SINCE the landmark consensus on the 7th National Finance Commission Award in November 2011, the debate has turned from ‘more resources for the provinces’ to ‘enhanced resource mobilisation by the provinces’ as federal fiscal position treads a deteriorating path. The debate flows from the NFC award that required the federating units to “initiate steps to effectively tax agriculture and real estate sectors.”

It is in this background that the new NFC constituted by the president has started deliberations for a centre-provincial financial relationship beyond 2015-16 as some in the federal capital wish to regain some of the lost ground in respect of the GST collection and provincial cash surpluses even before that year.

The legislative and administrative steps for taxing agriculture and real estate, however, still remain a pipedream both at the federal and provincial levels.

That the centre’s financial position would deteriorate as a result of 7th NFC was well known at the time of award signing but that the pace would be so fast, was not anticipated. The resources available to the centre after devolution are now estimated to range between 55-65 per cent of its expenditure. Spending has increased dramatically over time owing to unparalleled jump in debt, continuous rise in security cost and at times generous ‘dole outs’ by the political leadership to win over civil, military and judicial bureaucracy.

On the other hand, the four provinces generate less than Rs300 billion from their own resources including Rs65 billion through tax and the remaining through non-tax sources low by all standards with no signs of improvement.

Some people argue that higher share originating from the federal divisible pool has left little incentives for the federating units to enhance their own revenues.

A recent report of the Competitive Support Fund, a joint study of the ministry of finance and the USAID, has noted that Punjab makes the highest fiscal effort among the provinces, showing gradual improvement over time. The fiscal effort of other provinces including Sindh, has been much lower. Sindh has, however, maintained an overall revenue growth of 24 per cent primarily by imposing a sizable infrastructure fee that it charges from users of Karachi Port.

This implies, according to the report, a degree of ‘tax exporting’ to other provinces. The overall index for Sindh’s fiscal effort had dropped to 0.76 per cent in 2010. Khyber Pakhtunkhwa’s fiscal effort is declining, probably due to military operations, insurgency and terrorism. Balochistan has shown no improvement either, the report said.

Other factors contributing to the fall in the provincial tax-to-GDP ratio include the relatively low revenue potential and low elasticity of some revenue sources, either due to relatively small or slow growing tax bases or specific rates of taxes, fees and charges that have not been indexed to inflation.

Another factor is the large federal transfers from divisible pool (accounting for 80-90 per cent of provincial revenues) which have created a dependency syndrome.The provincial governments have also been reluctant to incur political costs of additional taxation.

On top of that the accuracy of budget reporting has remained questionable, not only at the provincial but federal level too. The budgetary projections for expenditure and revenues have never remained anywhere close to actual numbers at the end of the financial year. In many cases, the variation in actual and budgeted data has seen as wide as 30 per cent.

As a result, a slippage on federal revenue and higher expenditure for any reason — debt, security or running of the government — results in significant reduction in provincial figures, cutback on development side and deterioration in people’s life. Add to this the underestimated payments on accounts of interests, pensions and allowances.

As unrealistically high budgets for developments are designed to gain political support, these allocations and development projects become the first victim of cutbacks arising out of higher than projected current expenditures before the completion of first quarter of a financial year.

This is demonstrated by a recent astonishing revelation. The federal government reported non-utilisation of about 82 per cent of public sector development programme (PSDP) allocations by the four provinces over the last eight years; current expenditures coughed up a major chunk of Rs763 billion, after cut in development activities.

According to verified record of the ministry of finance, an amount of Rs934.3 billion was allocated for the provinces in eight financial years – from 2002-03 to 2010-11 out of PSDP but only Rs171.75 billion were utilised by the four provinces. The utilisation ratio against total allocations, stood at a meagre 18.4 per cent.

The report apparently suggests that the provinces fighting for increased shares out of federal divisible pool do not have the capacity to utilise even their allocated funds.

The report did not analyse the quality of spending and how much of taxpayer money went into the pockets of contractors and officials of the executing agencies.

Clearly, these huge funds were diverted to meet fiscal deficit. The average utilisation against total allocation varied between 13 per cent and 25 per cent over the eight-year period in various provinces. Despite being affected by continuous war-like situation, Khyber Pakhtunkhwa achieved the highest utilisation rate of 24.96 per cent, followed by Punjab with 23 per cent.

The other two provinces showed a dismal performance. Sindh utilised only 13.69 per cent of allocations while Balochistan’s performance stood at a meagre 13 per cent. In some years, the utilisation remained less than three per cent of allocation in Sindh which conforms to a general belief in the federal Planning Commission that Sindh has never been able to complete even a single development project in the stipulated time.

In these eight years, a total amount of Rs291 billion was allocated to Punjab but only Rs110 billion was released, accounting for less than 38 per cent. The Punjab administration utilised only Rs66.7 billion or 23 per cent of the allocation. About Rs225 billion was diverted to current expenditure that included bridging fiscal deficit.

Likewise, Sindh was allocated Rs241 billion in eight years but its releases were restricted to Rs65 billion, or 27 per cent. It utilised only Rs33 billion, accounting for 13.8 per cent of actual allocation.

Similarly, KP that secured allocations of Rs162.6 billion got releases of only Rs62 billion or 38 per cent but could use only Rs40.6 billion. Its utilisation rate stood at about 25 per cent.

Similarly, Balochistan, the largest province by area, was able to get a relatively higher allocation of Rs238 billion but utilised Rs31 billion, a paltry 13 per cent.