Can the 11th NFC Bake a Bigger, Fairer Pie?

The federal government has finally constituted the 11th National Finance Commission (NFC), setting in motion a process that will redefine the fiscal relationship between Islamabad and the provinces. On paper, the NFC is meant to be a formula-driven exercise for distributing resources under the Constitution’s Article 160. In practice, it has become one of Pakistan’s most politically charged negotiations, where questions of equity, autonomy and national cohesion intersect with the harsh realities of fiscal constraints.

Fifteen years ago, the 7th NFC Award marked a historic shift. It tilted the balance in favor of the provinces, increasing their share from 47.5% to 56% in 2010–11 and to 57.5% from 2011 onwards, along with additional special allocations for Khyber Pakhtunkhwa and Balochistan. Post-18th Amendment, this made sense. The provinces were tasked with major service delivery responsibilities—education, health, social protection—while Islamabad retained debt servicing, defence, and trans-provincial infrastructure under its belt.

That bargain has held for over a decade, largely because successive governments failed to achieve consensus on the 8th, 9th, and 10th NFCs. Each of these commissions ended inconclusively, which means the 7th Award, originally designed as a bold decentralisation step, continues to be extended annually by presidential orders. In practice, inconclusive awards freeze the existing distribution formula, preventing adjustments to reflect new fiscal realities and socio-economic shifts, as evident from the latest HDI numbers. As a result, the system has ossified: the Centre continues to complain of squeezed fiscal space, while provinces guard their shares fiercely, leaving the federation stuck in a cycle of status quo and mistrust.

The 11th NFC enters at a moment of acute fiscal stress. The federal government is grappling with a debt burden that consumes the bulk of its budget—around Rs 9 trillion was spent on interest payments, according to consolidated fiscal operations for FY 24-25—while defence, pensions and subsidies absorb much of what remains. The current fiscal framework operates as a ‘closed loop’: the federal government raises regressive taxes and transfers funds to provinces, which post surpluses; yet federal borrowing persists, fuelling fiscal repression and hampering growth. Public debt remains unsustainable, locking Pakistan in a structural trap that demands a radical fiscal redesign to break the cycle of perpetual consolidation.

For a government negotiating yet another IMF program, fiscal space is a luxury. It is no surprise that the new Terms of Reference (TORs) hint at an Islamabad eager to claw back resources ceded in 2010. Among the proposals under consideration: provinces contributing to federal disaster relief, financing national projects that have provincial spillovers and even earmarking funds for Gilgit-Baltistan and Azad Jammu & Kashmir—regions that currently lie outside the NFC framework.

The subtext is clear. The centre wants to reclaim ground without amending Article 160(3A), which explicitly bars reducing the provincial share below 57.5%. If special allocations continue for Khyber Pakhtunkhwa, Balochistan and Sindh, the effective provincial share already edges close to 59%. For Islamabad this is untenable, given the austerity we are in. For the provinces, it is non-negotiable. The battle lines are being drawn.

Both sides have valid grievances. Islamabad argues that it shoulders the cost of debt servicing, national security and mega projects, which provinces ultimately benefit from. It also funds social protection programs like the BISP at a federal scale. Provinces counter that they cannot be asked to underwrite federal inefficiencies, particularly when Islamabad persists with wasteful expenditures and populist subsidies. They also accuse the centre of shifting its crisis onto them by tightening provincial cash balances and imposing levies such as the petroleum development levy, which is outside the divisible pool. What was envisioned as a partnership is now a zero-sum contest.

This tug-of-war misses the point: Pakistan’s fiscal dysfunction is structural. The pie is too small and both tiers of government are trying to eat from the same shallow dish. The real issue is not how the existing resources are sliced, but how to enlarge the pie in the first place. Here, both federal and provincial governments have failed spectacularly.

The system remains riddled with exemptions for the politically powerful: real estate, agriculture and wholesale trade operate like tax havens in plain sight. Instead of expanding the base, policymakers have leaned on indirect taxation, which now accounts for over half of federal revenues. This is not just inefficient; it is inequitable. Sales taxes and petroleum levies punish the poor while sparing the rich, entrenching a Gini coefficient that has barely budged in 40 years.

Global experience tells a different story. Brazil’s Bolsa Família and Mexico’s Prospera programs demonstrate that progressive taxation coupled with targeted social transfers can shrink inequality and foster growth. Pakistan, by contrast, redistributes upward. Rather than a bottom-up approach, aid mostly flows top-down, benefiting elites. Development budgets skew towards urban showcase projects, neglecting rural education and health. Fiscal federalism was supposed to correct these imbalances; however, the NFC formula remains shackled to population as its primary criterion, 82% under the 7th Award, rewarding demographic inertia rather than human development or revenue effort.

If the 11th NFC is to be more than a political charade, it must break this cycle. We need a performance-based framework. Population can no longer be the sole proxy for need. Poverty reduction, revenue mobilisation, environmental sustainability and gender equity must enter the calculus. As per SDPI, a phased recalibration—cutting population weight to 50% over three cycles while raising incentives for tax effort and social outcomes—could nudge provinces towards responsible governance. Equalisation grants for lagging regions can cushion transitional shocks, ensuring that fiscal justice does not become a synonym for fiscal chaos.

But reform cannot be one-sided. Islamabad must abandon the temptation to re-centralise by stealth. Ring-fencing funds for Gilgit-Baltistan and AJK are a legitimate national obligation, but it cannot come at the cost of constitutional guarantees. Nor can provinces treat autonomy as a shield for complacency. They must tap underexploited revenue streams—property taxes, agricultural income tax and services—rather than depending on blanket transfers. Both tiers must commit to pruning waste. The federal sprawl of ministries and departments in devolved sectors is indefensible; so is provincial extravagance on perks and pet projects.

Furthermore, given these challenges, a comprehensive fiscal decentralisation program is essential, one that goes beyond federal-provincial revenue sharing to include provincial-to-local devolution. Local governments should receive direct, predictable revenue flows, possess authority over local taxes and fees and incorporate citizen feedback mechanisms to ensure accountability. Both conditional and unconditional grants should be employed: conditional grants to reward performance in critical sectors such as health and education; unconditional grants to provide the flexibility needed for effective local governance.

This exercise must avoid becoming another casualty of brinkmanship. The last three commissions collapsed under mistrust; this time, the stakes are existential. If the 11th NFC remains inconclusive like its predecessors, the existing arrangement will continue by default, freezing the current distribution formula despite radically changed fiscal realities. This would entrench the status quo—worsening federal deficits, provinces clinging to guaranteed transfers, and fueling regional disparities into socio-economic bloodbaths. Structural reforms would be delayed once again, leaving Pakistan trapped in the same vicious cycle the new award was meant to break.

With IMF oversight tightening and climate shocks mounting, we cannot afford a fractured federation. The NFC should be a platform for innovation in fiscal governance, not political point-scoring. Fiscal federalism is more than accounting, it is a moral choice about the state Pakistan wants to be: cling to old battles over slices or learn to bake a bigger, fairer pie. That means expanding the pie through revenue mobilization at both provincial and federal levels (to have something to share) and ensuring distribution based on fiscal equity (the more destitution, the greater the share). The answer will shape not just this award but the federation’s future.