National security and the NFC

Some vibes coming out of the recent security-economy conclave suggest that the current state of public finance is constraining the flow of resources to national security at a time when an additionality is critically needed. Economists hoping to be part of a cure-all technocratic set-up are pointing fingers at what they view as the overgenerous 7^th NFC award. This award was termed historic because the provincial share in the divisible pool of federal taxes was made larger than the share of the federal government for the first time.

In addition to an 11 percentage point decline in its share, the federal government was also required to make good any shortfall in the projected share of Balochistan. In addition, before applying the new formula to the divisible pool, one per cent of the proceeds would be deducted and assigned to Khyber-Pakhtunkhwa to meet the expenses on war on terror. Federal revenues were also affected by the devolution of GST on services to the provinces.

The 7^th NFC award was a hard-won consensus to address the long-standing concerns of the provinces. It was also necessary to enable the provinces to bear the burden of the devolution under the 18^th amendment. Most notably, the award shifted the criteria of distribution between the provinces from population to multiple indicators to promote inter-provincial harmony.



Before the award in 2009-10, defence expenditure exclusive of military pensions was 2.5 per cent of GDP. It remained at the same level until 2014-15. Thereafter it has been increasing, 2.6 per cent in 2015-16 and 2.8 per cent in 2016-17. The allocation in the budget is 2.6. While the defence expenditure has remained the same or increased, the net federal revenue receipts have declined. From the pre-NFC figure of nine per cent of GDP, the receipts plummeted 6.3 per cent in the year after. There have been ups and downs since, with a recovery to 8.1 per cent in 2016-17. The budget target for 2017-18 is also around 8.1 per cent of GDP. In other words, it will still be less than the pre-NFC level and the revenues have increased at lower rate than the increase in the defence budget.

The real impact can be seen by looking at the share of net federal revenues devoted to defence. In the year just before the NFC, ie 2009-10, 28 per cent of the federal receipts were utilised by defence. It jumped to 39.3 per cent in the following year, but it has been declining since. In 2016-17, the share was 34.1 per cent. These numbers reflect an effort to mobilise additional resources rather than reduce the defence expenditure. And this the way to move forward. While federal receipts in the post-NFC period have nearly doubled in absolute terms, it is the outcome of taxing more and more the already taxed. A serious effort to expand the net and reform the structure of the tax system has been lacking. Similarly, the federal expenditure incurred on the subjects devolved to the provinces has to end. Any rollback of the 7^th NFC will create more national security issues than it seeks to resolve. History would have been different if the 18^th amendment and the 7^th NFC award were in place in the early 1970s. Tinkering with the federal structure of the state can play havoc with the state of the economy as well as polity. Political parties hoping to occupy the seat of federal government after the elections in 2018 should be ready with plans to revolutionise the tax structure to pay for the security of the state as well as its people.

Published in The Express Tribune, October 27^th, 2017.

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