Pakistan’s intergovernmental fiscal system is out of balance. Provincial governments account for 35 percent of all government expenditures but only 7 percent of all taxes. It is doubtful that local residents see much connect between the level of taxes they pay to provinces and the expenditure benefits they receive. This means that the government misses out on one of the most important advantages of fiscal decentralization – taxpayers holding their elected provincial officials accountable for the quality of services delivered.

A second dimension of fiscal imbalance is the mismatch between the weak tax administration skills of the provincial governments and the hard-to-collect taxes that they have been assigned. The latter include taxes on agriculture, professions, property and the consumption of services. The result of this mismatch (and politics) is that the level of taxes is equivalent to approximately 0.2 percent of regional GDP in each province by comparison with about 10 percent at the federal level.

The purpose of this study is to review the status of revenue mobilization by subnational Governments in Pakistan, and to identify reform options that might lead to a higher level of revenues and a better functioning fiscal decentralization. This analysis is based on case studies of Punjab and NWFP provinces, and on data gathered in the course of field work in the two provinces.