The Khyber Pakhtunkhwa budget for 2019-20 focuses on raising its own revenue and cutting ever-growing government expenditure as the country faces its worst economic crisis of recent times.

The Rs900 billion budget is the largest outlay in the province’s history and has a massive Rs319bn allocation for development. Also, it is the first time that budget books of the defunct tribal districts have been brought before the provincial legislature. This explains the 39 per cent increase in the budget size as Rs151bn allocated to the region has been transferred to the province.

Since federal transfers contribute 82pc of the province’s revenue receipts, KP often finds itself in a tight spot due to smaller or late transfers from Islamabad. The budget document shows that during the first 11 months of the current fiscal year, federal transfers present a shortfall of up to Rs40bn.

This situation often hamstrings the provincial government’s ability to execute development programmes and pay its employees. Federal transfers have been projected at an ambitious Rs588bn. Historically, actual federal transfers have remained consistently lower than budget estimates.

The province has adopted a three-pronged strategy that entails reducing the province’s throw-forward liability, cutting pay and pension bills and increasing own revenues

With the ongoing economic crunch, it is most likely that federal tax collections will face a tough challenge. This will in turn directly impact the base of the province’s economy.

Apparently, the same concerns have forced the province’s economic managers to cut corners and make funds available for development and current expenditures. To this end, the province has adopted a three-pronged strategy, which entails reducing province’s throw-forward liability, cutting pay and pension bills and increasing own revenues.

Budget documents term that the province’s growing throw-forward liability as a ‘glaring anomaly’ and is defined as the ‘expenses that cannot be met in the current year and budgeted to be met in later years based on historical average allocations.’

The documents showed that more than half of the required expenses for completion of development schemes had been parked in throw-forward liability and the number of years to fund this amount has jumped to seven compared to three in the other provinces.

The documents claim that the throw-forward has been brought down by about four years after extensive rationalisation. This has freed fiscal space that has enabled the government to allocate fewer funds for ongoing schemes.

In the budget, the share of ongoing schemes has been brought down to 63pc from 90pc in the current year.

To arrest the galloping increase in the province’s pension bill, the government has decided to increase its employees’ age of superannuation to 63 years. The increase is likely to save the provincial government Rs20bn per annum.

Coupled with a few other measures, the finance department claims to save Rs95bn in the next fiscal, which it says would be diverted towards development.

However, increasing the retirement age may offer some temporary respite to the finance department for about three years and after that it would again have to start paying pensions to thousands of retiring employees.

The KP chief secretary had also opposed the proposal to increase the retirement age on the basis that in the absence of a clear policy on pension contributions, such a decision may not be rewarding. In the current year, the province’s salary and pension bill was budgeted at a whopping Rs256bn. However, the government is claiming that this amount will see a zero per cent increase in the next year.

The province’s economic mangers have also set an ambitious tax collection target of Rs53bn for themselves, which is 54pc higher than the revised revenue estimates for the current year. The KP government is pitching its own revenue at Rs100bn for 2023. However, in the past as well, the finance department has pitched outlandish targets that the province’s tax collectors were unable to achieve.

In his budget speech, the KP finance minister called upon the centre to release Rs34bn arrears of net hydel profit (NHP) which, to a large extent, is the lifeline of the province’s economy. At the same time, KP has been pressing the centre to resolve the NHP issue according to the AGN Kazi formula, which is likely to increase the province NHP proceeds to Rs129bn. Whether the federal government will agree to such a proposal in the current economic situation is anybody’s guess.

Published in Dawn, The Business and Finance Weekly, June 24th, 2019