The recent economic crisis has sparked a heated debate on the significance of fiscal federalism and the effectiveness of the parliamentary system in Pakistan. Although previous governments have been blamed for the crisis there seems to be no tangible strategy to move forward. Hence it is pertinent to assess the efficacy of this debate in the current context.
Fiscal federalism or multi-layered governance is considered to be an effective dispensation to address fiscal needs of diverse and heterogeneous regions and help bring governments closer to people.
A World Bank Report (1999-2000) notes, “The experience of the last 15 years shows that the devolution of powers affects political stability, public service performance, equity, and macroeconomic stability.” Decentralisation can better match service provision to local preferences and increase accountability. Evidence suggests that local informational advantages work in improving outcomes. Many benefits from decentalisation accrue in developing economies. Decentralisation has therefore been encouraged as an important governance reform by organisations such as the World Bank.
Political events as well as historical exigencies have had roles in shaping intergovernmental fiscal relations in most federations. The structure of an intergovernmental transfer system varies across countries depending on the extent of service and revenue functions assigned to subnational governments, the fiscal capacity of sub-national governments, extent of inequalities across subnational regions, and the specific nature of priority national objectives.
Major progress towards fiscal decentralisation in Pakistan took place after the passing of the 18th Amendment and the constitution of the seventh National Finance Commission in 2010. In the seventh NFC Award the proceeds of the provincial share of the divisible pool were increased from 46.25 per cent to 56 per cent for 2010-2011, and then to 57.5 per cent for the rest of the award period. The seventh Award period ended in June 2015. There was a constitutional obligation to initiate deliberations on the next Award. There has been a profound and protracted political and ethical lapse on the part of subsequent governments.
Prime Minister Imran Khan sometime ago expressed certain reservations regarding the burgeoning controversy over the 18th Amendment. He said, “After the passing of the 18th Amendment, the Federation has become bankrupt.” He said the Centre had to incur a shortfall of Rs 600 billion at the beginning of every fiscal year. Out of the 4,500 billion collected by the Centre, Rs 2,500 billion is transferred directly to the provinces. He said despite such transfers, some of the regions still remain backward.
The International Monetary Fund has asked the government to renegotaite revenue sharing with the provinces under the National Finance Commission. Some experts believe that it is suggesting that Islamabad cut the money it gives to the provinces. Should this happen, it will be a direct violation of Article 160(3A) of the Constitution that clearly states that the share of the provinces cannot be reduced in the divisible pool of taxes.
The four provincial governments together generate revenues equivalnt of 1.4 per cent of the GDP. It is only nine per cent of national revenues
The opposition parties have been warning against such moves and have referred to rolling back of the 18th Amendment as a weakening of the Federation. Instead of trying to improve the fiscal situation of the country through concrete policy measures, boosting revenues at provincial government levels and enhancing the share of federal government through resource mobilisation, there have been frivolous suggestions regarding switching towards a presidential system. The ruling party leaders incessantly cited the British Parliamentary system as a model of governance before elections; in fact, the incumbent governor of the Punjab has served as a member of the Labour Party of the United Kingdom.
The seventh NFC Award had also helped resolve issues like Gas Development Surcharge and Hydroelectricity Profit. Instead of engaging in meaningless trifles and dismantling the progress made in the institutional reform the government needs to further the reforms initiated in the 18th Amendment regarding decentralisation such as constituting local governments, and updating revenue sharing formulas according to current needs and demands of the provinces.
The provincial governments, on the other hand, must also show responsibility towards fiscal equalisation by generating their own revenue.
According to economist Dr Hafiz A Pasha, the four provincial governments in Pakistan together generate revenues equivalent to 1.4 per cent of the GDP. This is only 9 per cent of national revenues. The federal government generates the remaining 91 per cent. Provincial governments must assess and tap the potential of agricultural income tax, urban immoveable property tax, stamp duty on property transactions, and sales tax on services. Also, the provincial governments should try to tap non-tax revenue sources that remain largely unexploited.
It could be helpful to evaluate governence systems in neighboring countries. The vertical fiscal imbalance and intergovernmental fiscal transfers are integral part of the federal system of governance. Both India and Pakistan largely use unconditional transfers to address vertical fiscal imbalances. A study by SPDC (2018) shows a positive impact of these unconditional transfers on socioeconomic development. Therefore, it is recommended that FCs (in India) and NFCs (in Pakistan) should continue untied and transparent intergovernmental transfers to address vertical imbalances.
The comparative analysis presented in an SPDC study (2018) shows the differences in tax assignments of sub-national governments resulted in large vertical imbalances. However, the vertical imbalance in Pakistan is more striking than India. Studies on fiscal federalism show growing evidence that large vertical fiscal imbalances are a threat to fiscal stabilisation and efficiency. Therefore, the overall level of own-taxes of both state/provinces and local governments should be increased.
Furthermore, advancement on the SDGs in a federal country is a shared responsibility of all tiers of government. Considering the existence of large vertical fiscal imbalances in both countries, strengthening the federal fiscal system would help improve the resource position at the sub-national level to progress on SDGs. However, this entails evidence-based policy research at the sub-national level, connecting SDGs to sub-national finances and fiscal transfers.
It is high time that the government decided on an up-grade of horizontal revenue sharing criteria among the provinces in the current scenario. In light of the Census 2017, the merger of the FATA into the KPK, and human development needs of the provinces in view of SDGs, there needs to be a revised horizontal revenue sharing arrangement among the provinces. Adequately addressing the fiscal needs of the sub-national governments would strengthen the Federation, whereas weakening their capacity could also have alarming consequences for the provinces.
The government needs to be apprised about the economic pain the masses would feel if the economic crisis is prolonged and a collision course is adopted instead of taking political and business stakeholders on board. Instead of opening new a Pandora’s box, it is time to formulate a strategic plan to insulate the poorest segments from the harsh effects of price hikes and stagflation.
The writer is a freelancer