There seems to be a serious generational gap within the ranks of both the Pakistan Muslim League Nawaz (PML-N) and the Pakistan People’s Party (PPP). Perhaps nothing indicates this more than two recent proposals to amend the constitution.
The first, of course, is the proposed 27th Amendment which has taken over the news cycle. Forged in secret and discussed in clandestine meetings, there was no indication that such an amendment was even on the cards until PPP Chairperson Bilawal Bhutto Zardari announced on the 3rd of November. The amendment proposes to fundamentally change the balance of power in Pakistan. If it passes and is signed into law, an already weak judiciary will become completely beholden to political power, the military chain of command will shift, and the country’s economic governance shall return to the days of centralised power.
For all intents and purposes it would be a serious rollback of the hard-won 18th amendment, and it is being championed and discussed by the old guards of the PPP and the PML-N.
The second proposal to amend the constitution came only a few days before Mr Bhutto-Zardari announced his party had been approached for support on the 27th amendment. This proposal came from the Punjab Assembly, which sent a resolution to the federal government, seeking constitutional protection for local governments via an amendment to Article 140-A of the Constitution of Pakistan. The proposal points out that under the 18th Amendment, local governments are constitutionally mandated — a requirement the provinces have failed to take reasonable steps towards.
If passed, the resolution would strengthen democracy, governance, and the 18th Amendment. It was co-sponsored by members Ahmad Iqbal of the PML-N and Ali Haider Gilani of the PPP. Mr Iqbal is the son of planning minister Ahsan Iqbal and Mr Gilani is the son of former prime minister and current Senate Chairman Yousaf Raza Gilani.
It is a strange twist of fate. Yousaf Raza Gilani was the Prime Minister of Pakistan when the 18th Amendment was passed. After the 2008 election, Ahsan Iqbal had been part of Gilani’s cabinet in the short-lived PML-N-PPP coalition government. They were the generation of political leaders that paved the way to the 18th amendment, devolution of powers to the provinces, and the strengthening of democracy. The one element of that amendment that remained unimplemented was the establishment of local governments. It makes sense that the next generation is trying to fulfill that goal. Except it is now the very architects of the 18th amendment that are debating the merits of the 27th amendment.
Perhaps one of the most contentious measures in the proposed amendment is the removal of the protection placed by the 18th Amendment on the provinces’ share from the federal tax revenues. The federal government, you see, has a bit of a revenue problem. The ever increasing demands that the defence budget dictates and the yearly rise in loan repayments always leave Islamabad with a shortfall which the government then has to bridge with more loans. One of the answers to this has been to take some of the share that is constitutionally owed to the provincial governments.
This will cripple the ability of provincial governments to deliver essential services to their populations, and it will still not be enough to meet the expenditures of the federal government. Instead of trying to widen the tax net, restructure the FBR, crack down on cash-based businesses, or finally begin taxing agriculture, the government seems to be more interested in simply taking money from the provinces by going through the complicated steps of a constitutional amendment that will also restructure military and judicial administration.
All of this is happening without a Leader of the Opposition in either houses of parliament and with no real public debate. Profit looks at how both proposed amendments would change Pakistan’s economic governance.
What the 18th amendment changed
The 18th amendment serves two functions. The first is the very practical matter of how it dictates the country will be run as a federation. The second is its symbolic significance. It has become a golden example of how people could come together and take charge of deciding how they want to govern and be governed in a democratic system. For Pakistan’s political elite, it has also been a rallying cry.
After the comical-if-it-weren’t-so-tragic series of events over the past few decades where the President arrogated to himself the power to unilaterally dissolve the Parliament and did not shy away from doing exactly that, in 2010, the political parties of Pakistan by a consensus voted to pass the 18th Amendment.
The 18th Amendment was supposed to be a guarantee of democracy. The president’s powers were curtailed, and power was given back to the elected representatives in the Parliament. At the same time, the strong centre that military dictators had favoured was abandoned in favour of a more decentralized system. The provinces were given more responsibilities, and they now had an active voice in handling key issues. Some of the ministries devolved to the provinces included significant subjects like Education, Health, and Food and Agriculture.
At the same time, it provided a framework for financial relations between the centre and the provinces. The provinces were supposed to receive a certain percentage from the total divisible pool (the total amount of tax collected by the federal government). The percentage varied from province to province, but an overall protection was placed that this award could not be less than the previous award. The current share stands at 57.5%. Provincial governments felt – and still feel – that it is an important protection not only of their constitutionally mandated fiscal rights, but also of their right to govern and function as part of a federation.
Woes and the Federal Government
There have always been opponents to the 18th amendment. Perhaps none had more issues with it in the beginning than the country’s roster of bureaucrats that think they can solve national problems without any political will or mandate. This can be seen nowhere more than in the workings of Pakistan’s finances.
