Flashback to the NFC Award debates: What about the budget deficits?

The NFC award after its approval in 2009 has become an issue of last year, so I wrote this to try to understand what it means for the current economic scenario. 

In December last year, the Annual Conference of the Pakistan Society of Development Economists, our national experts came to the conclusion that the 7th NFC Award approved in 2009 was a political and not an economic Award.

Pakistan’s macroeconomic management has remained centralized until 2009-10. However,the 7th NFC Award and 18th Amendment contributed heavily to the decentralization of the macroeconomic management. We are all aware of the problems plaguing the economy, a narrow tax base (A World Bank report from 2004 states that out of the 39.1 million employed only a paltry 2.14 million, or 5.59 percent, paid taxes), double-digit inflation, rising debt servicing and a large budget deficit. In such time, is such decentralization logical?

It is common economic knowledge that a good government is that which can maintain fiscal discipline by keeping the budget deficit low. But in developing countries, especially Pakistan, governments love to spend but hate to collect taxes. So does the NFC Award that hands over 56 percent of tax resources to the provinces help maintain fiscal discipline? For some like Ashfaque H. Khan, Dean of NUST Business School in Islamabad and Sohail Zafar, Dean of the Lahore School of Economics Business School, the answer is a big ‘no’. Governments federal and provincial are never going to spend this among prudently.

Why so? Well the timing is such that the federal government’s expenditure is growing rapidly (more than doubling of interest payments in three years from Rs.365 billion to over Rs.800 billion this year, high defence spending, power sector subsidies of over Rs.175 billion, and crumbling public sector enterprises eating resources). There are hardly enough resources for the federal government to meet it’s own set expenditures, how does it expect to cater for provinces? The provinces themselves only generate 0.5% of total tax revenues; and the NFC Award further dampens the incentives to step up tax collection.

A historical overview of the NFC Awards shows that even with the amounts promised aren’t transferred. Well simply because they don’t exist. The data below illustrates his fact (there isn’t data available on the latest NFC Award).

Only around 75% of expected funds are typically forthcoming. NWFP is the worst, receiving limited funds of around 50–60%. Baluchistan is the only province receiving more than what it had expected. This discrepancy has resulted in a considerable shortfall of funds to most provinces, forcing them to borrow to meet their expenditure needs. It has also made planning at the provincial level more difficult.

Pakistan can only come out of the present economic crisis if it maintains fiscal discipline keeping its budget deficit low. But economists feel this may not be possible with the 7th NFC Award unless the provinces themselves can deliver surpluses to meet the federal deficits.

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