Centre vs provinces

DELAYS in budget announcements are normal. After all, it is not easy to satisfy different lobbies competing for a bigger share of the shrinking fiscal pie. But the current impasse is of a different order. It signifies a constitutional and political crisis that the government is struggling to contain. The immediate cause is clear, even if the government is reluctant to state it openly.

Islamabad wants the provinces to freeze their share from the federal tax divisible pool under the NFC award, returning any receipts above the current year’s level to the centre. This demand comes over and above the Rs1.95tr cash surplus that provinces are required to produce under the National Fiscal Pact.

The provinces are resisting the pressure. The reason the centre finds itself in this position is rooted in its failure to expand the tax net and boost revenues. That Pakistan is operating under the IMF programme’s strict conditions, requiring it to maintain a primary surplus and contain expenditures, is another reason. Meeting those targets while not touching defence spending and civil service perks intact leaves only one lever: squeeze the provinces.

The federal government’s broader narrative that the existing NFC award is the primary driver of its fiscal distress does not hold water. It excludes the petroleum levy and every other surcharge collected outside the divisible pool. GST on petroleum products was replaced by a levy precisely so that it would not have to be shared with the provinces.

By expanding non-shareable levies over the years, the centre has grown its own fiscal base while publicly lamenting its reduced NFC share. The provinces’ requirement to produce cash surpluses to help Islamabad meet key IMF targets is limiting provincial development spending.

Pakistan’s debt crisis was not triggered by higher provincial transfers, but by chronic under-taxation, reckless devaluation and serial borrowing — which have nothing to do with how the divisible pool is distributed.

However, the revenue failure is not the centre’s fault alone. Large parts of the economy — agriculture, retail, real estate, professionals like lawyers and doctors, etc — effectively remain outside the tax system, contributing only a negligible fraction of their potential to tax revenues. This is a structural issue that no NFC revision can resolve.

What is at stake, however, goes beyond provincial shares. The seventh NFC award and 18th Amendment are not merely about financial arrangement or devolution. They represent a constitutional guarantee of autonomous federating units and a stronger federation.

The undoing of this consensus will have an impact that will outlast this government and the IMF programme. The government can either address the structural issues holding back economic growth or continue to squeeze compliant taxpayers and claw back resources from the provinces.

Published in Dawn, June 10th, 2026