are provinces attracting greater private investment and creating more jobs?

These are the questions that ultimately matter to citizens. Pakistan now needs to move from revenue sharing to results-based fiscal federalism. This requires a fundamental change in the way fiscal performance is measured. Instead of evaluating provinces primarily on the basis of expenditure, Pakistan should establish a National Fiscal Performance Framework under the NFC.

Every province should publish an independently audited Annual Fiscal Performance Scorecard measuring agreed indicators such as own-source revenue growth, student learning outcomes, primary healthcare performance, development project completion, investment facilitation, water resource management, digital governance and climate resilience.

These scorecards should be presented annually before the Council of Common Interests, debated publicly and made available to citizens. Transparency itself can become a powerful driver of reform.

The next NFC Award should also introduce a bold but practical innovation. Without disturbing the constitutional distribution formula or reducing the overall provincial share of 57.5 percent, up to five percent of future NFC transfers could be allocated through a Performance Incentive Window.

Provinces that achieve pre-agreed targets in revenue mobilization, education, healthcare, investment promotion, export growth, digital governance and timely completion of development projects would receive additional incentive-based transfers.

This proposal would not weaken provincial autonomy. Nor would it alter constitutional rights. Instead, it would reward good governance, encourage healthy competition and create incentives for provinces to improve performance rather than merely increase expenditure.

Learning from Global Experience

Pakistan would not be venturing into unfamiliar territory. Successful federations around the world have demonstrated that fiscal autonomy and fiscal discipline can coexist.

Australia combines generous intergovernmental transfers with strong fiscal accountability and independent monitoring of public finances. Canada provides extensive provincial autonomy while maintaining robust fiscal responsibility frameworks. Germany's constitutional "debt brake" imposes borrowing discipline on both the federal and state governments.

In India, every Finance Commission reviews revenue-sharing arrangements periodically while increasingly emphasizing fiscal responsibility, tax effort and public finance reforms alongside equity.

None of these federations treats fiscal federalism as a static formula. They treat it as a living system that evolves with changing economic realities, institutional capacity and development priorities. Pakistan should adopt the same philosophy.

Making Fiscal Federalism Work Better

The next phase of fiscal federalism should also encourage provinces to become engines of economic growth rather than primarily recipients of federal transfers. Every province should compete to attract investment, promote exports, simplify business regulations, improve logistics, strengthen technical education and expand employment opportunities.

Provinces that build efficient institutions and business-friendly environments will naturally generate higher revenues, reduce dependence on transfers and improve living standards. Healthy competition among provinces can become one of Pakistan's greatest economic strengths.

Climate change adds another compelling reason to rethink the NFC framework. The devastating floods of 2022 demonstrated that climate resilience is no longer simply an environmental issue; it is a fiscal and economic imperative. Water scarcity, urban flooding, coastal erosion and extreme weather events are placing increasing pressure on provincial budgets.

Future NFC arrangements should therefore create incentives for investment in resilient infrastructure, watershed management, disaster preparedness, climate-smart agriculture and urban flood protection.

Fiscal federalism must evolve to finance tomorrow's challenges, not merely yesterday's priorities. Another reform deserves equal attention. Pakistan has not had a new NFC Award for many years, despite repeated changes in the economy.

Fiscal arrangements should not remain unchanged for long periods while economic conditions continue to evolve. A future NFC framework should therefore require an independent review every five years, even if the constitutional formula remains unchanged.

Such a review should assess whether transfers are improving fiscal sustainability, strengthening provincial tax effort, enhancing service delivery and supporting national economic objectives. Regular evidence-based reviews would make fiscal federalism more adaptive and forward-looking.

The Way Forward

The next NFC Award should therefore pursue five measurable reforms.

First, establish a Performance Incentive Window by allocating up to five percent of future NFC transfers against agreed performance indicators while preserving the constitutional provincial share.

Second, require every province to publish an independently audited Annual Fiscal Performance Scorecard, enabling citizens to evaluate governments on results rather than spending alone.

Third, introduce a mandatory five-year independent review of the NFC framework so that fiscal arrangements evolve with changing economic realities instead of remaining static.

Fourth, create incentives for provinces to strengthen agricultural income taxation, urban property taxation, digital tax administration and other own-source revenues so that greater autonomy is matched by greater fiscal responsibility.

Finally, establish a transparent National Fiscal Dashboard that publicly tracks province-wise performance on revenue mobilization, education, healthcare, investment climate, climate resilience, development expenditure efficiency and local government empowerment. These reforms would preserve the constitutional principles of the NFC Award while making fiscal federalism more responsive to Pakistan's economic realities.

The debate should therefore no longer be reduced to a contest over percentages. The real challenge is not how national revenues are divided. The real challenge is how public money can generate stronger growth, better governance and better lives for Pakistan's citizens.

The 7th NFC Award successfully delivered the first generation of fiscal federalism by strengthening provincial autonomy. The next NFC Award should deliver the second generation by strengthening performance, accountability and competitiveness. Pakistan does not need to choose between provincial autonomy and fiscal sustainability. It needs a framework that delivers both.

That is why the next NFC debate should move beyond revenue sharing and begin focusing on nation building. Only then can Pakistan's fiscal federal system become not merely a mechanism for distributing resources, but a catalyst for sustainable growth, stronger institutions and shared national prosperity.

About Author:

The writer, Shahid Anwar, is an Economic Analyst and former Secretary General of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI).

He has also served as Senior Director Research at the Institute of Cost and Management Accountants of Pakistan (ICMAP).

Disclaimer:

The above analysis/article is for informational and educational purposes only.

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