The federal government is looking for a scapegoat to cover up its failure to curtail its growing current expenditure and its disappointing tax performance, which is at the heart of its ballooning deficit. Or how else would you explain its criticism of what the cabinet last week dubbed as ‘misplaced’ provincial expenditure choices and their ‘poor’ tax effort?

The government, according to information minister Shibli Faraz, was of the view that the provinces had mostly diverted ‘additional’ money they receive on account of their enhanced share from the federal divisible tax pool under the 7th National Finance Commission (NFC) award to create jobs, pay fat salaries to their favourites, and purchase of cars and other luxuries instead of increasing their spending on public service delivery. In addition to that, the increased federal transfers had robbed them of incentives to raise their own provincial tax and other receipts. He did not name the names but it was obvious that the minister was targeting Sindh, the province ruled by the opposition Pakistan People’s Party (PPP), the chief sponsor of the landmark 18th amendment and the 7th NFC award, when he said it wasn’t clear where the billions given to a certain province were being used.

Islamabad has failed to raise the tax-to-GDP ratio, continues to spend a lot of money to maintain structures of devolved ministries and functions because of political reasons, and is not ready to cut its current expenditure

To support his argument, the minister claimed that the federal government was also expected by the provinces to chip in large amounts to help them deal with the adverse impacts of natural disasters and pandemics, as well as undertake infrastructure development. “Consequently, the centre is not left with enough resources to finance its own budget and is forced to borrow to meet its expenditure.” In view of this situation, the minister went on, the federal government is considering developing a mechanism to bring transparency and enforce financial discipline in the way the provinces spend money, as well as link the federal transfers with their social and economic uplift and revenue collection efforts.

The suggestion to evolve some kind of mechanism to hold the federating units accountable for how, when and where they spend their money by placing new curbs on their spending choices appears a continuation of the previous attempts by the centre to somehow cut their disbursements from the divisible pool of taxes and enhance its own share. It also remains unclear if Islamabad intends to execute its new plan through modifications in the existing NFC structure or by developing some mechanism outside its framework. In either case, the government will be required to amend the constitution to make room for any such mechanism.

The central government would do a service to the people by making itself transparent and accountable rather than twist the arms of the provinces

“There is no room for such mechanisms or curbs on the provinces in the existing constitutional scheme of things,” a person, who has been part of the ongoing NFC negotiations in recent years, told this correspondent. “The only job of NFC is to divide the tax revenues collected by the Federal Board of Revenue (FBR) for the entire federation (both the centre and provinces) vertically between the centre and the provinces and horizontally among the federating units. How a province spends that money and where is determined by its respective legislature. How can the centre control provincial assemblies or twist their arms? It would be a negation of the federation. The central government would do a service to the people by making itself transparent and accountable rather than twist the arms of the provinces,” he added on the condition of anonymity.

“The proposal reeks of desperation on the part of some elements in the government and the security establishment to roll back the 18th amendment, and shift the blame for federal incompetence and failures in raising the tax to GDP ratio to 15 per cent (in its five-year term to 2015) as agreed in the award. The PTI government is doing everything except boosting tax revenues to increase the size of the financial pie. The provinces have significantly raised their development spending and their own tax revenues since the finalisation of the award. It is the federal government, which has failed to cut back on its current expenditure and increase FBR tax revenues. It has to blame itself and not the provinces for its growing budget deficit,” he concluded.

Analysts agree that it is utterly wrong to blame the increased provincial share in federal taxes on the federal budget deficit. Different studies conducted by independent organisations and provincial governments on the actual impact of the increased federal transfers to the federating units on the centre’s budget show that the reduction in federal share from the tax pool has contributed merely 0.8pc to 1pc of GDP to its deficit. “The real reason for the deficit lies elsewhere: Islamabad has failed to raise the tax-to-GDP ratio, continues to spend a lot of money to maintain structures of the devolved ministries and functions because of political reasons, and is not ready to cut its current expenditure,” a provincial official, who has been involved in preparing Punjab’s case for the NFC negotiations, remarked.

He, nevertheless, agreed that like the centre, the provinces also needed to urgently improve their financial and tax governance to slash their non-essential expenditure, plug financial leakages and create greater fiscal space for social and economic development. “In order to make the provinces truly accountable to their citizens, we need to give the assemblies greater power on how, when and where public funds are spent. This will require major changes in the budget processes and massive investments in the technology at every tier of the government besides taking the process of administrative and financial devolution launched after the 18th amendment to the lowest tiers of the local government.”

Published in Dawn, The Business and Finance Weekly, December 21st, 2020