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Federal footprints on provincial budgets

June 17, 2012

Following in the footsteps of the federal government, all the four provinces have adopted a populist stance in their respective budgets for 2012-13.

Interestingly, senior officials at the ministry of finance and planning commission are yet not in a position to comment on the provincial budgets arguing that they have been pre-occupied with parliamentary debate on federal budget, and whatever they know about the provincial budgets is through the media reports.

Instead of expanding their revenue base, the provinces have relied heavily on additional transfers under the 7th National Finance Commission Award that account for 82-86 per cent of total provincial receipts.

No initiatives have been taken to effectively tax farm income and real estate despite their commitments, even in the third budget after 7th NFC Award. In fact, the overall revenue from farm income tax in all the provinces, has fallen over time from a couple of billion rupees to a few millions this year.

It is clear at the very outset of the new fiscal year that an estimated Rs80 billion cash surplus (of the provinces), envisaged by the federal government to contain fiscal deficit at 4.7 per cent or Rs1.1 trillion is unrealistic. In fact, the two larger provinces – Punjab and Sindh – have come up with a cumulative deficit of about Rs37 billion for the next fiscal year.

And within two weeks after the National Economic Council (NEC)( led by Prime Minister Yousuf Raza Gilani comprising all the four chief ministers and finance and development ministers) approved provincial development envelop of Rs513 billion, the provinces announced cumulative development outlays of Rs614 billion.

Punjab has put its total development outlay at Rs250 billion, followed by Sindh at Rs231 billion, Khyber Pakhtunkhwa at Rs97 billion and Balochistan at Rs36 billion.

A cursory look at the provincial budgets, however, indicates that the provincial governments have increased allocations for social sectors like health, education and population welfare — mostly related to infrastructure development in the basic and tertiary areas — without fully taking over the devolved responsibilities under the 18th Amendment for which the 7th NFC award had promised additional resources.

For example, the provinces have expressed their inability to take over the responsibility of major vertical projects in health, education and population welfare till 2014-15, the terminal year of the NFC award. For instance in health, the major nine vertical projects like HIV/AIDS, EPI, hepatitis, polio etc would continue to be funded and operated by the federal government.

Almost same is the case with education and population welfare. As a result, the federal government would continue to fund these projects of devolved responsibilities with a total cost of Rs27 billion frozen at the level of fiscal year 2010-11.

In preliminary feedback, however, the federal government is perturbed over the provincial development outlays that exceeded the NEC-approved size by a wide Rs101 billion.

While they try to hide behind the argument that the NEC approved size of provincial development allocations was of ‘indicative nature’ in view of ‘work in progress’ in preparation of provincial budgets at the time of NEC meeting last month, they believe the provincial budgets were highly dependent on overall revenue collection by the Federal Board of Revenue and would be adjusted accordingly.

The provinces do not have the constitutional powers to raise foreign loans on their own. How they are going to meet their deficits without prudent fiscal operations raises a question mark.

With this policy direction in an election year, the federal and provincial governments have earmarked funds for subsidies, simple dole outs, discretionary allocation and job creation for a full fiscal year even though they would have less than eight months at their disposal to make use of these liberal allocations.

For example, the largest province by population led by PML(N) has in mind a long list of popular schemes. It has promised creation of 80,000 new jobs in the already overburdened and bleeding public sector, and internship programme for 50,000 graduates.

This is in line with federal government’s initiative to provide 100,000 internships for the youth. And all the provinces have followed the federation by increasing salaries and pensions of government employees by 20 per cent. Likewise, without any mechanism to monitor implementation, all the provinces have increased minimum wages for workers.

Punjab’s popular schemes to secure maximum votes in coming elections also include interest-free loans, cheaper tractors, yellow cabs and continuation of free distribution of laptops in addition to low cost housing, over 100,000 free small plots to low income groups. In a welcome development, Punjab has also allocated substantial funds for power generation and modern transport system for Lahore.

Punjab has also followed Sindh’s pattern of creating a provincial revenue board to take control over collection of general sales tax on services. While Sindh has removed the head of its revenue board who raised provincial revenues by almost 100 per cent to Rs23 billion during this fiscal year to pave the way for the appointment of a politically connected police officer, Punjab has sought assistance of the former Sindh Revenue Board chief to help develop its board of revenue.

IN a positive development, almost all the provinces have earmarked funds for promotion of solar energy by offering subsidised solar panels. That should have a positive impact, although on a limited scale, on expensive electricity being supplied through national grid.

Likewise, Sindh has given priority to education, health, clear water supply and development of alternate energy and Thar Coal development that would be critical going forward. Sindh has also allocated a substantial amount for social protection including disbursements to people affected by floods.

Khyber Pakhtunkhwa has followed Punjab to start distribution of free laptops to 25,000 students. It has also launched a new initiative to provide subsistence allowance to senior citizens and stipends to unemployed post-graduates. A few schemes also relate to employment generation and medical facilities for patients of hepatitis.

Balochistan has gone an extra mile in discretionary use of public funds by allocating 54 per cent of its total Rs36 billion development budget for projects/schemes recommended by the provincial legislators. Every member of the provincial assembly will get Rs300 million each for development schemes during the next fiscal year. They will have the powers to spend Rs50 million each on small schemes at their discretion and identify projects for the remaining Rs250 million each. It will also create about 6,500 new jobs and an emergency service on Punjab’s 1122 pattern.