It is not an uncommonly known fact that the federal government has its own priorities. It deals with matters that are different from what the provinces normally deal with. Therefore, it has its own expenditures. But, and herein lies the rub, the pool both the provinces and the centre draw money from is more-or-less the same. And it becomes a zero-sum-game: the centre cannot increase its share from the total divisible pool without reducing the provinces’ share, and vice versa.
For instance, the national budget is the centre’s problem. While the major source of income is taxation, the expenditures far exceed whatever amount the government is able to generate as income. The bulk of these expenses are consumed by international loan payments and military expenditures. The expenses do not give any signs of reducing, nor does the income give any signs of significant increase.
How does the government then finance this shortfall? It taxes even harder the people it knows well enough to tax. And that is the salaried class. In Fiscal Year 2025, the salaried class paid a total of around Rs 606 billion in income tax at source, which is roughly equal to what was received combined from exporters, electricity bills, income from property, purchase and sale of immovable properties, and sales from distributors, retailers, and wholesalers. On a year-by-year basis, the tax collected from the salaried class increased by 54.7%, a horrifying jump.
The issue, despite this poorly-received and ineffective turn of policy, stayed. This increased revenue was not enough. And now, the federal government eyes the provinces’ share from the total divisible pool. In a tweet on X, the Chairman of Pakistan People’s Party (PPP), Bilawal Bhutto Zardari mentioned that his party had been approached by a Pakistan Muslim League – N (PML-N) delegation to request PPP’s support in getting the 27th Amendment passed. One of the features he mentioned as salient to this amendment is the “removal of protection of provincial share in NFC”.
According to reports, the amount that is being asked of the provinces totals to around PKR 500 billion a year. A readily foreseeable consequence of this measure is that the reduction of the provinces’ share would directly impact their ability to provide and improve public services. And, even in this quartet of woe, KP and Balochistan are likely to suffer more because they don’t have as many sources of revenue as do the other two more populous and prosperous provinces.
There is also a counter-argument which goes something like this: since the provinces are sure that they will receive a certain sizable amount, they grow complacent and therefore do not have enough incentive to develop and expand their own revenue streams. At the same time, there is a credible point to be made that the provincial governments often spend what they get from the federal tax revenues not in the social sector, but, cynically, on efforts to bolster their own popularity – on appearances more than the real thing.
Taxes, taxes, taxes
In any case, there is certainly a huge problem of raising enough taxation revenues, and financing the budget deficit. The deficit remains a permanent problem. No one could deny that. Despite the tax-to-GDP ratio in FY2025 reaching the highest level in two decades (15.7%), the Federal Board of Revenue missed its revenue collection target by a staggering PKR 1.23 trillion.
Beside the obvious consequences of alienating the provinces and rolling back on the federalism championed by the 18th Amendment, the proposed measures of removing the protection on the provinces’ share would simply be an unsustainable practice. It would be a temporary fix. No new measure will have been taken to meaningfully increase tax revenue streams. This way, the total left for everyone would not increase in any significant way, and of this amount left, the centre will be free to impinge on the provinces’ share once the protection is removed. And once the precedent is set, rolling back this invasion of the provinces’ rights would be tough. The situation could well become way worse, as the provinces fear.
However, instead of strongarming the provinces into giving up more of their share, there is a more sustainable way of addressing the problem. It would require substantial reforms, but without it, no meaningful long-term progress could be made.
The federal government needs to shift its focus from heavily taxing the salaried class to shift to other sectors which have historically paid lower than they should have. In other words, instead of taxing one sector deeply, reforms should be introduced that would widen the serviceable tax net by sharing the burden with other sectors. These would include the agriculture sector, corporations and industries.
The easy fix of simply overburdening salaried individuals with taxes needs to be abandoned. It would allay part of their dissatisfaction of the majority of the country’s population, and raise public morale, eventually encouraging participation in the political process and development of the country. It would also give young people a hope: staying in Pakistan and serving their country wouldn’t necessarily have to mean giving up a big chunk of your salary with little substantial to show in return. At the same, it would mobilise other sectors which, as part of the social and economic fabric of the country, should also be a part of the democratic effort to help finance national expenditures.
Local Governments
The issue of taxation and revenues is also deeply intertwined with how people govern themselves at the grassroots level. The 18th Amendment beside strengthening the provinces’ role, also gave a framework to ensure every part of the society played a part in it. The keystone of this project were local governments. This third tier would comprise of the locally elected city, district, and tehsil representatives serving in municipal committees and municipal councils.
The system was stipulated to be a tiered one. On the federal level, as the FBR collected taxes, it gave a percentage of the total tax revenues to the provinces through the NFC award. The provincial governments were, in turn, supposed to collect both the sum from the NFC award and the provincial revenues, and allot a certain percentage of this total amount to local governments. The devolution of powers envisioned in the 18th amendment would have led issues such as health and education to eventually come under the purview of the local governments. The funds received from the provincial government would go, therefore, primarily to finance education and health authorities at the district level.
