The 10th NFC and its discontents

No sooner had the 10^th National Finance Commission (NFC) been notified on May 12 than the questions began to be raised about its composition. One regarding the non-statutory member from Balochistan has been resolved gracefully by the nominee, Mr Javed Jabbar, by tendering his resignation. Another, pertaining to the membership of the Prime Minister’s Adviser on Finance and the authorisation for him to chair the meetings, remains. There is also a question mark on the designation of the Federal Finance Secretary as member as well as official expert. These are, however, technicalities and may well be corrected by the court that has taken up the matter.

The more serious issue is the central message of the terms of reference (TORs). It can be illustrated by the federal fiscal operations in the first three quarters of the current fiscal year. Out of the FBR tax collection of Rs3,044 billion, a sum of Rs1,932 billion was transferred to the provinces as per the 7^th NFC Award. The federal government was left with an amount of Rs1,113 billion, not enough to cover the single largest item of expenditure i.e. debt servicing of Rs1,880, billion. If you add the receipts from non-NFC taxes and non-tax heads, and defence to the expenditure side, the increased revenue of Rs2,375 billion is way below the expenditure of Rs2,682 billion. And there still another expenditure of Rs1,740 billion to be covered.

Has the problem been caused by the 7^th NFC? In the comparable period of 2009-10, the year before the implementation of the award, the federal government was left with Rs202.2 billion after meeting the debt liability and defence needs. Even then, federal revenue covered only 58% of the total expenditure that now has declined to 54%. Had the federal government succeeded in raising the tax to GDP ratio to the NFC-recommended level of 15%, there would have been no problem. Alternatively, it should have re-assessed its spending, at least to the extent of devolution of subjects to the provinces under the 18^th Amendment.

As the 18^th Amendment stands in the way of increasing the federal share, the federal government wants the provinces to share the burden of security, expenditure on natural disasters, subsidies, losses of public enterprises and allocations to Azad Jammu and Kashmir, Gilgit-Baltistan and the merged districts of Khyber-Pakhtunkhwa. Only the share of K-P in the divisible pool is a genuine NFC issue. The resolution lies in the NFC formula. K-P’s share should increase based on the additional population (2.4% according to census) and the application of backwardness criteria. Other provinces have to accept the resulting reduction in their respective shares.

The real problem is the rising burden of debt. Who should bear the burden of debt? Foreign debt servicing, let it be clear, is only 12.5% of the total debt servicing. Foreign assistance to the provinces is passed on by the federal government on the same terms as contracted. In other words, the liability is already with the provinces. As for the larger burden of domestic borrowing, the provinces have no part in creating it. How much to borrow and at what cost, lies entirely in the federal domain. In fact, the resulting State Bank profits are the largest component of the non-tax revenue. The burden is directly related to the inability of the federal government to reform the tax structure. As for the provincial borrowing, the limits are already set by the National Economic Council. There is no alternative to federal government putting its own fiscal house in order.

Published in The Express Tribune, June 5^th, 2020.

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