Rethinking the NFC

By: Danish Bhutto

Talk of amending the National Finance Commission Award has once again reached a crescendo in Pakistan’s policy discourse. This time, however, the chorus is louder, more deliberate, and troublingly political. What was once hailed as a landmark constitutional consensus ensuring fiscal equity between the centre and the provinces is now being repackaged as a fiscal constraint. The NFC Award, rather than being viewed as a reflection of cooperative federalism, is increasingly cast as a scapegoat for the state’s economic mismanagement and structural inefficiencies.

The 7th NFC Award, announced in 2009 and implemented in 2010, significantly increased the provinces’ share in the divisible tax pool to 57.5 percent. Anchored in Article 160 (3A) of the Constitution, this share cannot be reduced in subsequent awards. Yet despite notable economic, demographic, and structural changes, the Award has remained unrevised for over a decade. To do so every five years is a constitutional obligation that has been neglected for the sake of political convenience.

At the heart of the issue lies the Award’s flawed distribution formula. The current formula allocates 82 percent weight to population, a metric that rewards demographic expansion rather than developmental performance. This structure incentivizes provinces to inflate their population figures and discourages investment in education, healthcare, and revenue governance. With a national population growth rate of 1.6 percent and persistently high poverty levels, the formula promotes quantity over quality. The remaining components— poverty at 10.3 percent, revenue collection and generation at 5 percent (split equally), and inverse population density at 2.7 percent, fail to promote governance or accountability.

This formula has institutionalized complacency. Provinces, guaranteed a fixed share from the federal pool regardless of performance, have little incentive to broaden their tax bases or improve public service delivery. Provincial tax revenues remain alarmingly low, hovering between just 0.7 and 0.8 percent of national GDP. This reflects both administrative incapacity and political unwillingness to tax powerful lobbies at the provincial level.

Despite repeated IMF conditions for provinces to maintain significant annual cash surpluses, many have continued to expand their development budgets aggressively. Punjab’s development outlay for FY2024 stands at Rs 1.24 trillion, which is nearly 25 percent larger than the federal Public Sector Development Programme of Rs 1 trillion. Even resource-constrained Balochistan has allocated Rs 290 billion for development this year. Such financial behaviour reflects a troubling disconnect between fiscal responsibility and political expediency.

Moreover, the NFC structure fosters a system in which good governance is neither rewarded nor demanded. Between the 2023 and 2024 budgets, the provincial contribution to total revenues through own-source revenues declined from 15.4 percent to 14.8 percent. Meanwhile, spending on critical sectors such as health, education, and infrastructure continues to stagnate. The federal government, left with just 42.5 percent of the divisible pool, must shoulder disproportionately heavy responsibilities, including defence, debt servicing, energy subsidies, and social safety nets.

Importantly, this imbalance is not a result of provincial overreach. It was the outcome of a negotiated, unanimous agreement that embodied the political aspirations of a post-Musharraf Pakistan. The 7th NFC Award, alongside the 18th Amendment, symbolized a new vision for decentralized governance. To now portray it as a theft of federal prerogative is not only disingenuous, it is a distortion of recent political history.

That said, grievances with the formula are not without merit. It is outdated, and reform is long overdue. But reform must not be confused with reversal. Unfortunately, what we are witnessing today appears less like a rational re-evaluation and more like a veiled attempt to re-centralize authority, possibly through constitutional revision.

The ruling coalition, empowered by a controversial two-thirds majority in the National Assembly and poised for possible Senate dominance, is now positioned to amend even the most sacred constitutional safeguards. Among them is Article 160(3A), which protects the provincial share in the divisible pool. This manoeuvre seems less about addressing fiscal constraints and more about consolidating central authority.

The PPP, historically the principal architect of the 7th NFC Award and a vocal proponent of provincial rights, now finds itself under pressure. Political inducements and systemic coercion threaten to dilute its traditional stance. Though the party has long prided itself on defending the constitutional framework of provincial autonomy, even principled positions are vulnerable under sustained political strain.

At the same time, public disillusionment with provincial governance is real. Over the past 15 years, provinces, particularly those governed by entrenched political parties, have failed to translate increased fiscal space into measurable development outcomes. The result has been a steady rise in population, stagnation in social indicators, and unaccountable governance. The call to revisit the NFC formula, therefore, is not unjustified. But such an effort must be rooted in data, development, and decentralization, not in power politics.

There are some encouraging signs of macroeconomic stabilization at the federal level. The FBR’s AI-driven audit systems have reportedly increased tax recovery in sectors like sugar by 47 percent. The number of active tax filers has risen by 13 percent year-on-year. Innovations such as faceless customs assessments are improving compliance, while remittances and foreign investment are beginning to lift economic sentiment. Yet these gains must not come at the cost of constitutional equilibrium.

The solution lies in a restructured NFC framework, one that does not penalize provinces for their autonomy but compels them to perform. The formula must evolve to include indicators such as poverty reduction, provincial revenue mobilization, climate vulnerability, and genuine fiscal decentralization to the district level. These are the real metrics of governance, not crude population figures.

In sum, slashing provincial shares will not fix Pakistan’s fiscal mess. But redesigning the incentive structure might. The NFC needs reform, not reversal. Any attempt to centralize power under the guise of fiscal prudence must be recognized for what it is: a short-sighted move that risks eroding federal harmony and undermining democratic devolution.

Pakistan deserves a functional federation, one that rewards responsibility, fosters accountability, and remains true to the spirit of the Constitution. The NFC must not become collateral damage in the war for political control.

The writer can be reached at [email protected]