Rolling back the NFC award?

As if the federation did not have enough problems, the resource mobilisation and expenditure management panel of the Expert Advisory Council (EAC) set up by the Ministry of Finance has decided to make its own contribution. Instead of focusing on measures to rationalise the oversized spenders at the federal level and bring into the tax net the well-known delinquents, the panel wants to restore the federal dominance in resource distribution. In 2010, the seventh National Finance Commission (NFC) award raised the provincial share to 57.5 per cent. This is a dangerous game which, unfortunately, has already begun in a disguised form by forcing the provinces to show heavy surpluses in the current year to meet the federal deficit. In the first six months, federal expenditure exceeded the revenue by Rs694 billion. However, a provincial surplus of Rs165 billion reduced the consolidated fiscal deficit by that much. The game neither makes economic nor political sense.



A business-leaning political leadership that has failed to achieve the revenue target fixed for the current year with great fanfare, an establishment which claims the lion’s share of expenditure and donors whose money has not achieved reform of the tax machinery would love it. It is no accident that the panel includes economic enthusiasts from the Musharraf team. True, the provinces have traditionally fought shy of mobilising their own resources. The jump in their NFC share reduced any incentive there was to expand their tax base. Their expenditure practices also leave much to be desired. These weaknesses make a case for reform to enlarge the cake, not to shift it around. Most productive areas of expenditure — education, health, water supply and sanitation, agriculture, irrigation — lie in the provincial domain. Federal fiscal imprudence far outweighs that of the provinces. Since 2005-06, the federal government has been running a revenue deficit. In other words, it has been borrowing for current expenditures and not just for development. Debt servicing, security, civil administration and subsidies are its major heads of expenditure, all falling in the category of unproductive expenditure. If the provinces have not generated their own revenue in line with the understanding given in the NFC, the ratio of FBR’s tax collection-to-GDP has been a single-digit affair since 2001-02. Direct taxes constitute only one-third of the tax collection, more than half coming from withholding agents. The indirect Sales Tax is the largest source of revenue — 55 per cent of its collection through the imports from just five items and 67 per cent of the domestic collection only from six items. Despite the devolvement of 17 ministries to provinces, federal expenditure has risen instead of decreasing. As a matter of fact, most devolved ministries continue to function by another name. Reform, not the rollback of the NFC, is the way to deal with the federal fiscal cliff.

A centralised system of political and economic decision-making and the resultant need to concentrate resources at the centre was among the main reasons for the separation of East Pakistan. The 1973 Constitution was the first major step to address this imbalance. However, the spirit of the Constitution was not reflected in resource allocation until 2010, the year of the Eighteenth Constitutional Amendment and the seventh NFC award. The former inserted Article 160 (3A), stating: “The share of the provinces in each award of the National Finance Commission shall not be less than the share given to the provinces in the previous Award.” Disturbing this hard-won consensus is insane. By choosing to be silent to date on the issue, has the finance minister, who chairs the EAC, acquiesced?

Published in The Express Tribune, May 9^th, 2014.

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