FISCAL federalism continues to hold, with the central government indirectly influencing the spending choices of the provinces.

The situation defeats the purpose of fiscal autonomy allowed to the federating units under the current National Finance Commission (NFC) Award, which conceded to the provinces greater control over their fiscal resources and boosted their share in federal taxes from 50pc to 57.5pc five years ago.

“Old habits die hard. The federal government’s requirements continue to drag our development and push our non-development expenditures, though mostly indirectly,” a Punjab finance department official said.

The low tax-to-GDP ratio is making the federal government encroach upon provincial territory.

Punjab’s actual development spending has lagged far behind the rapid surge in its non-development expenditure in the first four years of the present award to June, despite the fact that its total revenues had doubled during the period.

The province’s funding for development — including foreign loans and grants — has increased by Rs90bn to Rs224bn, against a jump of Rs266bn in its current expenditure to Rs584.67bn.

The trend was quite visible in the very first year of the award when the development funding was raised by less than 3pc against 21.8pc increase in non-development budget, notwithstanding 28.6pc raise in Punjab’s revenues.

It will hold during the present fiscal, the last year of the award, despite an anticipated growth of 144pc in the province’s revenues to Rs1,033bn over the life of the award.

Economist Ayesha Ghaus-Pasha, who led Punjab’s effort to reform its tax collection and development choices in the provincial budget for the present year, argued that the federal government’s decision to massively increase pay and pension of government employees in the last five years and its demand from the provinces to produce budget surpluses to keep its fiscal deficit within the limits set under the loan agreement with the IMF are pushing Punjab’s current expenditure more rapidly than its development spending.

The provinces collectively produced a surplus of Rs183bn last year. The target for the current fiscal has been raised by the centre to Rs289bn.

The increases in Punjab’s salary bill and surplus requirements aren’t the only reasons for its development woes.

“The federal government’s inability to boost its tax collection from under 10pc to 15pc of GDP in five years, as anticipated in the award, is forcing Punjab and other provinces cut their development spending to control their overall expenditure,” said Ayesha, a PML-N member of the Punjab Assembly.

The inability of the Federal Board of Revenue (FBR) to collect the targeted tax revenue also cuts into the provinces’ share from the divisible pool. Punjab received Rs182bn less than the promised divisible pool funds during the last two fiscal years because of the shortfall in FBR’s collection.

Since Punjab largely depends on federal transfers, any shortfall in federal tax collection directly impacts its revenues and is detrimental to its development.

Moreover, Ayesha said the low tax-to-GDP ratio is also making the federal government encroach upon provincial territory.

“It also is, for example, taxing telecom services and transfer of property — two areas already being taxed by the provinces. This [double taxation] is hampering the compliance with, and affecting the collection of, these levies by the provinces. All these issues affecting the fiscal autonomy granted to the provinces will have to be discussed in the next award.”

Apart from the federal government’s interventions and its inability to boost tax collection to the anticipated level, Punjab’s failure to step up its provincial tax collection to reduce its dependence on federal transfers is also adding to its development woes.

Punjab’s own tax collection has increased only marginally in four years, and that too mainly because of the transfer of the collection of GST on services to the provinces. Provincial tax revenues continue to constitute just 12-14pc of its total revenues.

The provincial taxes of Rs111.778bn constituted 13.22pc of its revenues in the last financial year. Almost 47pc of provincial taxes, or Rs52bn. came from GST on services.

The present year’s provincial budget targets tax collection of Rs164.58bn, including GST on services of Rs95bn or 57.7pc of total tax revenues.

Even full realisation of this target will form merely 15.94pc of Punjab’s total revenues.

Ayesha admitted that Punjab has been slacking in mobilising its own taxes, but says significant moves had been made in its current budget to improve the collection of GST on services and property taxes — the two major provincial taxes with a big potential to help raise provincial tax revenues.

“Punjab is taking steps to improve tax management by boosting collection, plugging leakages, rationalising tax rates and taxing the under-taxed and untaxed sectors,” she concluded.

Published in Dawn, Economic & Business, December 29th, 2014