This arrangement made sense, since it would – at least in theory – lead to a genuine trickle down from the top to the bottom. It would empower and enable people to make decisions about matters which most directly affected their lives. It would help ensure that issues that were the day-to-day concerns would be addressed efficiently, without going through the complex and bureaucratic process of involving the provincial or federal government. At the same time, it would leave lawmakers in the assemblies to focus on bigger strategic issues, instead of being caught up in quotidian operational affairs at the lowest level.
The Current State
However, as might be evident to anyone living locally, this system hasn’t really borne out the promise. It is not for some inherent problem with the idea. In fact, the cause is easily identifiable: provincial governments have taken little genuine interest in developing these local administrations.
As mentioned by a recent Punjab Assembly resolution (no. 91), since the passage of the 18th Amendment in 2010, local governments remained in power for only around two years in Punjab, and neither a continuous nor an independent system of local governments could be meaningfully established.
After one initial attempt during the Musharraf era, the first major step to institute and develop local governments was taken in 2013, when the newly-elected PML-N and Pakistan Tehreek-e-Insaf (PTI) governments sought to develop this tier in their respective provinces. The attempt by PML-N in Punjab was elementary: there was no guaranteed funding for the local governments and they only had limited powers to contribute to the important issues such as healthcare and education.
The Punjab Local Government Act 2019 passed by the PTI government was a massive improvement on the 2013 Act. It stipulated guaranteed funding as well as increased the powers of the local governments. However, this was never applied. The PTI government walked back on it, and the officials supposed to serve in these new local governments were never elected.
Yet another valiant attempt was made by the short-lived Hamza Shehbaz government in Punjab in 2022, which provided more clarity on how much these local governments would receive from the provincial government, totalling around PKR 550 billion.
However, a scandal reported earlier this year revealed that at least PKR 828 billion which were supposed to be owed to the local governments over a period of eight years had never been processed. The interim Provincial Financial Commission (PFC) was supposed to oversee the transfer of these funds from the provinces to the local governments, just like the way the NFC transfers federal tax funds to provinces. But, either due to negligence or incompetence, it never happened.
Consequently, these local governments find themselves in a dilapidated state. With no regular elections and their inability to finance their expenditures, they find themselves robbed of what the Constitution had empowered them to do. And people, in general, are the worst for it.
The current state of local governments is a matter of concern not merely because it is not fulfilling what the Constitution says, though of course that is a significant issue. The more important thing is that without these local governments participatory democracy cannot really function. In theory at least, they are supposed to be an efficient system, allowing people to address the problems they face and which they know the best about. Unlike the current cumbersome and heavy-handed system where the government-appointed District Commissioner is essentially king, local governments are directly accountable to the people at the organic level. They can move swiftly and are a direct line to the people.
What is to be done?
As the former Finance Minister, Miftah Ismail, said in a recent post on X, “independent and effective local governments across Pakistan are the most significant and needed reform in the governance structure of Pakistan”. A recent resolution passed by the Punjab Assembly, which Miftah welcomed, also urged the federal government to amend the constitution and make a provision to empower local governments.
Local governments must be empowered both structurally, with real mechanisms set in place to ensure that they function and flourish. And this would not be possible without these administrations receiving their due share from the NFC. One obvious way would be that the provincial government through improved PFCs could create a steady and reliable stream of money, which will be transferred to the local governments. This is their constitutional right.
An alternative would be, as Miftah suggests, that, since the provinces had failed to “meaningfully and equitably transfer funds to localities,” the federal government could step in and, based on the formula used by NFC, directly transfer funds to these local governments.
The advantages – beside the deepening of democracy – would also be financial. These empowered local governments were also supposed to help with generating revenue. Some of the most potentially rich sources of income such as agriculture and property would be significant streams of taxation revenue for these local governments. Small retailers, which also form a big potential source of revenue, often fall through the tax net because there are no refined mechanisms to collect taxes from them. Consequently, they do not pay as much tax as they should. Local governments, which work on the ground and have a reach that the provincial government lacks, could also be great avenues to collect money from this sector.
Empowering local governments would therefore give a financial cushion to the provincial government. At the same time, these localities would have enough funds to work on their own independently, and not rely each second on the capricious moods of the provincial government for their lifeblood.
The provincial governments in turn would also be able to provide some to the central government in revenues. Since the provinces are also protected by the armed forces, there is a case to be made that the provinces could contribute to the national defence expenditures, and help ease some of the financial pressures the centre has to bear. Instead of cutting through the provinces’ share in the total divisible pool, as the 27th Amendment might purport to do, strengthening local governments would provide the provinces a better and more sustainable way to help ameliorate the centre’s woes.
