1. Introduction / Executive Summary

Writing an article in Business Recorder ‘Is It Time to End the Cycle of Endless Consolidation?’ on 11th August 2025, I argued the following: “The depressing social and economic outturns during FY23-FY25 should serve as a wake-up, the next FY27 budget must not be yet another missed opportunity. The time for halfway measures is long gone. Pakistan’s political leadership must decide whether they wish to continue administering the same palliative year after – or whether they are finally prepared to confront the structural roots of the fiscal trap that has held the economy back for far too long.”

Unfortunately, the FY27 federal budget does more than mobilize and allocate resources; it marks a profound shift in the country’s fiscal federalism. On paper, the constitutional architecture remains intact: Articles 160–161 continue to govern the National Finance Commission (NFC), provinces retain their guaranteed share of the divisible pool, and the 18th Amendment’s protections remain untouched. But in practice, the FY27 budget introduces two measures that fundamentally alter the flow of resources between the federation and the provinces: (1) IMF‑mandated provincial budget surpluses, and (2) nearly Rs 1 trillion in provincial grants to the federal government. Together, these measures reverse the logic of the NFC. Instead of the federation transferring resources to provinces, the provinces are now expected to transfer resources back to the federation. This is not a formal collapse of the constitutional framework, but it is a deep hollowing‑out of its substance.