Pakistan’s federal fiscal system faces acute challenges as it negotiates the distribution of resources between the centre and provinces. On August 22, President Asif Ali Zardari constituted the 11th National Finance Commission (NFC), tasked with recommending the sharing of divisible revenues as per clause (3) of Article 160 of the constitution. The commission’s meetings will likely involve critical and complex negotiations.

Yet, the NFC debate often narrowly centres on revenue-sharing formulas, overlooking a fundamental flaw: without empowering local governments, Pakistan’s fiscal federalism remains dysfunctional and distant from its citizens’ needs.

Other reasons compound dysfunction. The 2010 NFC Award excluded key joint federal-provincial responsibilities – such as public debt and the electricity sector – which impose major fiscal costs and remain fully funded by the federal government. Fiscal resource devolution was also not aligned with devolved expenditure responsibilities.

A glaring symptom is the reporting of tax expenditures – revenues forgone through exemptions and concessions to select sectors and groups. The Ministry of Finance initially reported tax expenditures at a record Rs5.84 trillion ($21 billion), or 5.1 per cent of GDP, for the prior fiscal year. This figure was quietly revised down by Rs3.4 trillion to Rs2.43 trillion shortly afterwards, with the correction buried in an annexure of the Economic Survey of 2024-25 and no clear explanation provided. This inexplicable change, with a fiscal impact twice that of the Petroleum Development Levy (PDL), has attracted little public attention.

Mere adjustments to revenue shares cannot fix the deep fiscal dysfunction. As Dr Nadeem Ul Haque recently argued, Pakistan needs a comprehensive fiscal decentralisation programme that extends beyond federal-to-province transfers to address the critical gap: provincial-to-local devolution. True fiscal federalism requires all levels of government to have clear responsibilities, adequate resources and real authority.

Traditionally, federal tax revenues' divisible pool allocations have prioritised population, with some adjustments for poverty and regional development. These formulas, however, have failed to drive better public services. The current NFC........

© The News International