THE announcement of the constitution of the 10th National Finance Commission has come at a time when devolution of significant administrative and financial powers to the provinces under the 18th Amendment is under renewed attack from the proponents of a stronger centre. The additional agenda for the new commission — whose sole constitutional job is to divide financial resources between the centre and the provinces — is reflective of this mindset. The presidential order indicates that the centre wants the provinces to fund security expenditure, share losses of SOEs, bear the cost of subsidies and fund federal debt repayments. Islamabad is also looking to them to help finance its expenditure on AJK, GB and former Fata. Since the provincial share from the tax divisible pool cannot be slashed from the present 57.5pc under the Constitution, the federal government is attempting to bypass it by putting these proposals on the NFC table. This isn’t the first attempt to undo the gains the provinces have made under the seventh award. Back in 2015, the PML-N government had also demanded they voluntarily give up 7pc of the undivided pool for some of these federal responsibilities. The demand was rejected as unconstitutional.
The 18th Amendment and the seventh NFC award are regarded as a watershed in the country’s constitutional and fiscal history; neither can exist alone. While the amendment devolved several federal ministries and functions including education, health, women development, tourism, environment, etc to the provinces, the NFC created fiscal resources from the divisible pool and enhanced the provincial tax base by recognising the provinces’ rights over services tax and CVT on immovable property to support their new responsibilities. It also conceded the provinces’ right to their natural resources, and made some subjects like ports, electricity, water resources, national planning, census and regulatory authorities a joint provincial and federal responsibility. These steps have helped the provinces increase their incomes and spend more on development and delivery of public service to their citizens.
The increased provincial share is often blamed for increasing the federal budget deficit, which isn’t based on facts. A study by the Punjab government shows that the enhanced provincial share from the tax resource has contributed just 0.8pc to 1pc of GDP to the federal deficit. The real reason for the deficit lies elsewhere. For starters, Islamabad has failed to raise the tax-to-GDP ratio from 10pc to 15pc during the five-year life of the seventh award. It also continues to spend a lot of money to maintain structures of the devolved ministries and functions because of political reasons, and is unable to plug the massive haemorrhaging of resources by SOEs. Devolution has done much to strengthen the federation. The centre should focus on raising taxes, cutting its unnecessary expenditure and pulling out of devolved functions. It should look ahead and not attempt to reverse the progress made so far.
Published in Dawn, May 14th, 2020