The provincial and local governments lost additional amounts, which would have accrued to them if the sixth NFC award was revised upwards. Delay in announcing the seventh would result in further losses to the federating units affecting the finances of local governments and their empowerment. The allocation for civic amenities, poverty alleviation programmes and growth would slow down. It may be noted that the Khushhaal Pakistan Programme funds are not part of local funds.
The NFC in the ’50s considered the local finance as a component of public finance. A local government finance committee was set up with the Governor State Bank, Abdul Qadir, as its Chairman. The committee produced a comprehensive report, unparalleled as yet. It considered taxes of local bodies (as these were called) as residual in nature, although this observation was made when the taxation powers of these bodies were broader than under the devolution plan at present.
The agricultural produce market committees, along with funds, were proposed to be merged with the district boards. Various recommendations of this committee were supported by the experts committee on problems of local taxation (1964), the local government reorganization committee set up in Punjab in 1972. Fakhr Imam’s local government commission (1983) was also supportive of the recommendations of the Abdul Qadir committee.
The state of local finance was considered by the NFC in the ’80s, but no recommendations were made. Since then, the finances of local governments have not figured on the agenda of the NFCs. The National Reconstruction Bureau has failed to develop a viable financial system for the local governments, with the result that ad-hoc measures were being taken in the matter and dependence on federal and foreign assistance and loans has increased. The statutory provincial-local government commissions are handicapped because these get indicative allocations, which are residues spared by the provinces.
The vulnerability of local finance is apparent, which could accentuate with the shifting priorities at other levels. The finances of local governments are national reserves usable in emergencies like war or natural calamities. However, such reserves are no longer available. An assured flow of funds would have enabled the participation of local governments in the current earthquake-related relief operations without the loss of time.
The consideration of local finance as a constitutional function of the NFC would improve the situation. The constitution does not take note of the local finance as an integral component of the public finance.
If properly developed, the local finance could help reduce the budget deficits and boost the economy in several ways. The terms of reference of the NFC exclude reference to the local finance. The finance managers have yet to realize the importance of local government finance in development and administration.
The situation calls for constitutional amendments to provide security to local councils against the uncalled for dissolutions, adequate finances and financial powers, and other substantive matters. We could make an advance over the 73rd amendment in the Indian constitution by making such provisions mandatory.
The seventh NFC needs to deliberate upon the financial condition and performance of the local governments, in particular the union councils, which are the most representative bodies, and have greatly suffered because of unfair financial dispensation in the devolution plan. These councils are being supplanted by the unelected citizens’ community boards.
However, the primary data on various parameters is no longer available as the ministry of local government has stopped computerizing the local government budgets, once described as the ‘gold mine of fiscal data’ by World Bank experts. The constitutional amendments as proposed would ensure that problems of local finance receive continuing attention.
As important as local revenues is the need for rationalizing the patterns of expenditure. The recognition of excessive sales tax collected by the federation could influence the provincial shares. At present, 2.5 per cent of the GST collections are given to local governments through provincial governments, in lieu of the octroi tax since abolished.
A study made in collaboration with the Central Board of Revenue in Gujjar Khan municipality, had shown that even after exempting milk and vegetables, a levy of local sales tax at one per cent could generate income sufficient to compensate the loss of octroi income. Thus, if the local governments are allowed to levy local sales tax at one per cent, the GST could be reduced by 1.5 per cent. This would give much needed relief to businesses and would set in motion a multiplier effect on the economy. This would also restore financial autonomy of the local governments to some extent.
The transfer of funds of agricultural produce market committees to district councils is long overdue. The maintenance of the local government boards is eating into the funds of local governments like termites. There was little justification for the retention of local council service under the devolution plan.
Certain issues were raised which, directly or indirectly, would influence the NFC award. If the local finance as a subject is not deliberated upon by the seventh NFC, its award would remain lopsided. It would also fall short of the requirements for developing symbiotic fiscal dynamics at local, provincial and federal levels.