PLANNING Minister Ahsan Iqbal’s call for forward-looking reforms in the NFC Award has reopened an important debate on Pakistan’s fiscal architecture. The focus should now be on reshaping the revenue-sharing framework to ensure fiscal sustainability, reward performance and reflect changing economic realities. Highlighting the imbalance between federal responsibilities and fiscal capacity, Mr Iqbal cited budget figures to underscore the scale of the centre’s financial constraints. After transferring the provinces’ share from the divisible tax pool under the NFC Award, the centre is left with only enough money to finance debt servicing and defence expenditure. This forces the centre to rely on borrowing to fund essential functions such as pensions and social protection, perpetuating a cycle of rising debt and shrinking fiscal flexibility. However, the solution is not a reduction in the provincial share, which is constitutionally problematic and counterproductive. The 18th Amendment redefined the federal structure, transferring significant functional duties to the provinces along with corresponding fiscal resources. Undoing this arrangement would weaken provincial autonomy and risk destabilising the federation itself.

The solution lies in the expansion of the pie, not redistribution. Raising the tax-to-GDP ratio from 10.5pc to at least 18pc would dramatically expand fiscal capacity for both the centre and provinces. This requires structural tax reforms: broadening the tax base, eliminating exemptions and improving enforcement. Sustainable fiscal federalism must be accompanied by sustainable revenue generation. Also important is the need for expenditure reform at the federal level to ease pressure on public finances. At the same time, the centre must rationalise its institutional footprint by withdrawing from functions that the amendment devolves to the provinces. Beyond vertical distribution, Mr Iqbal’s proposal to reform the horizontal distribution formula among the provinces merits consideration. The current formula assigns overwhelming weight to population size and poverty levels, which weakens incentives for the provinces to improve social outcomes and boost their own revenue effort. A progressive formula should have performance-based indicators, such as poverty reduction, population control, tax effort, human development improvements and climate resilience. The NFC framework must adapt to reflect new realities but reform must be guided by the principle of cooperative federalism to strengthen the federation rather than force a zero-sum redistribution.

Published in Dawn, March 2nd, 2026