The federal fiscal transfers under the extended 7th NFC award which completed its five-year mandated term in mid-2015 are estimated at Rs2,590 billion for FY2019, up from Rs2,384bn budgeted in the previous fiscal year.
This increase in provincial revenues will help shore up socio-economic uplift programmes at a time when federal development spending has been slashed and current expenditure hiked. Defence and debt services account for 65 per cent of the estimated federal current expenditure
While the Federal Finance Minister Miftah Ismail laments that federal revenues have shrunk by 10-11pc as a result of 7th NFC award, he tends to forget that most of the development functions have been devolved to the federating units after the 18th Amendment.
The provincial development spending is a critical factor in supporting the current growth trajectory which the PML-Nawaz government claims as its exclusive achievement.
Much of the credit for this year’s 3.81pc growth, highest in 13 years, in the agricultural sector goes to the sub-federations as agriculture is a provincial subject.
The combined provincial Annual Development Plans (ADPs) exceeding the federally financed Public Sector Development Programme has helped propel the expansion of the economy. To quote the latest economic survey: in the first half of FY 2017-18, the actual development spending by the provinces at Rs316.8bn was much more than that of the federal government recorded at Rs242.1bn.
While the federal Finance Minister Miftah Ismail laments that federal revenues have shrunk by 10-11pc as a result of the 7th NFC award, he tends to forget that most of the development functions devolved to the federating units after the 18th Amendment
Development of human resource, a primary responsibility of the federating units, is also an important factor in raising productivity.
No doubt the centre’s investment in physical infrastructure and energy has helped boost economic growth but this has been complimented by a surge in provincial expenditure on health, education and skills development after the 18th amendment and 7th NFC award.
The socio-economic uplift programmes undertaken by the provinces are part of the agenda for sustainable development.
Then the provinces also help the federation to contain fiscal deficits. When federal fund transfers, accounting for 80pc of the total provincial revenues increase, the sub-federations produce bigger budget surpluses that assist Islamabad to reduce fiscal deficit.
During July-December FY2018, the cumulative budget surplus shot up to Rs203.9bn from Rs90.6bn a year ago because in the comparative six months federal transfers went up simultaneously to Rs1,363.9bn from Rs1,064.2bn. For the FY2018-19, these surpluses have been estimated at Rs285.4bn
While further fiscal devolution has been arrested at the technical level — owing to deadlock in the National Finance Commission over the 9th award — proactive federalism by minority provinces has extracted the PML-N government’s promise to include some of the projects recommended by the provinces in the federal Public Sector Development Programme, not considered by the National Economic Council (NEC) in its April 25 meeting.
A few federal projects are reported to have been dropped to accommodate provincial projects to keep the overall size of the PSDP intact.
Perhaps Punjab Chief Minister Shahbaz Sharif left the NEC meeting earlier anticipating what was going to happen and to avoid an embarrassing situation as the PML-N president.
It may be recalled that it was Shahbaz who made the 7th NFC formula possible by conceding to do away with the sole criterion for distribution of resources on population basis. Punjab also accepted that ‘every subsequent award cannot be less than the previous one’.
Given this background, the chief minister of the largest province may have a different view than that expressed by Finance Minster Miftah Ismail who presented the federal budget.
Mr Ismail wants to scale up federal share in the Federal Divisible Pool following previous finance minister Ishaq Dar’s footsteps. Mr Dar’s surprising interpretation of the ‘net’ proceeds of the Dividable Pool was intended to scale up the federal share of distributable resources by 7pc on various counts.
The proposal had turned out to be one of stumbling blocks in finalisation of the 8th NFC award. Though rejected by the provinces, the proposal is still not yet off the NFC agenda for the ninth award.
Miftah Ismail had told senior journalists last October that the 7th NFC award had tilted resources away from the federal government towards the provinces and it needed a revisit.
However, self -assertion of the minority provinces has received an impetus from the weakening of the PML-N government’s writ under immense political pressure at the fag end of its tenure.
Officials of the Sindh government hold the view that the horizontal distribution criteria are at the ‘minimum level’ and need to be expanded to include infrastructure. They agree that implicit in the proposal is that the distribution of resources on the basis of population should be reduced.
It is stated that there is an overwhelming, disproportionate gap between Sindh’s contribution in the country’s overall tax revenue and the share it receives from the federal Divisible Pool. Punjab is the fastest developing province and more prosperous than any of the minority provinces and perhaps it can afford to reduce its share linked to population ratio.
The finance minster should consider the views of the provinces on how revenues can be raised by devolution of collection and distribution of taxes on the basis of equity and efficiency. As he revealed, The Federal Board of Revenue’s (FBR) revenues will go up by 11pc in the next year which will be less than the nominal GDP growth.
The four provinces and the federation recognised each others’ rights and responsibilities when they signed the First National Water Policy on April 24 to mitigate the impact of climate change and for rapidly developing water resources.
The mutual accommodation demonstrated by them at the Council of Common Interests meetings should be emulated for forging the 9th NFC award.
Published in Dawn, The Business and Finance Weekly, April 30th, 2018