Economy watch: Pre-budget moot promotes grasp of fiscal federalism

Lawmakers attend workshop organised under UNDP-funded project.

LAHORE:

A pre-budget workshop was organised on Tuesday to facilitate Punjab Assembly lawmakers’ understanding of fiscal federalism and the provincial budget.

Parliamentarians from the treasury and opposition benches attended the workshop organised by the Parliamentary Support in Pakistan project of the UNDP.

Fiscal federalism

Economist Dr. Pervez Tahir shed light on political economy of federalism, the impact of the 7th National Finance Commission (NFC) award and the 18th Constitutional Amendment on provincial budgets, fiscal decentralisation, provincial revenues after devolution, strengthening of the Council of Common Interests’ role, realistic planning for efficient social sector, provincial development schemes and PSDP.

Tahir said fiscal federalism was a politically agreed arrangement for division of resources between the federal and provincial governments (vertical distribution) and among provincial governments (horizontal distribution).

Talking about the impact of 7th NFC award on provincial budgets, Tahir said in 1997 all federal taxes were distributed by a ratio of 62.5:37.5 ratio and in 2010 by a ratio of 42.5:57.5.

He said the cost of collection of the tax during this period had reduced from 5 per cent to 1 per cent and one per cent of the net proceeds of the divisible pool before vertical distribution was earmarked for Khyber Pakhtunkhwa to meet the cost of the war on terror. He said Balochistan was guaranteed a projected share even if the NFC projections did not materialise and Sindh was allowed 0.66 per cent of its share in the net proceeds of the divisible pool to make up for the loss resulting from discontinuation of distribution of 1/6th of the sales tax proceeds in lieu of octroi.

Tahir said that after the 18th Amendment, 15 ministries (18 divisions) had been devolved to the provinces and the provinces had complete control over the social and production sectors, a larger role in the electricity generation and water sectors, ports, natural resources, and had a larger public sector development programme than the federal government. After the 7th NFC award, the provinces had more revenue to spend than the federal government and were also allowed to contract domestic and external debt.

Tahir said fiscal federalism had accommodated diversity for the first time but not enough had been done to correct past disparities or prevent future ones. Low tax-to-GDP ratio had kept the resource envelop small.

Tahir said the Federal Board of Revenue needed structural reform, supplemented by provincial control over natural resources and revitalisation of the provincial finance commissions to reflect diversity and prevent disparity at the local level.

Procedures in the PA

Earlier, Inayatullah Lak, the legislation (parliamentary affairs and research) director general, briefed the parliamentarian on the budgetary process. He said the legislature exercised control over the government’s financial affairs by considering and approving the budget, and by considering reports of the Auditor General of Pakistan. Lak said a member could move a cut motion to reduce the amount of a demand in the finance bill. The speaker was authorised to decide whether a cut motion was admissible or not under the rules, he added.

Published in The Express Tribune, May 28^th, 2014.