Punjab backs sharing defence costs as KP, Sindh oppose reducing divisible pool under NFC 

Punjab expressed willingness to share the federal burden of defence and debt servicing under the next National Finance Commission (NFC) award, but other provinces like Sindh and Khyber Pakhtunkhwa did not endorse the proposal, exposing divisions over fiscal responsibility and resource distribution.

The debate unfolded at the concluding session of the Pakistan Governance Forum 2026, where federal and provincial representatives discussed the future framework of the NFC award.

Punjab Senior Minister Mariyam Aurangzeb said debt servicing and defence — projected at Rs 11 trillion out of an estimated Rs 18 trillion federal budget this year — should be addressed jointly by the federation and provinces. However, Sindh and Khyber-Pakhtunkhwa did not support expenditure sharing and instead called for adherence to the constitutional framework.

K-P’s technical NFC member Musharraf Rasool said such grants could be accommodated within the constitutional scheme.

Sindh Finance Secretary Fayaz Jatoi said the next NFC award should remain within constitutional parameters, even though the current arrangement was not sustainable for either the Centre or the provinces.

K-P Finance Adviser Muzzammil Aslam questioned reducing the provinces’ share, asking what guarantee existed that additional funds retained by the Centre would not be mismanaged.

Both Sindh and K-P representatives said the debate should focus on expanding the overall revenue pool rather than reallocating shares. They recommended greater emphasis on human development, climate resilience and provincial participation in federal tax collection.

Planning Minister Ahsan Iqbal clarified that the vertical distribution of resources — under which provinces receive 57.5% of the divisible pool — is constitutionally safeguarded and not under review. He said the discussion concerns horizontal distribution and broader fiscal alignment.

From roughly Rs 14 trillion in federal tax revenue and Rs 5 trillion in non-tax revenue, about Rs 8.2 trillion is transferred to provinces under the NFC arrangement. After these transfers, the federal government retains around Rs 11.07 trillion against expenditures nearing Rs 17.5 trillion.

Iqbal said nearly half of federal expenditure goes toward debt servicing and around 25% toward defence, leaving limited fiscal space to finance pensions, salaries, development spending, grants and social protection programmes.

He noted that despite social welfare becoming a provincial subject after the 18th Constitutional Amendment, the federation continues to fund major programmes such as the Benazir Income Support Programme, which costs about Rs 716 billion annually. The Centre also bears financial responsibility for Azad Jammu and Kashmir, Gilgit-Baltistan and the Islamabad Capital Territory.

The minister proposed that the next NFC award examine lawful mechanisms to provide structured fiscal recognition to AJK, GB and ICT without altering the constitutional framework.

He also highlighted widening development financing imbalances. Provincial development allocations now stand at approximately Rs 3 trillion annually, while the federal Public Sector Development Programme has declined to around Rs 1 trillion. Throw-forward liabilities have reached nearly Rs 11 trillion, with strategic projects such as Diamer-Bhasha Dam receiving allocations far below annual requirements.

Iqbal raised concerns over the current NFC formula, which assigns 82% weightage to population and 10% to poverty. He said this structure creates limited incentives for population stabilisation and poverty reduction. He proposed recalibrating the formula to reward improvements in human development, poverty reduction, climate resilience and population control.

Sindh Finance Secretary Fayaz Jatoi said the new NFC must remain within constitutional limits. Khyber-Pakhtunkhwa Finance Adviser Muzzammil Aslam questioned whether reducing the provincial share would ensure better fiscal discipline at the federal level.

Representatives from Sindh and K-P argued that the focus should be on expanding the overall revenue pool rather than redistributing shares. They also called for provincial participation in federal tax collection and greater attention to human development and climate spending.

Revenue performance was also debated. K-P’s technical NFC member Musharraf Rasool said commitments to raise the tax-to-GDP ratio to 15% by 2015 remain unmet. He claimed revenue shortfalls under NFC commitments had accumulated to Rs 63 trillion over time.

Iqbal said the discussion marked the beginning of a structured national dialogue on fiscal federalism and stressed the need to revitalise the National Economic Council to better align fiscal allocations with development priorities.

President Asif Ali Zardari has constituted the 11th NFC, which held its first meeting in December. Further meetings are pending completion of technical work by sub-groups.