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‘NFC award should add tax effort as fifth criterion’

Updated May 03, 2015


Dr Ishrat Hussain.—White Star
Dr Ishrat Hussain.—White Star

The 9th National Finance Commission (NFC) that will decide the 8th award has started its work with its first meeting convened in Islamabad earlier this week.

With negotiations for the next award expected to last well beyond this fiscal year, Dawn spoke with Dr Ishrat Hussain, a former governor of the State Bank of Pakistan, on what he would like the commission to discuss and focus on.

Here are some excerpts of the conversation:

Q. What must the new commission focus on?

A. When the present award transferred bulk of financial resources to the provinces, it was assumed that they’d spend most of their money on development of the social sector: education, health, drinking water, etc. This assumption has proved incorrect.

Moreover, the devolution process set off by the 18th Amendment to the Constitution remains incomplete and the functions, authority and resources haven’t been delegated by the provinces to the districts. As we do not have the local government system in place, most of the financial resources accruing to the districts are being retained and spent by the provincial governments.

Now is the time that the provinces constitute provincial finance commissions (PFCs) and devolve resources and administrative authority to the districts. The Supreme Court has already ordered them to hold local government elections.

The districts are closer to the people and can spend money more prudently and effectively. The provinces should, nevertheless, give the districts policies and targets, monitor the outcomes, and hold them accountable for the results. This is one area that the new NFC should focus on. The next award should clearly allocate a specific share for the districts (to be distributed under the PFCs) in the resources transferred to the provinces from the divisible tax pool.

The new commission should also focus on evolving some kind of mechanism for consolidated budgetary framework to set both (current and development) expenditure and revenue (generation) priorities for the provinces and ensure coordination between the federal government and the provinces on their budgetary allocations. The framework can be evolved at the Council of Common Interests or the National Economic Council level.

The last award and the 18th Amendment have brought about a fundamental structural change in the fiscal and administrative affairs of the country. Power and financial resources have shifted to the provinces. The provinces are now flush with resources derived from the divisible pool, but the federal government finds itself stuck in a precarious fiscal situation because of its inflexible expenditures such as debt servicing, defence spending and subsidies, and is facing a financing problem in the face of its declining share from the pool.

The budgetary framework should define national priorities. The provinces should be responsible for spending on development of the social sector and the federal government for building infrastructure. This is crucial to maximise the impact of the present award and achieve the objective of transferring bulk of resources to the provinces.

Q. Many experts say that the provinces have also failed to keep their side of the deal and done little to boost their tax revenues and help increase the tax-to-GDP ratio. How can the new award help motivate them to collect more taxes?

A. I think the new award should add ‘tax effort’ as the fifth criterion in the formula for horizontal distribution of the combined provincial share. There is a lot of potential in the provinces to substantially increase their tax base and revenues. Raising the tax-to-GDP ratio isn’t exclusively a federal responsibility. After the 7th award provinces have as much responsibility to increase tax revenues as the federal government.

Q. The initial indications are that the provinces, especially Balochistan and Khyber Pakhtunkhwa, want substantial increase in their share from the resources in view of their special conditions and needs. They also want adjustments in the weights assigned to different indicators constituting the formula for horizontal distribution of the resources. What is your take on this demand?

A. The formula for distribution of resources among the provinces should not be touched in the next award. Evidence shows that the increase in the provincial share does not automatically translate into more development in the provinces. The special development needs of Balochistan and Khyber Pakhtunkhwa can be met from the federal public sector development programme.

Published in Dawn, May 3rd, 2015

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