ISLAMABAD: Provincial fiscal operations provided significant support to the federal government in improving the ove­rall fiscal situation in the outgoing year.

“The dedicated efforts at the provincial level for effective resource mobilisation and prudent expenditure management triggered higher growth in provincial revenues relative to expenditures,” the Economic Survey of Pakistan 2025-26 acknowledged.

All four provinces collectively achieved the highest-ever surplus of Rs1,636.1 billion in July-March, compared to Rs1 trillion last year. Provincial revenue incr­eased by 12.9pc during the same period.

Sajid Amin Javed, Deputy Executive Director at SDPI, said the Centre was “fair” to urge provinces to share fiscal responsibility, but should lead by example by broadening its own tax net. He noted that since the federal government cannot constitutionally compel provinces to relinquish their NFC share, it has resorted to a “moral language of shared responsibility.”

He stressed that the fiscal relationship between Centre and provinces must be reciprocal. Given that provincial tax collection remains well below par, he recommended revamping the NFC formula to incentivise revenue generation and reduce the weight of population as a distribution criterion. He further cautioned that the current freeze on NFC funds is a temporary measure, and that a lasting solution must be discussed at the 11th NFC meeting.

A former provincial finance minister said the development budgets and SOE expenses of both the Centre and provinces needed “serious review” to create fiscal space and provide the public relief from over-taxation. He pointed to government departments that had become redundant after the 18th Amendment, but continued to burden federal and provincial exchequers. “Just look at the state’s splurge in excess of 65 per cent over the last three years on salary increases and perks and privileges — well above inflation — and its ‘bloated size’ even after the 18th Amendment, while it was tightening the belt of the rest of the population,” he added. By not addressing the fundamental flaws in the economy, this model will remain unsustainable.

Provincial tax collection rises

The provinces own tax collection and development spending are expected to rise by nearly 26pc and 39.6pc respectively during the outgoing financial year, according to the survey.

The size of provincial budgets is estimated at Rs9,913.6 billion in FY2026, up from revised estimates of Rs8,159.9bn in FY2025 — a growth of 21.5pc. Current expenditures are projected to increase by 14.8pc while development spending is expected to rise sharply by 39.6pc. Total revenues were budgeted at Rs10,127.6 billion, showing growth of 17.9pc.

Under the NFC Award, federal transfers to provinces were budgeted at Rs8,206 billion in FY26. In the first three quarters, these rose 10.7pc to Rs5,630.8 billion. Province-wise shares were: Punjab Rs4,076bn, Sindh Rs2,043.8bn, KP Rs1,342.8bn (inclusive of 1pc for war on terror), and Balochistan Rs743.2bn.

Provincial own revenue receipts grew 28.3pc to Rs1,138.2 billion, with tax collection up 25.8pc to Rs860.7 billion and non-tax revenue up 36.7pc to Rs277.5 billion — supported by higher receipts from hydroelectricity profits, mark-up, and other sources. Federal transfers nonetheless remained the dominant source, contributing around 78pc of total provincial revenues.

Published in Dawn, June 12th, 2026