Strengthening Fiscal Federalism in Pakistan

Overview & Synopsis

This report argues that broad reforms to current fiscal federalism arrangements are critical to addressing development challenges, both through and beyond any new NFC Award. Current fiscal federalism arrangements provide important benefits to Pakistan. The design of fiscal federalism arrangements always reflects complex political considerations, and there is no universally applicable best practice. From a technical perspective, however, reforms to the current fiscal federalism arrangements could substantially help address Pakistan’s most pressing challenges. Reducing the current misalignment between financing and function across federal and provincial levels could help reduce or eliminate Pakistan’s chronic and sustained fiscal deficits, addressing a long-run cause of macroeconomic instability and low investment. Reforms to revenue-sharing formulas and assignments could help support intergovernmental coordination, align fiscal incentives behind national development priorities, and reduce fragmentation and complexity in the tax system that is fundamentally constraining revenue performance. Strengthening of local government could help close accountability loops, increase incentives for service delivery performance, and address local level coordination failures, thereby supporting improved human development outcomes. Rejuvenating fiscal federalism institutions could support national coherence in the execution of fiscal policy and coordination of service delivery and economic development priorities. Without addressing existing critical weaknesses in fiscal federalism arrangements, Pakistan will struggle to grow faster, meet basic human capital needs, and deliver on the expectations of its rapidly growing population.