The National Finance Commission (NFC) Award, a constitutional obligation under Article 160 of the Constitution of Pakistan, is the bedrock of fiscal federalism in the country. It serves as a vital mechanism for the vertical and horizontal distribution of financial resources between the federal government and its constituent provinces, and among the provinces themselves. The purpose of this initiative is to foster economic equity, ensure provincial autonomy, and drive balanced national development.

The NFC addresses both vertical and horizontal fiscal imbalances. Vertical imbalance arises because the federal government collects the majority of the revenue, while provinces bear the primary responsibility for providing essential public services like health and education. The NFC rectifies this by transferring a significant share of the federal divisible pool (a pool of specified taxes and duties) to the provinces. The landmark 7th NFC Award, for instance, increased the provincial share to 57.5%, providing them with greater financial space.

Horizontal imbalance, the disparity in fiscal capacity and needs among provinces, is addressed through a multi-criteria formula. The 7th NFC Award moved away from population as the sole criterion, incorporating factors like poverty/backwardness, revenue collection/generation, and area, with population still holding the majority weight. This multi-indicator approach aims to ensure fairer distribution and address........

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