Was the seventh NFC Award a disaster?
The case is built around the rising fiscal deficit. It is said that the federal government has frivolously spent its resources without realising the inflexibility of its other expenses. The provinces have been allotted too many resources. One notices a spending spree in the federal government and no expression of fiscal responsibility to help reduce the deficit. However, the cure is worse than the disease. The fiscal deficit was not any lower before the promulgation of the Seventh NFC. Any rollback is unlikely to do much about the deficit. There is only one solution to reduce the gap between revenues and expenditures: a sustained increase in the tax-to-GDP ratio by the federal government. It is, in fact, the federal government that has a gap of Rs515.5 billion between its revenues and expenditure for the period of July-December 2011-12. Only Punjab has posted a deficit. The provinces, as a whole, are in surplus and they should be encouraged to remain more prudent.
Furthermore, there has been a problem of sequencing. The Eighteenth Amendment should have preceded the Seventh NFC. But consensus-building is a complex affair and the outcomes cannot be held hostage to precise sequencing. Once such consensus is achieved, disturbing it can have grave political consequences. The deal was reached with Punjab giving up as much as 5.62 percentage points in its share. This loss became the gain of other provinces: 3.98 percentage points for Balochistan, 0.84 percentage points for Sindh and 0.80 percentage points for Khyber-Pakhtunkhwa. The federal government chipped in to ensure that Punjab did not suffer an absolute decline. If Punjab has been running a deficit in the first six months of the current year, and other provinces have posted surpluses, it is because of the burden it shared by initially supporting the consensus. To entirely blame Punjab for the fiscal deficit is to let macroeconomic fetishism take precedence over inter-provincial harmony, which has been strengthened by the shift from the single criterion of population to multiple indicators –– population, poverty or backwardness, revenue collection or generation and inverse population density. A number of special provisions in favour of smaller provinces are also in addition to these criteria.
Fortunately, those working on building the consensus had anticipated that rollback attempts might be made. The Eighteenth Amendment added a new clause to Article 160 relating to the NFC: “(3A) The share of Provinces in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award.”
Published in The Express Tribune, April 6th, 2012.
COMMENTS (7)
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@Meekal Ahmed:
We the macro economists are prepared for all types of random shocks to cause deficit but not willing to accept vertical distribution of resources as a systemic shock. Fiscal deficit and austerity obsess us so much that we think nothing more important than walking the true path.
Another half-baked meaningless experiment and people who are studying it like there's no tomorrow.
Was this country made for all type of political, social and economic experiments and many other adventures?
Strange, Punjab did not loose her share out of love but it is actually Sindh which provides the biggest chunk of money in Budget around (67%), and in return, we get nearly nothing.I wonder people call it a big sacrifice for smaller provinces. Lolx. Punjab is not giving money from its own generated revenue but its federal pool pumped by money from Sindh.
PT,
You can't run a macro-economy on favorable surprises. They have to be RULES that apply to the proivinces. That is the fatal flaw of this arrangement. What is the agreed time-path of fiscal adjustment in the provinces? What are their fiscal goals? There is nothing.
You want the federal government to raise revenue. Agreed. What about the provinces with the richest one in deficit? Why does Punjab have a deficit?
Dr. Sahib, Excellent analysis of a step in the right direction. Had Pakistan taken such steps from the earliest days, the national integration would have never been an issue. Our worthy politicians need to tone down their nonsensical rhetoric.
I agree that it is a good move in general but I think that some national issues still ought to stay with the federation. These involve issues like counter-terrorism, taxation, water management, environment management, and electricity generation. The problem of de-centralizing these functions is that at first widespread expertise is not available, secondly the solutions will be held hostage to local politics, and thirdly the solutions might end up being costlier because of siloed redundancies. Furthermore, keeping in view our high federal fixed costs, provinces have been allocated too many resources without holding them accountable for proportional revenue collection. The logical outcome of this is significant fiscal deficit which we continue to see.