FEDERATIONS devolve power constitutionally across state tiers. They ensure equity via fiscal transfers from rich to poor sub-units. Devolution makes power responsive. Equity cements national bonds despite diversity. Both together ensure peace and progress. Budgets help review both.
We give 57.5 per cent of federal taxes to the provinces. But once we count all revenues and provincial surpluses, the figure falls near 40pc, lower than in most large developing states. The transfers do raise equity as Balochistan’s per capita budget is now about Rs70,000 and Punjab’s about Rs45,000. But Balochistan is still the poorest unit after 16 years of devolution. We must study Australia’s unique system that ensures that each state has funds for similar services in line with local needs. Equity is also about which sub-units fund others. Rough data suggests only Sindh may be doing so (mainly due to Karachi). Punjab may be in deficit despite being the richest, biggest and strongest unit. So, the 82pc weight for population in NFC Awards must be cut in favour of poverty.
Our centre, provinces and local bodies spend about 70pc, 25pc and 5pc of all state outlays. The mean federal share among peer states is about 50pc. So, we are among the less devolved states and our federal share is rising despite devolution. The centre’s own funds after provincial transfers just cover debt and defence outlays; it borrows 35-40pc more for other outlays.
Our ratios of debt (45pc) and defence (15pc) spending in federal outlays exceed those of most of our peers but those of social outlays and tax-to-GDP are lower. Even so, the fiscal deficit and Rs1.7 trillion that the provinces gave up can be covered by raising GDP growth to generate more taxes. We must also cut some of the Rs5.8tr worth of tax exemptions and subsidies, the nearly Rs800 billion that loss-making state units bleed, and hundreds of billions of waste in state outlays. These inherent ills cause deficits. But, because they serve their interests, our rulers want to, instead, buck the global trend towards fiscal devolution.
We must raise more taxes progressively.
Federal transfers fund about 80pc to 84pc of the budgets of Sindh, Punjab and Balochistan; 90pc of KP’s budget, and 95pc of the Gilgit-Baltistan and Azad Kashmir budgets. Hence, critics say the provinces don’t raise enough taxes. However, the biggest tax heads lie with the centre to enable transfers from rich to poor units. Hence, the funds going to the provinces aren’t really the centre’s own. This skewed revenue ratio is misleading. While some say it can be fixed by giving more tax heads to the provinces, this would sacrifice equity. Studies show provinces can raise Rs1-2tr more taxes via more effort; but the centre can raise Rs4-6tr more. Most provincial-level revenues come from indirect taxes — about 50pc from sales tax on services. So, nearly 65-70pc of revenues at all levels come via anti-poor, indirect levies. Agricultural taxes in land-rich Punjab and Sindh provide only 2-3pc of provincial revenues and 7-9pc in KP and Balochistan.
Social sectors (health, education, development, social protection, etc) consume around half of the provinces’ outlays. While a new World Bank report says that 75pc of the spending is for current costs such as salaries, many say that the salaries of direct service providers, including school and health staff, should be seen as programme costs. The value of these outlays is unclear as our social indicators haven’t improved much since 2008, more so in Sindh and Balochistan despite their higher per capita budgets.
Even in big cities, our local bodies don’t have sufficient taxation and collection powers and their dependence on often opaque provincial transfers is up to 90pc. Provincial entities often usurp their functions and funds. Lack of data constrains deeper analysis. Islamabad has the most fiscally devolved and functionally integrated system and its results show. Even then, it needs an elected set-up running development and other areas. Many states constitutionally protect the mandates, funds and functions of even local bodies.
Our federation finances exhibit low efficiency, effectiveness and equity. To fix these gaps, we must raise more taxes progressively; improve the accountability and outcomes of all outlays via transparent data sharing; increase fiscal devolution and pro-poor outlays; tie federal transfers more closely to needs and outcomes; ensure all rich units contribute fairly; and constitutionally protect the mandates, funds and functions of local bodies. We need legitimate and empowered set-ups to effect such big changes.
The writer holds a PhD in political economy from the University of California, Berkeley, and has 25 years of grassroots to senior-level experience across 50 countries.
Published in Dawn, July 7th, 2026