As Pakistan enters another budget season, public attention is once again focused on the federal budget. Television debates will dissect taxation measures, IMF targets, fiscal deficits, public debt and federal development spending. Analysts will scrutinise every number presented by the finance minister, while political parties will argue over who bears the burden of adjustment.
Yet, increasingly, the most important fiscal story lies elsewhere. Over the past decade, provincial governments have quietly become central players in Pakistan’s fiscal architecture. They are no longer merely implementing agencies dependent on federal transfers. They are major spenders, significant contributors to fiscal consolidation and, increasingly, the principal financiers of public development expenditure. As provincial budgets are announced this month, they deserve far greater scrutiny than they typically receive.
The timing is particularly important. Discussions surrounding the 18th Amendment and the NFC Award have once again resurfaced in policy circles. These debates often focus on how much money provinces receive from the federation. Far less attention is paid to what provinces do with these resources and how their fiscal behaviour affects Pakistan’s broader macroeconomic stability.
A review of fiscal trends over the past five years reveals a striking reality: provincial budgets have become indispensable to Pakistan’s fiscal consolidation efforts.
The transformation began gradually. During the Covid-19 period, provincial governments not only maintained fiscal discipline but also expanded development spending. In FY2020, provincial development expenditure reached Rs622 billion, exceeding federal PSDP spending of Rs468 billion. In FY2022, provincial development spending grew by an extraordinary 58 per cent and became the primary driver of public investment growth in the country. While federal development spending was constrained by fiscal pressures, provinces carried much of the burden of sustaining public investment.
The devastating floods of 2022 interrupted this trajectory. Provincial governments faced enormous expenditure pressures related to rehabilitation, health, education, local infrastructure and disaster response. Development spending slowed and fiscal surpluses weakened. Yet even during this difficult period, provincial finances remained critical to overall fiscal management.
The most remarkable transformation has occurred over the last two years. In FY2024, provinces generated a combined surplus of more than Rs518 billion. During the first nine months of FY2025, that surplus exceeded Rs1 trillion. These are not merely accounting statistics. They have become central to Pakistan’s macroeconomic stabilisation strategy.
The federal government’s fiscal framework increasingly assumes that provinces will generate substantial surpluses. These surpluses reduce the consolidated fiscal deficit, support IMF programme targets, limit government borrowing requirements and help contain inflationary pressures. Put differently, Pakistan’s fiscal consolidation efforts are no longer solely a federal undertaking. They increasingly depend on provincial fiscal discipline.
What is often overlooked, however, is that provincial fiscal performance is no longer driven solely by federal transfers. Provincial revenue collection has shown notable improvement in recent years. Provincial tax revenues grew by 15.2 per cent during the first nine months of FY2021, 18.4 per cent during FY2022, 19.3 per cent during FY2024 and more than 24 per cent during the first nine months of FY2025. Much of this growth has come from the sales tax on services, motor vehicle taxes, and improvements in provincial tax administration.
These figures remain modest compared to federal collections, but they demonstrate that provinces are beginning to play a larger role in domestic resource mobilisation. This is an important shift because Pakistan’s fiscal debate often portrays provinces as passive recipients of NFC transfers rather than active fiscal actors.
Indeed, the revenue side of provincial budgets deserves far more attention than it currently receives. Provincial budget discussions tend to focus on expenditure allocations – how much will be spent on education, health, agriculture or roads. Equally important is the question of how these commitments will be financed. Sustainable development requires not only spending capacity but also revenue capacity.
Yet provincial finances continue to reveal a significant structural weakness. Despite improvements in tax collection, roughly four-fifths of provincial revenues still originate from federal transfers through the NFC framework. Provincial own-source revenues remain modest relative to their expenditure responsibilities.
This creates an important paradox. Provinces often demand greater fiscal space and autonomy, yet their own revenue systems remain underdeveloped. Provincial tax revenues have grown, but provincial taxation still contributes only a small fraction of GDP. In practice, devolution has transferred substantial expenditure responsibilities to provinces without a corresponding strengthening of provincial revenue bases.
The challenge is not just technical but political. Many of the most important sources of potential provincial revenue – property taxation, agricultural income taxation, urban service charges and local levies – remain politically sensitive. Provincial governments frequently find it easier to rely on federal transfers than to undertake reforms that may face resistance from influential constituencies.
This is where the current debate on the NFC Award and the 18th Amendment risks becoming incomplete.
Fiscal federalism is not simply about how resources are distributed between the federation and provinces. It is also about whether provinces are using their constitutional authority to strengthen their own fiscal foundations. Discussions about resource sharing should therefore be accompanied by serious conversations about provincial revenue mobilisation, expenditure efficiency and fiscal accountability.
The upcoming provincial budgets provide an opportunity to move this conversation forward.
Several questions deserve close attention. First, are provinces continuing to generate large surpluses, and if so, how? Are these surpluses the result of stronger revenues and improved efficiency, or are they being achieved through delayed development spending?
Second, what is happening to provincial development budgets? Provinces now account for a substantial share of public investment. The composition and quality of that spending matter enormously for long-term growth, productivity and competitiveness.
Third, are provinces taking meaningful steps to strengthen their own revenue bases? The future sustainability of devolution depends not only on federal transfers but also on the willingness of provinces to mobilise resources from property taxation, agricultural income taxation, urban taxation and service charges.
Fourth, how are provinces preparing for mounting expenditure pressures arising from population growth, urbanisation, climate change and increasing demand for public services?
Finally, how are provinces balancing fiscal prudence with developmental ambition? Pakistan undoubtedly requires fiscal consolidation, but it also needs investments in human capital, infrastructure, climate resilience and productivity enhancement. Provincial governments increasingly sit at the centre of this balancing act.
The tendency to treat provincial budgets as secondary documents is becoming increasingly outdated. In many respects, provincial budgets now tell us more about Pakistan’s developmental trajectory than the federal budget itself. They reveal where schools will be built, which hospitals will be funded, how local infrastructure will be maintained and whether provincial governments are willing to undertake difficult fiscal reforms.
As budget season unfolds, attention will naturally remain focused on Islamabad. Yet policymakers, economists, investors and citizens would do well to look beyond the federal budget speech. The future of Pakistan’s fiscal consolidation agenda – and indeed much of its development agenda – will depend not only on decisions taken in the federal capital but also on those taken in Lahore, Karachi, Peshawar and Quetta.
The debate over the 18th Amendment and the NFC Award should therefore move beyond the narrow question of who receives what share of national resources. The more important question is whether provinces are using those resources effectively, investing them productively and building the revenue systems necessary to sustain devolution in the long run.
The era when provincial budgets were merely an administrative afterthought is over. They now influence Pakistan’s fiscal deficit, borrowing requirements, IMF commitments, public investment levels and service delivery outcomes.
The writer is a research fellow at the Sustainable Development Policy Institute (SDPI), Islamabad.
