10th NFC: Barking up the wrong tree

The 10^th National Finance Commission (NFC) has been constituted by the government to decide on resource distribution between the federation and the provinces.

The 18^th constitutional amendment abolished the concurrent list, limiting the federal government’s role, while the 7^th NFC Award fundamentally altered the resource distribution arrangements, enhancing provincial share to 57.5 per cent of the divisible pool. It was agreed that the federal and provincial governments would collectively increase the tax-to-GDP ratio to 15 per cent by 2014-15. While the provinces have enjoyed greater resources ever since, the tax collection lagged far behind the target.

The 10^th NFC, however, has been given the mandate to once again review this arrangement — this time to create more fiscal space for the federation. But it is easier said than done. The provincial share cannot be reduced, at least without amending the constitution, which is an uphill task. That is why the NFC has been tasked to explore how provinces can contribute to the major federal expenditure heads, like debt servicing, defence, losses of state-owned enterprises, and development of Gilgit Baltistan and AJK. While the provinces are likely to resist any reduction in their share, the fiscal pressure faced by the federal government is also real.

The federal government incurs 67 per cent of the national expenditures but only gets 42.5 per cent of the divisible pool. Last year, the federal government’s markup payments exceeded its net revenue receipts and the entire federal government ran on borrowed money.

But the federal government also has to take the blame, owing to excessive increase in its size in recent years, despite a reduced role post-18^th amendment. Since 2011-12, the expenditures on running civil government and defence have grown by 13 and 14 per cent per annum respectively, while pensions increased by 17 per cent. The tax revenues on the other hand only grew by 11 per cent. As a result, the debt-to-GDP ratio rose sharply and development expenditure was squeezed, registering a modest growth of 9 per cent. The provincial governments over the last few years have also used the additional resources to expand much faster than growth in their resources.

Sooner or later, Pakistan would have faced a serious fiscal crunch, but Covid-19 has accelerated this process. Expenditures are rising, revenues are falling, and the federal and provincial governments do not have virtually any money for development next year. The fact is that we have grown way beyond our means.

Last year, a total of Rs2.4 trillion was transferred to provinces. The federal government spent Rs1.9 trillion in markup, Rs928 billion on foreign loan repayment, and Rs1.1 trillion on defence. This amounts to a total of 4 trillion. If provinces are expected to contribute as per their share in the divisible pool (57.5 per cent), this amounts to Rs2.3 trillion, which is almost equal to the resources transferred to provinces. This, of course, is not feasible. The word on the street is that the federal government may be content with 15 to 20 per cent contribution from the divisible pool, above the line. Even this would mean practically reducing provincial share to 45-50 per cent, taking them even beyond 18^th amendment situation, only with much-increased responsibilities.

If provinces are coaxed into giving up too much, they would have no money left for salaries, pensions or development. If the federal government does not get its hands on enough resources, it could lead to a paralysed federation.

It is time for a new paradigm, centred not on how the pie is divided between the federation and provinces, or between the civil and military, but on reducing government’s size, rationalising defence expenditure, and increasing revenues.

Published in The Express Tribune, May 19^th, 2020.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.