Pakistan is an underdeveloped state with strong central government. At present there are three levels of government functioning in Pakistan i.e. the federal, provincial and the local. Due to the competence and distributional aspects, the resource allocation method always remained under discussion. Therefore, the present study focused on the role of fiscal autonomy in reducing poverty in Pakistan. Both expenditure and revenue indicators of fiscal policy are considered in this study. For the purpose of analysis, time series annual data from FY1972 to FY2010 is used. Ordinary least square technique is applied to estimate the effect of fiscal autonomy on poverty. The study concludes that the central government should transfer fiscal powers to lower tiers of government in order to reduce poverty in Pakistan.