Says it will focus on transferring expenditure to the provinces. PHOTO: FILE
In an attempt to strike a balance on fiscal decentralisation, the government has assured the International Monetary Fund (IMF) that the upcoming round of negotiations with the provinces over the new National Finance Commission (NFC) award will focus on transferring some federal expenditure to the provinces.
The assurance came in the Memorandum of Economic and Financial Policies (MEFP) that Islamabad submitted to the IMF recently. However, analysts fear that any such attempt will open a Pandora’s box, allowing the provinces to raise politically sensitive issues.
“The government will seek a new agreement that will ensure that the terms of fiscal decentralisation find a balance between devolution of revenue and expenditure responsibilities”, reads the MEFP report that the IMF released last week.
Subsequently, Islamabad also assured the monetary body that the negotiations with provinces for the 8th NFC Award will begin from July this year.
The 7th five-year NFC award had been agreed in 2010 between the federal and provincial governments. The award increased the provincial shares in federal taxes from 47.5% of the divisible pool to 57.5%. Under the 18th amendment in the constitution, the provincial share in federal taxes cannot be reduced from 57.5% until a new amendment is made.
Sharing details, officials said that the PML-N-led government wanted to go the extra mile and was contemplating on asking the provinces to shoulder the federation by sharing expenditures incurred on defence and maintaining law and order in the country.
If the federation presses the provinces into taking on these responsibilities, the federating units in return can ask for powers to collect all types of taxes and the powers to determine the federation’s share of taxes, said Dr Kaiser Bengali, an economist and a leading expert on provincial finances.
“If the federal government is going to introduce the principle of funding the federation by provinces, it should be done in totality,” said Bengali. He said then the responsibility of collection of taxes should be with the provinces and they will determine the federation’s share in taxes -- which will be a reversal of the present mechanism.
The IMF agreement, according to Dr Bengali, is unfair because it is silent on the issue of slashing the federal government’s expenditures. “We did not try to get more money for the provinces to finance the federal government,” he added.
According to another expert, the consequences of such a debate could be explosive, as it could turn the federation into a confederation.
At a time when Musharraf’s administration was negotiating the NFC in 2004-05, he said, the Muttahida Qaumi Movement (MQM) had floated a proposal to transfer all types of tax collection responsibilities to the provinces that in return will fund the federation. The proposal had been rejected as its implementation would turn the country into a confederation, he added.
According to the MEFP, the 7th NFC award left the federal government with an imbalance between its remaining expenditures responsibilities and its revenues.
Critics of the 7th NFC award hold former finance minister Shaukat Tarin, ex-finance secretary Salman Siddique and former special finance secretary Asif Bajwa for not linking the increase in share of revenues with the responsibilities that under the constitution are provincial subjects.
Published in The Express Tribune, January 6th, 2014.
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