The federal government recently faced challenges in securing budget approval, largely due to IMF conditions and disputes with provinces over tax revenue distribution. Since the 18th Amendment, provinces have received a larger share of national resources, while the federal share has declined, creating ongoing tension. Before this budget, no significant progress was made on a new National Finance Commission (NFC) award. For the first time, provinces helped the federal government meet expenses through grants, as it struggles with defence and debt-related costs. To enable this, cuts were made in provincial Annual Development Programmes (ADPs), with Punjab facing the largest reduction, followed by Sindh and Khyber Pakhtunkhwa.
World Bank Report Highlights Spending Patterns
The 18th Amendment, NFC Award, and provincial finances are again at the centre of national debate, partly due to the World Bank report “Strengthening Fiscal Federalism in Pakistan”. The report states that after the NFC Award, provinces received greater financial resources, but a large portion was spent on government expenses, salaries, and pensions rather than development. Current expenditure averaged 75% of total provincial spending. Between fiscal year 2009 and 2023, nearly 82% of additional resources transferred to provinces went into current expenditure, driven by higher spending on salaries and pensions.
Development Spending Trends
On development spending, the report notes that between 2009 and 2023, provincial development expenditure increased by around 60% in real terms, but remained a limited part of overall spending. Development expenditure was 19% of total provincial spending in 2009, rose to 31% in 2017, then declined to 23% by 2023. In contrast, real provincial spending on salaries increased by 250%, and spending on pensions and retirement benefits rose by 330% over the same period. Thus, a major part of additional resources after the NFC Award was absorbed by salaries and pensions instead of development projects.
Reducing Provinces' Share: A Solution?
The report strengthens the impression that provincial funds were not spent on development as expected, leading to debate on reviewing the NFC Award. However, the key question is whether reducing provinces’ share and increasing the federal share will solve the Centre’s problems. Giving more money to the federal government does not automatically lead to development projects across the country. The real need is to transfer authority further down to the local level, empower local governments, and strengthen accountability and oversight systems. Only then can public money be spent where needed most and produce real results.
Tax Reforms and Revenue Challenges
Both the federal government and provinces need serious tax collection reforms. Provinces, like the Centre, have failed to expand the tax base. Agriculture tax is a clear example: provincial governments collected only Rs5.62 billion out of Rs306 billion declared by taxpayers, less than 2% of declared agricultural income. In a country with a tax-to-GDP ratio around 10% and a weak tax base, resource distribution issues will persist. Expenditure will continue to rise, but revenue will not keep pace.
Way Forward: Governance Over Formulas
The World Bank report is likely to fuel debate on constitutional amendments and NFC Award changes. But unless basic reforms are carried out, changes in constitutional formulas alone will not produce desired results. The debate on resource distribution should not become a tug-of-war between the federal government and provinces. Its real purpose should be better governance, transparent spending, stronger local governments, and improved public services. Increases in salaries and pensions may have provided relief to government employees during high inflation, but that cannot substitute for development, service delivery, and structural reform.
