Pakistan's provinces post record surplus, but deeper economic issues persist

Provinces in Pakistan collectively posted a record surplus of Rs1,636.1 billion in July-March, significantly bolstering the federal government's fiscal health. The Economic Survey of Pakistan 2025-26 highlighted that dedicated efforts at the provincial level in resource mobilization and expenditure management led to higher revenue growth compared to expenditures.

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The dedicated efforts at the provincial level for effective resource mobilisation and prudent expenditure management triggered higher growth in provincial revenues relative to expenditures.

Provincial revenue saw a 12.9% increase during the same period. Sajid Amin Javed, Deputy Executive Director at SDPI, suggested that while the federal government's call for shared fiscal responsibility is fair, it should lead by example by expanding its tax base. He noted the federal government's reliance on "moral language" to encourage provinces to share responsibility, as it cannot constitutionally force them to cede their National Finance Commission (NFC) share.

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The Centre was “fair” to urge provinces to share fiscal responsibility, but should lead by example by broadening its own tax net.

Javed emphasized the need for a reciprocal fiscal relationship between the center and provinces. He proposed revamping the NFC formula to incentivize revenue generation and reduce the population-based distribution criterion, given the provinces' low tax collection. He also cautioned that the current freeze on NFC funds is temporary, and a lasting solution requires discussion at the upcoming 11th NFC meeting.

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the fiscal relationship between Centre and provinces must be reciprocal.

A former provincial finance minister called for a "serious review" of development budgets and state-owned enterprise expenses at both federal and provincial levels. This review, he argued, would create fiscal space and alleviate public over-taxation. He pointed to redundant government departments, which continue to burden taxpayers even after the 18th Amendment, and criticized the significant increase in salaries and perks for government employees, which far outpaced inflation. He warned that the current economic model, without addressing these fundamental flaws, remains unsustainable.

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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.