Provinces shares static at 35 percent for over seven years: report
LAHORE (May 10 2008): The share of total transfers to provincial governments in the Federal revenues (tax plus non-tax) has remained virtually static at 35 percent over the last seven years. In addition, it is expected that revenue transfers from the divisible pool and grants-in-aid will constitute 50 percent of the revenues in the divisible pool by 2010-11.
This was stated in a report titled "State of the economy: challenges and opportunities," launched by the Institute of Public Policy (IPP) of the Beaconhouse National University. The report was prepared by a team of eminent economists - Sartaj Aziz, Shahid Javed Burki, Dr Hafeez A. Pasha, Dr Parvez Hasan, Dr Akmal Hussain and Dr Aisha Ghaus Pasha.
The report says: "The fiscal federalism" plays an essential role in addressing the issue of regional disparities. There is a need to ensure the pattern of inter-governmental fiscal relations evolved in such a way that the greater need for support to the more backward provinces is recognised."
It says the National Finance Commission (NFC) is expected to make an award every five years to resolve the problems, first, of vertical imbalance in resources between the Federal government and the four provincial governments combined and, second, the horizontal imbalance among the provincial governments. "However, the NFC has failed over the last six years since 2002 to arrive at a consensus on a new award to replace the 1997 award.
"Consequently, the President of Pakistan has promulgated an interim arrangement for transfers with effect from 2006-07. The changes with respect to the 1997 award are, firstly, the share of provinces in the divisible pool of revenues has been increased from 37.5 percent to 41.5 percent in 2006-07, rising to 46.25 percent by 2010-11; secondly, in 1997 NFC award grants-in-aid were only given to NFWP and Balochistan, which has now been extended to all four provinces on the basis of pre-determined shares.
"Overall, it is expected that revenue transfers from the divisible pool and grants-in-aid will constitute 50 percent of the revenues in the divisible pool by 2010-11. The sharing of revenues in the divisible pool, based on population and the coverage of straight transfers, remains unchanged," the report said.
The report also says the basic issue is whether over the last seven years fiscal transfers have been adequate and if the goal of fiscal equalisation has been achieved whereby the two smaller and less developed provinces, NWFP and Balochistan, have received higher transfers on a per capita basis.
Incidentally, in the Pakistani context, straight transfers have also been performing historically an equalisation function. NWFP has access to hydro-electricity profits and Balochistan to revenues from natural gas, which raise per capita transfers significantly.
A look at the four provincial budgets reveals that transfers have probably been adequate to support an increase in their combined share of public expenditure.
But a more in-depth analysis reveals that provincial expenditures have risen because of greater resort to borrowings, which are now financing as much as two-thirds of development expenditure.
In addition, the share of total transfers to provincial governments in the Federal revenues (tax plus non-tax) has remained virtually static at 35 percent over the last seven years. The reports adds the overall growth in per capita transfers of all types to the provinces from 2000-01 to 2006-07 has been 144 percent for Sindh, 106 percent for NWFP, 103 percent for Punjab and 75 percent for Balochistan.
It appears that the process of fiscal equalisation has largely broken down with the highest growth in transfers to the most developed province, Sindh, and the lowest growth in transfers to the least developed province, Balochistan.
Today, the level of transfers per capita to Sindh is higher than NWFP, while Balochistan is unable to meet even its current expenditure obligations, the report says.
Overall, the report adds, a review of the process of inter-governmental relations over the last seven years reveals the emergence of serious imbalances. This has been one factor, contributing to faster growth of the economies of Sindh and Punjab as compared to Balochistan and NWFP during the current decade.
Clearly, there are strong reasons for dissatisfaction of the smaller provinces with the workings of the federation during the tenure of the last government.
Now, the report says, the elected coalition governments are in place in Islamabad and the provincial capitals with the common element of one party, PPP, there is need for urgent reconvening of the NFC to arrive at an early consensus award which ensures the following:
-Further expansion in transfers from the divisible pool to cover the emerging sizeable deficits of the provinces with the understanding that they will, henceforth, face a "harder" budget constraint, with only limited access to borrowings. Provision will also have to be made for higher transfers to cover the costs of taking on Concurrent List functions by the provinces.
-Adoption of multiple criteria for determination of transfers from the divisible pool, including, in particular, backwardness, to ensure more fiscal equalisation. The collection criteria could also be given some, albeit small, weight. Punjab should now have less objection to this as research at IPP shows that the share in collection from the province of apportionable taxes (all taxes, excluding taxes on imports) has approached its population share.
-Higher grants-in-aid are restricted largely to NWFP and Balochistan.
-Review of the formula for determination of hydro-electricity profits to NWFP, a long-standing demand of the province. There is no doubt that the transition from an ad hoc award by the President to a consensus based NFC award will be a major step forward in strengthening the federation and be a key indicator of success of the newly elected governments.
Business Recorder [Pakistan's First Financial Daily]
