Fiscal negotiations

Given the fact that it is a negotiation over money, it is perhaps, natural to expect most parties to ask for as much as they can. And when it comes to the fate of the National Finance Commission (NFC) Award, which will likely allocate several trillion rupees over its five-year term, we can understand that there are many perfectly legitimate ways to distribute the money that make rational sense. Having said that, in the debate between the federal and provincial governments over how much money should stay in Islamabad and how much should be transferred to the provinces, consider us sympathetic to the federal government’s view. In a nutshell, the provinces believe that, given the fact that they were granted more legislative and executive authority through the 18^th Amendment to the Constitution, they are entitled to more money from the federal pool of tax revenues in the 8^th NFC Award. The federal government agrees that the provinces would need more money to manage their new responsibilities, but argues that it was already allocated to them in the 7^th NFC Award, which represented the first time that the provinces were granted more than half of all federal tax revenues.

The provincial governments are technically correct to argue that their responsibilities have increased after the agreement on the 7^th NFC Award was signed in December 2009. But we are inclined to agree with Islamabad’s stance: the 7^th Award dramatically increased the allocation of financial resources to the provinces in anticipation of what were by then very advanced deliberations on the 18^th Amendment, which ultimately passed parliament in April 2010 to become law. Islamabad’s assertion is reasonable: if the provinces want still more money in the 8^th Award, they should agree to take on more responsibilities.

At the same time, however, we do believe that all of this haggling would be rendered irrelevant if both the federal and provincial governments were able to improve their revenue generation capabilities. It may seem astonishing to say this, but the provincial revenue collection efforts thus far have been so pathetic as to make the Federal Board of Revenue (FBR) look competent by comparison. Which, of course, is not to say that the FBR is particularly good at its job, when one considers the fact that the Rs3.2 trillion tax collection target for fiscal year 2016, which would only represent a little over 12 per cent of the total size of the economy, is considered completely beyond the ability of the FBR to achieve and is actively being criticised by many in Islamabad as an unrealistic target.

Ultimately, however, the debate over who gets how much money, while important, should be subservient to what we believe is a much more important argument: how can the money the government does collect in taxes be spent more efficiently. Sindh, for example, is the province that most loudly complains about financial heavy-handedness from Islamabad and yet it is also the provincial government that is among the most inefficient at spending the money that does get allocated to it. It is not uncommon for Sindh to be unable to spend over half of its development budget allocations, simply because the government has not bothered to build up the capacity to efficiently utilise taxpayer money.

The truth is that when it comes to managing money, the performance of both Islamabad and the provinces is nothing short of a disgrace. Far from being able to crack down on tax evasion, neither level of government even has a plan to tackle what is unquestionably one of Pakistan’s biggest problems. And when it comes to spending, the level of waste would leave even the most casual observer frustrated with the inefficiency exhibited by the bureaucracy. And this is before we even take into account the rampant corruption that we as a nation have become inured to. The debate taking place in Islamabad over the NFC allocations is an important one. But both sides should remember their larger accountability to the taxpayers and voters whose money they are making decisions about.

Published in The Express Tribune, May 2^nd, 2015.

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