Provinces cannot rescue a debt-driven state

The Federation or a Province may make grants for any purpose, notwithstanding that the purpose is not one with respect to which Majlis-e-Shoora (Parliament or, as the case may be, a Provincial Assembly may make laws—Article 164 of the Constitution of Islamic Republic of Pakistan

The Federation or a Province may make grants for any purpose, notwithstanding that the purpose is not one with respect to which Majlis-e-Shoora (Parliament or, as the case may be, a Provincial Assembly may make laws—Article 164 of the Constitution of Islamic Republic of Pakistan

Finance Minister Muhammad Aurangzeb….said that provincial contributions to federal spending had been partly reflected in next year’s defence budget, adding that talks were under way on a three-year contribution framework. Addressing his post-budget news conference, the finance minister elaborated on the use of over Rs. 1 trillion grant provided by the provinces to the Centre, enabling it to meet pressing financial needs that exceeded the available federal fiscal space—Centre taps provincial grant for defence, The Express Tribune, June 14, 2026

The provincial grant to the federal government of over one trillion rupees for meeting “pressing financial needs” in Budget 2026-27 has been appreciated as cooperative federalism. After weeks of negotiations, the provinces agreed to provide fiscal support to the Centre. Punjab alone is expected to contribute around Rs. 570 billion. In return, the existing National Finance Commission (NFC) Award would remain intact.

The political deadlock may have ended, but the agreement exposes a far more troubling reality: Pakistan’s fiscal crisis has reached a stage where even provincial surpluses are being mobilised to sustain federal finances.

The most revealing fact is not the provincial contribution itself. It is that despite this extraordinary support, the federal government has still announced a monstrous fiscal deficit of Rs. 7.020 trillion for fiscal year (FY) 2026-27 as the Federal Board of Revenue (FBR) has failed to achieve the original target of Rs. 14.131 trillion (now revised at Rs. 12.983 trillion), fixed at the time of approval of budget for FY 2025-26. Resultantly, the huge deficit of over Rs. 7 trillion will once again be financed through borrowing.

This single fact should end the recurring narrative that Pakistan’s fiscal difficulties stem primarily from the NFC Award or from provinces receiving an excessive share of revenues. If more than one trillion rupees in provincial support, unprecedented petroleum levy collections, repeated tax increases and years of IMF-backed fiscal adjustments still leave a financing gap of Rs. 7.020, then the problem clearly lies elsewhere. The issue is not revenue distribution. The issue is a debt-driven fiscal model that has become structurally incapable of financing itself.

For decades, successive governments have preferred borrowing over reform. Difficult decisions regarding public-sector restructuring, tax-base expansion, expenditure rationalisation, energy-sector efficiency and governance reforms were repeatedly postponed. Borrowing became the easiest political option.

Borrowing is not inherently problematic. Nations borrow for infrastructure, education, technology, energy and productive investments capable of generating future growth. Problems emerge when new borrowing increasingly serves to finance obligations created by previous borrowing.

Pakistan has gradually drifted into precisely such a situation. Every budget discussion now begins not with development priorities but with debt-servicing obligations. Before a single rupee is allocated for schools, hospitals, clean water or economic transformation, enormous sums must be earmarked to satisfy creditors.

The result is a fiscal system increasingly focused on sustaining itself rather than serving citizens. Ironically, this has intensified pressure on the provinces, despite the constitutional framework established after the Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment].

The NFC Award is not a discretionary concession by the federal government. It is a constitutional mechanism reflecting the federal character of the state. Through the 18th Amendment, provinces assumed responsibility for most sectors directly affecting citizens’ daily lives, including health, education, agriculture, local government, social welfare and numerous development functions previously administered by Islamabad.

Article 160(3A) of the Constitution further protects provincial shares by providing that the share allocated to provinces under any NFC Award cannot be reduced below that of the preceding award. Those advocating reductions in provincial transfers rarely explain how provinces are expected to discharge these constitutional responsibilities if their fiscal space is curtailed. More importantly, the federal government’s own policies have often undermined the spirit of fiscal federalism.

The petroleum levy offers a striking example. Over recent years, collections under this levy have increased dramatically and now constitute one of the largest sources of federal revenue. Unlike taxes included in the divisible pool, petroleum levy proceeds are retained exclusively by the federal government.

