Pakistan’s development challenge is no longer only about reducing poverty. It is about rebuilding a social contract that citizens can trust, grounded in fair fiscal rules, credible institutions, and reliable public delivery. Yet, Pakistan’s development trajectory remains constrained by deep fiscal inequalities, weak state capacity, and persistent regional disparities, conditions that have increasingly placed governance reform at the centre of public demands.

Although constitutional reforms and resource devolution promised a more balanced federal system, these goals have only been partially achieved. Poverty has declined markedly, from nearly 50 percent in 2005-2006 to about 22 percent in 2018, but inequality has risen sharply. The top 10 percent of households capture over 40 percent of total income, while the bottom half receive only around 13 percent, and wealth and property remain concentrated among a narrow elite. Growth has disproportionately benefitted higher income groups, leaving many middle- and lower- income households behind.

This paradox of declining poverty alongside widening inequality exposes a central weakness in Pakistan’s federal system. Fiscal transfers and social spending have helped reduce extreme deprivation, but they have not broadened economic opportunity or meaningfully shifted entrenched power structures. Regional imbalances persist as well, with Punjab continuing to outpace less developed areas such as Balochistan and the former tribal districts. The result is a federal framework that has not yet delivered equitable growth or inclusive governance, underscoring the urgent need to strengthen provincial institutions, improve accountability for service delivery, adopt fairer fiscal policies, and target social investments more strategically to achieve balanced development.

The introduction of the 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award in 2010 marked important milestones in Pakistan’s devolution process. These reforms were designed to transfer greater authority and resources to the provinces, with the provincial share of the divisible pool increased to 57.5 percent. The idea was to make provinces more responsible for social services and development spending.

However, more than a decade later, evidence suggests that the provinces have not developed the institutional and fiscal capacity needed to fully exercise their new powers. They continue to rely overwhelmingly on federal transfers, with limited effort to generate their own revenue. There is enough evidence that provinces are disincentivized to raise taxes because their financial needs are already met through their share of federal taxes. Consequently, rather than fostering competition and innovation, the system has perpetuated dependency and weakened accountability.

This situation has also hindered the development of robust provincial finance commissions. Despite the constitutional obligation to establish provincial finance awards for resource distribution among districts, most provinces have either delayed or produced weak frameworks that lack transparency and equity. Without strong provincial finance mechanisms, the benefits of federal devolution fail to reach the local level, further entrenching inequalities within provinces. Fiscal autonomy, in this sense, has remained largely theoretical—a system where authority has been devolved but capacity and incentives have not followed.

The weakness of local governments further compounds these challenges. Although Article 140-A of the Constitution requires provincial governments to devolve administrative, political, and fiscal powers to local bodies, most provinces have failed to sustain functional local government systems. Elections are delayed, councils are dissolved, and administrative control remains centralized. In practice, local governments operate with minimal financial authority and rely on irregular transfers from provincial governments. This absence of empowered local governance structures has serious implications for resource distribution and accountability.

Tax collection remains another major weakness in the federal system. Pakistan’s overall tax-to-GDP ratio remains below ten percent, one of the lowest in South Asia. Provincial tax collection contributes little to this figure, with most revenues raised at the federal level. Property and agricultural income taxes, both under provincial jurisdiction, are either poorly administered or politically contested. When citizens perceive the tax system as unfair and disconnected from public service delivery, it fosters widespread tax evasion and a culture of noncompliance. At the grassroots level, the lack of transparency and local engagement in fiscal decision-making has eroded trust in government and weakened the social contract. People are less willing to pay taxes when they see little improvement in education, healthcare, or infrastructure in their communities.