Fiscal Equalisation Among Provinces in the NFC Awards

Fiscal equalisation refers to attempts within a federal system of government to reduce fiscal disparities among jurisdictions, which emerge due to variation in sub-national jurisdictions ability to raise revenues to meet the public expenditure needs of their residents. This is because of an imbalance in the assignment of revenue sources to sub-national levels and their expenditure needs, given the allocation of the inter-governmental fiscal powers and responsibilities. In the Pakistani context, the need for transfers is highlighted by the fact that while provincial governments generate only about 8 percent of total national resources, their share in total public spending is 28 percent. Also the fiscal capacity of the four provinces varies, with the relatively more developed provinces being able to self-generate a higher proportion of their resource requirements. As such, transfers take place, according to the provisions of the National Finance Commission (NFC) awards, with the objective of removing both vertical and horizontal imbalances between own-revenues and expenditure.