Similarly, when sales tax on major petroleum products was effectively reduced to zero with effect from tax year March 1, 2022 while petroleum levy rates were increased, revenues that would otherwise have formed part of the divisible pool were replaced with collections accruing solely to the Centre.

The contradiction is difficult to ignore. Federal authorities frequently complain about limited fiscal space after NFC transfers yet simultaneously rely on revenue measures that bypass the constitutional revenue-sharing framework. The latest arrangement therefore does not resolve the underlying problem. It merely postpones it. The more troubling question concerns the opportunity cost of these fiscal choices.

Resources that could have been invested in schools, hospitals, local infrastructure, environmental protection and climate resilience a

re increasingly diverted towards servicing an ever-expanding debt burden.
Provincial governments have reportedly agreed to restrain development spending at a time when millions of Pakistanis remain deprived of basic public services. Nowhere is this failure more visible than in access to clean drinking water.

Recent visits to remote areas across Pakistan reveal a grim reality. Millions of citizens still lack access to safe drinking water. In many places, canal and river water has become contaminated by industrial effluents, untreated sewage and environmental degradation.

Communities already struggling with poverty are forced to consume water that threatens their health and dignity. This is not merely an administrative failure. It raises serious constitutional questions.

In Ms. Shehla Zia and others v. WAPDA (PLD 1994 Supreme Court 693), the Supreme Court recognised that the right to life guaranteed by Article 9 extends beyond mere animal existence and encompasses the conditions necessary for a healthy and dignified life. Access to a clean and healthy environment now forms an integral part of constitutional guarantee under Article 9A. Three decades later, however, budgetary priorities continue to tell a different story.

Governments routinely claim resource constraints when confronted with deficiencies in water supply, sanitation, healthcare and education. However, the same state continues to borrow trillions of rupees annually to sustain an unsustainable fiscal structure.

The contradiction is stark. Citizens are asked to pay ever-increasing taxes, levies and utility charges. Provinces are asked to contribute unprecedented surpluses. Future generations are burdened with additional debt in the face of a bitter reality that basic public goods remain unavailable to large segments of the population.

Viewed through the lens of universally recognised human rights, the situation becomes even more troubling. Access to clean water, healthcare, education and a healthy environment are not governmental favours. They are among the most fundamental obligations of a modern state.

Taxation derives its legitimacy not merely from the state’s power to collect revenue but from the reciprocal duty to use those resources for advancing public welfare.

When governments repeatedly prioritise debt servicing over human development, taxation risks becoming an exercise in extraction rather than a mechanism for promoting collective prosperity. The real tragedy of Budget 2026-27 is, therefore, not the size of the deficit itself. It is what the deficit represents.

Despite unprecedented provincial support, the federal government still faces an estimated financing gap of Rs. 7.020. The country remains trapped in a cycle where borrowing finances deficits, deficits generate further borrowing and debt servicing consumes resources desperately needed for development.

Provincial surpluses may provide temporary relief to Islamabad. They may help satisfy IMF targets and improve fiscal indicators. They cannot, however, eliminate structural weaknesses, generate sustainable growth or rescue the federation from a debt trap decade in the making.

Pakistan does not merely need another budget compromise. It needs a fundamental reassessment of fiscal priorities. The question confronting policymakers is no longer whether provinces should contribute more to the Centre.

The real question is whether a state that continues to collect taxes, accumulate debt and demand sacrifices from citizens is fulfilling the very purpose for which governments exist that is protecting rights, expanding opportunities and ensuring that every citizen enjoys the minimum conditions of a dignified human life. Until that question is answered honestly, every budget will continue to redistribute scarcity while postponing prosperity.

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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, environment, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds an LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996.

He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA).

He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include, Tax Reforms in Pakistan: Historic & Critical Review, Towards Broad, Flat, Low-rate, and Predictable Taxes (third edition, 2024), Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 3000 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

X (formerly Twitter): DrIkramulHaq
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan.

His areas of expertise include legal, strategic planning, cross-border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).

Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to ensure knowledge transfer.

His notable publications are Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.

His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .

X (formerly Twitter): Abdul Rauf Shakoori

The recent publication, coauthored by these writes with Huzaima Bukhari is:

Pakistan Tackling FATF: Challenges & Solutions, available at:

https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35