New formula aims to ease federal fiscal strain and reward revenue performance
Centre Prepares Push for Redistribution as NFC Meets Today
Ahead of the maiden session of the new National Finance Commission, the federal government has floated multiple proposals that could reshape Pakistan’s fiscal landscape.
Planning Minister Ahsan Iqbal has recommended options that would reduce provincial shares—particularly for Punjab and Sindh—while increasing allocations for smaller provinces, including Balochistan and Khyber-Pakhtunkhwa (K-P).
The proposals, shared with Prime Minister Shehbaz Sharif, introduce major adjustments to both vertical and horizontal distributions of resources. These include upfront federal deductions from the divisible pool and a reweighted formula prioritizing revenue generation and social indicators.
KP Demands Nearly 20 Percent Share After Tribal Merger
K-P has insisted that its NFC share should increase by 6 percent, rising from around 14.62 percent to close to 20 percent, citing the financial burden of integrating the formerly FATA tribal districts.
The federal proposals, however, project a more modest rise—between 1 percent and 3 percent—depending on which formula is adopted. Under all options, K-P gains some ground but falls significantly short of its stated demand.
Despite receiving an additional one percent share over the years as compensation for the war on terror—estimated at Rs700 billion since 2010—the federal side argues that improvements in policing, safety, and post-conflict recovery remain “largely unrealized.”
Provinces Hesitant to Accept Revenue Cuts
According to background discussions, provinces have signaled resistance to any reduction in revenue shares, even though they showed mild willingness to share some federal expenses.
A Planning Ministry report notes that provincial tax efforts remain notably low, contributing only 1.1 percent of the national GDP. The Centre argues this has created a culture of dependency, leaving provinces vulnerable whenever federal revenue fluctuates.
Vertical Cuts: 4.7 to 6 Percent Proposed for Federal Needs
To ease federal fiscal pressure, two vertical reduction options have been proposed:
- 4.7 percent upfront deduction for war on terror, water security, civil armed forces, and special regions.
- 6 percent deduction covering the Benazir Income Support Programme and the Higher Education Commission.
If applied, the federal share could be 12 percent higher by 2030 compared to the baseline scenario under the 7th NFC Award.
Horizontal Distribution: Punjab Likely to Lose Most
In the revamped horizontal formula, population weight may drop from 82 percent to as low as 60 percent, with greater emphasis on revenue generation, fertility rates, forest cover, and inverse population density.
Across the three main scenarios:
- Punjab loses up to 10 percent
- Sindh faces a smaller reduction
- K-P gains between 1 and 2.6 percent
- Balochistan gains up to 3 percent
- Islamabad Capital Territory may receive up to 5 percent for the first time
The shift is designed to reward fiscal effort, ecological contribution, and social outcomes, not merely population.
Why This Matters: Stability, Resource Equity, and Fiscal Survival
Fiscal experts argue that rebalancing the NFC Award is not simply a reform push—it is a structural necessity.
The federal government faces heavy obligations: defence, debt servicing, strategic subsidies, water security, and climate resilience projects. Without adequate federal capacity, national stability becomes increasingly fragile.
At the same time, provinces insist that reducing their shares could cripple essential services. The tension underscores a larger debate:
Should Pakistan incentivize self-reliance at the provincial level or preserve the comfort of guaranteed federal transfers?
The answer will shape not only intergovernmental relations but also the balance of power within the federation.