By Sardar Khan Niazi

The World Bank’s latest report on Pakistan’s fiscal federalism has reopened an old but unavoidable debate: has the National Finance Commission (NFC) Award delivered on its promise of better governance, or has it merely redistributed resources without improving public services? The report argues that while the 18th Constitutional Amendment and the Seventh NFC Award represented historic progress in devolving authority to the provinces, the existing fiscal arrangement has created structural imbalances that now threaten macroeconomic stability and service delivery. This is not an argument against provincial autonomy. Rather, it is an argument for making devolution work as originally intended. The Seventh NFC Award fundamentally altered Pakistan’s fiscal architecture by increasing the provincial share in the divisible tax pool. Provinces gained substantial financial resources along with constitutional responsibility for sectors such as health, education and agriculture. The expectation was straightforward: decisions taken closer to citizens would improve governance, increase accountability and produce better social outcomes. Yet more than fifteen years later, the results remain mixed. The World Bank points out that provincial revenues increased significantly after the 2010 reforms, but federal expenses failed to adjust accordingly. The result has been persistent fiscal stress at the federal level alongside limited improvements in tax mobilization and public service delivery. Pakistan’s tax-to-GDP ratio remains among the lowest in comparable economies, while provincial governments continue to rely overwhelmingly on federal transfers instead of expanding their own tax bases through agriculture, property and other provincial taxes. Equally concerning is the spending pattern. According to the report, much of the additional provincial revenue has been absorbed by recurrent expenditures, particularly salaries and administrative costs, rather than investments in education, healthcare or local infrastructure. Local governments, which should form the third pillar of fiscal federalism, have steadily weakened, accounting for less than five per cent of total government expenditure today. These findings should not be interpreted as an indictment of devolution itself. International experience demonstrates that fiscal federalism can enhance efficiency and accountability when accompanied by strong institutions, clearly defined responsibilities and effective incentives. Countries such as Australia and Canada have developed transfer mechanisms that reward fiscal effort while addressing regional disparities. Pakistan’s challenge lies in incomplete implementation rather than flawed constitutional design. The forthcoming NFC Award presents an opportunity to move beyond the politics of percentage shares. Instead of focusing exclusively on how much each province receives, policymakers should ask how resources are utilized and what outcomes they produce. Fiscal transfers should increasingly reward improvements in provincial revenue collection, efficient public spending and measurable progress in health, education and local governance. Similarly, the federal government must undertake difficult reforms of its own. It cannot continue financing functions that have already been devolved while simultaneously complaining about shrinking fiscal space. Greater clarity in expenditure responsibilities would reduce duplication and improve accountability across all tiers of government. Political consensus will not be easy. The NFC Award has become one of Pakistan’s most sensitive constitutional arrangements, with provinces understandably reluctant to reopen settled questions of autonomy. However, refusing to discuss reform carries its own risks. Fiscal sustainability cannot be achieved if incentives remain misaligned and service delivery continues to lag despite increasing public expenditure. The World Bank’s recommendations should therefore be viewed as the beginning of a national conversation rather than a prescribed blueprint. External institutions can identify weaknesses and offer comparative experience, but lasting reform must emerge from domestic political consensus. Pakistan’s federal compact was designed to strengthen both democracy and development. That objective remains valid. The question today is not whether devolution should continue, but whether fiscal federalism can evolve from simply distributing money to rewarding performance, improving governance and delivering better lives for citizens. The next NFC Award should seize that opportunity. Otherwise, Pakistan risks repeating the familiar cycle of fiscal disputes without addressing the deeper governance failures that continue to undermine economic stability and public trust.