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Bloated, opaque provincial budgets

June 23, 2014

IN the accounting exercise, the Sindh budget fares better in transparency than those of Punjab and Khyber Pakhtunkhwa, with the northern provinces projecting their 2014-15 expenditures on unrealistically high revenue generation targets.

“The practice may generate political capital in the short run for the political party in power, but it renders the financial management ineffective. The increase in revenue expenditure, in an artificially bloated budget, amplifies risks of bigger cuts in the development budget,” commented an expert of public finance from Islamabad.

“Dashed public expectations by the end of the year will not serve the party or the system,” he feared.

“The trust deficit is most taxing for businesses. You may colour the projections, but can’t fake development. In this day and age, transparency is a pre-condition for effective governance,” said a business leader.

Punjab hopes to increase its tax receipts by 47pc. The revised estimate of tax receipts for 2013-14 was Rs111.7bn — Rs15bn less than the budget 2013-14’s projection of 126.7bn. Despite the shortfall of last year, the Punjab government hopes to raise Rs164.6bn next year.

The province’s non-tax receipts were comparatively better. Punjab raised Rs23.4bn against the projected Rs 28.7bn last year, and expects them to increase 55pc over the original budgeted estimates to 44.5bn, in 2014-15. From where is this windfall expected is not clear.

The same is the case with the KP, which hopes to raise its tax receipts by 89pc. The revised estimate of the overall tax receipt in the concluding year was Rs10.2bn, against the projected Rs16.9bn — short by Rs6.4bn. The provincial government did not explain what it intends to do to double the tax collection to Rs19.4bn during 2014-15. KP intends to increase non-tax revenues by 41pc, from Rs6.6 to Rs9.3bn.

In contrast, the Sindh budget envisages a rise of 20pc in tax receipts in the year ahead. From Rs89bn in 2013-14, it targets Rs107bn in 2014-15. The province’s performance in non-tax receipts trail much behind others. The province scaled down its estimates by 37pc, from Rs28.8bn for 2013-14 to Rs10.8bn.

On the expenditure side, Punjab and the KP restrained their revenue expenditure, with Punjab increasing its by 20pc to Rs699.9bn in FY2014-15 from Rs584.6bn in 2013-14, and KP by 13pc to Rs250bn from Rs222bn. Sindh has projected to raise its revenue expenditure by 18pc to Rs436bn in 2014-15, from Rs368.4bn in 2013-14.

The difference in the approach of budget-making teams in the three provinces becomes stark in terms of their development budget allocations. If estimates of the currently debated budgets are put up against the 2013-14 projections, Punjab and the KP hiked theirs by 19pc each, but Sindh, for the first time, actually slashed its annual development plan by 9pc. In 2013-14, Sindh’s development budget was Rs185bn. It has now been brought down to Rs168bn.

Punjab ignored the fact that in the concluding year, it got to spend Rs224bn on development, which is Rs66bn less than the projected Rs290bn. So, against actual development spending last year, the next year’s development budget at Rs345bn is a sizable 54pc higher.

In KP, development spending in 2013-14 was marginally (Rs2bn) less than the projected Rs83bn. Against the revised estimates of development spending, the next year’s budget is higher by 23pc.

When contacted, the members of provincial finance teams were reluctant to offer formal comments. A senior bureaucrat in Islamabad defended Sindh’s approach.

“I believe it was very bold of the PPP leadership in Sindh to allow reduction in development budget for the political cost it may entail. I see no wisdom in bloating development budgets knowing that it will have to be slashed because of revenue shortfalls. The axe falls on development spending when revenue projections are not realised. Last minute adjustments generate bad blood and entail costs,” he argued.

Asad S Jafar, President Overseas Chamber of Commerce and Industry, without commenting on details, thought that the federal and provincial budgets did little to address the structural flaws, and were, therefore, disappointing to multinationals.

“The overarching demand of broadening the tax base has again been ignored. There is little movement in clarifying jurisdictional issues between the FBR and provincial revenue boards, and more could have been done. Sindh, like other provinces, could have made agriculture tax rate realistic and its collection effective,” he said over phone. He did support transparent budget-making as opposed to creative accounting practices in public finance.

Usman Zakaria, President Federation of Pakistan Chamber of Commerce and Industry, was also critical. “The business community will only be happy if the ease of doing business improves. For us, it is all a self-serving jugglery of numbers.”

“The Sindh government, I believe, does not appreciate the value of expansion in business activity for the province’s economy, particularly in the context of rampant unemployment. It is a problem that sits at the root of the law and order breakdown.

“Unless the province improves physical infrastructure and sets land ownership records straight, no serious local or multinational company will invest. There are some six kinds of leases functional in the province. Look at the fate of the Textile City, Garment City, National Industrial Parks or other specialised zones; they tell the sorry tale of the Sindh government’s lack of interest. The situation is way better in Punjab. The KP is not relevant for us at this point.”

Published in Dawn, Economic & Business, June 23rd, 2014