Paying Paul to rob Paul

The federal government wants to put in place a mechanism to call the provinces to account for their profligate spending of the enhanced revenue transfers under the 7^th NFC and their failure to mobilise greater provincial revenues. The message is that while the federal government is in dire fiscal straits, the provinces are enjoying a joyride. As the Constitution is silent on the issue of mechanism, there is no need to discuss it further. There is, however, the need for a fact-check to see if there is any substance in the case that is presented over and over again by the backers of an establishment that will never understand the lessons of 1971.

In FY10, the year before the inception of the 7^th NFC, total federal expenditure was 15.3% of GDP. In FY20, it was 16.3 % GDP. While the NFC award had reduced the federal share in the divisible pool of taxes, the 18^th amendment also slashed the burden of responsibilities by abolishing the concurrent list. This should have led to lower federal spending. However, the facts reveal the opposite. Instead of shrinking, the federal footprint has expanded. Provinces cannot be blamed for this expansion. The increase cannot be fully accounted for by the assistance for disasters and pandemics, as was suggested in the official pronouncement. Net federal revenue receipts in FY10 were 9% of GDP, which decreased to 7.9% of GDP in FY20. Expenditure increased by one percentage point of GDP, while net federal revenue receipts decreased by 1.1 percentage point of GDP. Rather than reducing expenditure and increasing revenue, the federal government did the reverse, with distorted priorities. Development expenditure declined from 2.9% of GDP to 1.7%. Defence expenditure increased to 2.9% of GDP from 2.5%. The refrain is that the expenditure increase is largely because of an unusually high burden of servicing past debts. From 4.3% of GDP in 2010, debt servicing has risen to 6.3%. However, 5.5% of GDP is due to domestic debt, the cost of which was raised enormously by the government itself. Under the IMF pressure, cheap borrowing from the State Bank was stopped. To make matters worse, the State Bank Jacked up the policy rate to double-digit. Federal borrowing from commercial banks became costlier in direct proportion. All this was done in the name of keeping prices stable, which only started to come down when supply side improved. Distorted expenditure priorities were thus reinforced by distorted policy priorities. External debt servicing was only 0.4% of GDP in FY10. It increased to 0.7% in FY20 mainly because of higher short term and commercial borrowing.

Provinces have to do a lot better, but the federal blame does not stick. While the FBR revenue barely increased from 9.5% of GDP in FY10 to 9.6% in FY20, the provinces’ own tax revenue more than doubled from 0.4% of GDP to 1.0%. This has enabled the provinces to accede to the frequent federal requests to show budgetary surpluses to support the overall fiscal deficit. In FY19 and FY20, this support was 0.4% and 0.2% of GDP respectively. In the budget for FY21, the provincial support is targeted even higher at 0.5% of GDP. Since FY10, the provincial expenditure on education has increased from 1.4% of GDP to 2% in FY19. Of course, they need to do more in the health sector. Instead of pursuing the stratagem of paying Paul to rob Paul, the federal government should check politically motivated spending in provincial sphere, restructure its own expenditures and focus on reform to raise tax-to-GDP ratio.

Published in The Express Tribune, December 25^th, 2020.

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