The stagnating revenues and burgeoning current expenditure have adversely affected the Punjab government’s annual development spending during the last two years. With the economy estimated by the international lenders to grow at a much slower pace over the next few years than was expected before the onset of the Covid-19 pandemic, the provincial government will have to struggle hard to catch up with the ‘development momentum’ of the past one decade.

In fact, the annual provincial development investment had progressively been increasing in the last 10 years on the back of increased provincial share from the federal divisible pool as well as the transfer of general sales tax on services to the federating units under the 7th National Finance Commission (NFC) award before the all-pervasive economic slowdown forced the government of Chief Minister Usman Buzdar to substantially squeeze the funding for development.

Though the government has increased its original development budget target to Rs337 billion this financial year from Rs310bn last fiscal year, its attainment would largely hinge on how quickly the economy rebounds. In order to make up for the reduction in public sector development investment, the provincial government is focusing on attracting private financing for the infrastructure development schemes.

The actual annual development fund utilisation has dropped by a whopping 43pc in two years as political authorities try to prioritise expenditure on more visible schemes that they believe could help PTI wrest Punjab from PML-N

According to the consolidated summary of the federal and provincial fiscal operations during the last financial year, the public finances of Punjab — as well as Khyber Pakhtunkhwa — have further deteriorated because of the contracting economy amid the global health crisis. Punjab accrued a deficit of Rs8.8bn at the end of the last fiscal year because of a shortfall of Rs473.6bn in the indicated federal transfers and Rs103.9bn in the targeted provincial tax and non-tax revenue receipts. The last time the province had booked a deficit of over Rs6bn was in 2017-18 because of the delayed transfer of a tranche of its share from the divisible pool.

Read: Shrinking spending in Punjab

Originally, the deficit was estimated to be in the range of Rs118bn and Rs130bn. However, it was brought down by using the cash surplus of over Rs48bn from 2018-19, cutting development expenditure and controlling the current expenditure through “austerity measures”.

A comparison of the published data for the years 2017-18 and 2019-20 shows the total provincial revenues have increased marginally by 3.3 per cent, from Rs1,41 trillion to Rs1,46tr in two years. The provincial dependence on federal transfers under the NFC award has also increased substantially because it failed to maintain growth in its tax and nontax revenues. The federal transfers — which have risen by a modest 10.9pc — formed 82pc or Rs1.197tr of the total provincial revenues last year compared with 76pc or Rs1.08tr in 2017-18. The provincial tax income has also dropped, although marginally, by below 4pc from Rs197.5bn to Rs189.8bn in the same period.

While revenues were slow to grow, the current expenditure has spiked over the last two years. The current spending rose by a hefty 26.7pc from Rs948.8bn to Rs1,20tr compared with just a marginal 3.5pc increase in the overall provincial expenditure to Rs1,47tr.

Consequently, the actual annual development fund utilisation has dropped by a whopping 43pc from Rs469.7bn two years ago to Rs265.5bn. The massive reduction in development spending is now becoming more pronounced because of deteriorating urban infrastructure in the major cities of Punjab as the political authorities are trying to prioritise their expenditure on more visible schemes like a new Dubai-like city on the banks of the river Ravi and other brick-and-mortar projects that they believe could help the ruling PTI wrest Lahore and the rest of the province from the opposition PML-N.

The large reduction in the development investment since the ascension of the PTI to power is widening the infrastructure gap in the province. The government plans to fill the gap by roping in private capital through the Public-Private Partnership (PPP) mode. It has already created a legal framework and infrastructure and identified projects worth Rs300bn that will be undertaken in the PPP mode. The private investors are unlikely to respond enthusiastically — at least in the near term — in a contracting economy and uncertainty caused by the Covid-19 contagion. Last year, the provincial authorities had budgeted private investment of Rs40 billion in the PPP projects, especially in the road sector. But they were unable to initiate work even on a single scheme.

The PTI government planned to grow provincial revenues by 16pc by the end of its term in 2023. But the deceleration in tax receipts since its ascension to power reflects poorly on its performance. It is widely believed that Punjab with a strong manufacturing and services base can easily double its tax collection in the medium term by widening the services tax net. This will create room for financing its development expenditure and improve social and economic infrastructure for accelerating growth. Without mobilising provincial taxes to reduce its reliance on federal transfers, Punjab is unlikely to wriggle out of its financial troubles any time soon.

Published in Dawn, The Business and Finance Weekly, August 17th, 2020