The federal government is considering a proposal to reduce provincial transfers under the National Finance Commission (NFC) Award in the upcoming fiscal year as it seeks additional fiscal space to meet strategic expenditure requirements, sources said.
According to sources, the federal government has proposed reducing overall provincial transfers by nearly Rs. 1.2 trillion in Budget 2026-27. The proposal stems from limited fiscal capacity at the federal level and ongoing efforts to accommodate rising expenditure needs.
Under the proposed framework, Punjab could receive approximately Rs. 620 billion less than its expected NFC allocation, while Sindh may face a reduction of around Rs. 310 billion. Khyber Pakhtunkhwa is expected to receive nearly Rs. 180 billion less, while Balochistan’s share could decline by more than Rs. 85 billion.
Sources said discussions between the federal government and the provinces on the proposed reduction remain unresolved, with negotiations continuing over the distribution of resources and the potential fiscal implications for provincial governments.
Officials believe that if the NFC transfers are reduced, the overall size of the federal budget could increase beyond Rs. 17.5 trillion, providing the Centre with additional resources to meet spending requirements.
However, sources cautioned that any reduction in NFC allocations could make it difficult for provinces to generate the budget surpluses that are often required under broader fiscal management arrangements.
Meanwhile, development allocations for certain regions are proposed to increase under the upcoming budget. Sindh’s allocation under the Annual Development Program is proposed to rise from Rs. 50 billion to Rs. 62 billion, while development funding for Gilgit Baltistan is expected to increase from Rs. 13 billion to Rs. 19 billion.
The proposal is still under discussion, and a final decision on NFC transfers is yet to be reached as talks between the federal government and provincial administrations continue ahead of the presentation of the federal budget.