The debate over Pakistan’s fiscal federalism has once again come into focus following the World Bank’s latest assessment of the country’s public finance system. More than fifteen years after the landmark 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award transformed the distribution of financial resources between the federation and the provinces, an important question remains unanswered: has devolution actually delivered better governance and improved public services?
The constitutional reforms of 2010 represented one of the most significant shifts in Pakistan’s political and fiscal landscape. By abolishing the Concurrent Legislative List, the 18th Amendment transferred numerous functions—including health, education, agriculture, and social welfare—to the provinces. At the same time, the 7th NFC Award substantially increased the provincial share of federal tax revenues while introducing a more balanced distribution formula that considered poverty, backwardness, and revenue generation alongside population.
The objective was straightforward. Provinces were expected to assume greater responsibility for delivering public services, while increased financial resources would enable them to respond more effectively to local needs. The reforms sought to move Pakistan away from an overly centralized model of governance toward a more balanced federation where decisions would be made closer to the people they affected.
More than a decade later, however, the results remain mixed. While provinces have undoubtedly gained greater fiscal autonomy, the broader architecture of fiscal federalism remains incomplete. The World Bank’s findings suggest that Pakistan has successfully devolved financial resources but has failed to fully devolve responsibilities, accountability, and institutional reform.
One of the report’s most significant observations is the growing imbalance between the federation’s shrinking revenue base and its continuing expenditure obligations. Provincial revenues, including federal transfers, increased substantially after the NFC Award, rising from less than four percent of GDP to an average of around 6.5 percent over the 2010–2024 period. Yet the federal government did not reduce its own spending in proportion to the transfer of responsibilities.
This contradiction lies at the heart of Pakistan’s fiscal challenges. While the Centre transferred resources to the provinces, it continued financing ministries, departments, and development programmes in sectors that had already been constitutionally devolved. Rather than restructuring itself around genuinely federal responsibilities, the federal government largely retained its administrative footprint, resulting in overlapping functions, duplicated expenditures, and persistent fiscal pressure.
The problem, therefore, extends beyond the formula used to divide tax revenues. Fiscal federalism can only function effectively when financial resources are accompanied by clearly defined responsibilities and corresponding accountability. Without aligning expenditure assignments with constitutional responsibilities, increased transfers alone cannot eliminate inefficiency or improve governance.
Provincial governments must also accept a significant share of responsibility. Although they have benefited from larger fiscal transfers for over a decade, improvements in public service delivery have often fallen short of expectations. Much of the additional funding has been absorbed by recurrent expenditures, including salaries, pensions, and administrative costs, rather than translating into meaningful improvements in education, healthcare, sanitation, municipal infrastructure, or agricultural support.
This pattern has weakened the original rationale behind devolution. Provincial autonomy was intended to improve efficiency by allowing governments closer to citizens to make better policy decisions and respond more effectively to local challenges. Instead, many provincial administrations have replicated the same centralized governance model that they once criticized at the federal level.
Citizens rarely evaluate fiscal arrangements through constitutional provisions or revenue-sharing formulas. Their judgment is based on the quality of roads they travel, schools their children attend, hospitals they visit, clean water they receive, and municipal services they rely upon. By those standards, the promise of devolution remains only partially fulfilled.
Revenue generation presents another major weakness. Although provinces now control important tax bases, particularly the sales tax on services, their efforts to expand their own-source revenues have remained limited. Agriculture income tax, urban property taxation, and several other provincial taxes continue to generate far less revenue than their potential would suggest.
Political considerations largely explain this underperformance. Many of the sectors subject to provincial taxation are closely linked to influential economic and political groups. As a result, provincial governments often find it politically easier to depend on guaranteed federal transfers than to implement difficult but necessary tax reforms.
This dependence has created an imbalance within Pakistan’s federal structure. Fiscal autonomy cannot simply mean receiving a larger share of federal revenues. True autonomy also requires provinces to mobilize their own resources, manage expenditures responsibly, and accept accountability for policy outcomes. Without stronger provincial tax efforts, fiscal decentralization risks becoming a system of permanent dependence rather than genuine self-governance.
Businesses have also faced growing challenges arising from fragmented tax administration. The division of tax authority between federal and provincial governments has created overlapping jurisdictions, inconsistent procedures, and additional compliance costs. Sales taxation on goods and services, in particular, has become increasingly complex due to separate tax authorities operating under different rules and systems. Greater coordination, harmonized regulations, and integrated digital platforms are essential if Pakistan is to build a more efficient tax environment.
Looking ahead, the next NFC Award should focus less on renegotiating financial shares and more on improving incentives throughout the fiscal system. Given constitutional protections preventing reductions in provincial allocations, simply redistributing revenues is unlikely to resolve the country’s structural fiscal weaknesses. Instead, future transfers should increasingly reflect objective indicators such as expenditure needs, revenue effort, fiscal discipline, governance performance, and service delivery outcomes.
Such reforms require stronger data collection and transparent performance measurement. Policymakers need reliable information about which level of government is responsible for each public service, how efficiently resources are being spent, and whether those expenditures are producing measurable improvements for citizens. Without credible evidence, future NFC negotiations risk becoming political bargaining exercises rather than opportunities for meaningful reform.
Perhaps the most neglected element of Pakistan’s devolution process remains local government. Although the 18th Amendment recognized elected local bodies as an essential component of democratic governance, meaningful fiscal decentralization has rarely extended beyond provincial capitals. Provincial Finance Commissions remain weak, local governments possess limited financial authority, and resource transfers often depend on provincial discretion rather than transparent formulas.
Empowering local governments should become a central priority of future reforms. Resources should be distributed through predictable Provincial Finance Commission awards based on multiple indicators, including population, poverty, geographic size, infrastructure gaps, revenue potential, and development needs. Stable financial resources would enable districts and municipalities to deliver essential public services more effectively while strengthening democratic accountability at the grassroots level.
At the same time, the federal government must complete its own unfinished reform agenda. It cannot continue criticizing the financial consequences of the NFC Award while maintaining ministries, development projects, and administrative structures in areas that have already been constitutionally devolved. The Centre should concentrate on national responsibilities such as defence, foreign affairs, macroeconomic management, interprovincial coordination, national infrastructure, and regulatory oversight, leaving provincial functions to provincial governments.
Temporary fiscal arrangements—including provincial cash surpluses or one-off financial adjustments—may provide short-term budgetary relief, but they cannot substitute for comprehensive institutional reform. Pakistan’s recurring fiscal challenges reflect structural weaknesses that require long-term solutions rather than accounting measures.
The 18th Amendment and the 7th NFC Award fundamentally reshaped Pakistan’s federal system, but they represented only the beginning of a much larger reform process. Fiscal federalism cannot succeed through financial transfers alone. Resources must be matched with responsibilities, responsibilities must be supported by authority, and authority must be accompanied by accountability. Until these elements are fully aligned, Pakistan will continue struggling with inefficiencies, overlapping responsibilities, and uneven service delivery. The World Bank’s report should therefore be viewed not as an argument against devolution but as an opportunity to complete the unfinished project of building a stronger, more accountable, and genuinely federal state.