A Critical Path to Fiscal Federalism: Policy Imperatives for the NFC Award Remake

Mahmood Khalid, Iftikhar Ahmad and Nasir Iqbal
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Mahmood Khalid: Pakistan Institute of Development Economics
Iftikhar Ahmad: Pakistan Institute of Development Economics
Nasir Iqbal: Pakistan Institute of Development Economics

No 2026:3, PIDE-Working Papers from Pakistan Institute of Development Economics

Abstract: This study presents a comprehensive analysis of Pakistan's current fiscal federalism framework under the 7th National Finance Commission (NFC) Award and proposes a new, performance-based model to address its inherent shortcomings for the upcoming 11th NFC Award. The 7th NFC Award, despite its historic devolution of resources, has created a "structural trap" of provincial dependency on federal transfers1, disincentivizing own-source revenue generation along with efficient public service delivery.1 The study 's core thesis, supported by empirical evidence, is that a robust and sustainable fiscal system is a function of public trust which in turn is based on demonstrated performance of federating units.2 By critiquing the current formula, analyzing successful global models from Canada 4 and India 6, and leveraging academic research on tax morale 9, this study proposes a new framework which would nudge the current system for not just better taxes but also improved service delivery. This framework introduces a multi-dimensional Provincial Performance Index (PPI) to a revised horizontal distribution formula.8 The PPI would reward provinces for tangible improvements in revenue mobilization, governance and trust-building, human development outcomes, and fiscal prudence. However, the transition has to be backed by political will and should be gradual. The recommendations also include institutional reforms, such as the creation of a permanent NFC Secretariat 7 and the constitutional devolution of resources to local governments 12, to foster a more equitable, accountable, and ultimately, sustainable path for Pakistan's national development.

Pages: 21
Date: 2026
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