Growing current expenditure and low tax performance at heart of Centre's ballooning deficit

The federal government is searching for a scapegoat, which is at the core of its ballooning deficit, to cover up its inability to curb its increasing current spending and its misleading tax results. Or how else can you justify your critique of what the cabinet called ‘misplaced’ provincial budget decisions and their ‘bad’ tax effort last week?

According to information minister Shibli Faraz, the government claimed that the provinces had mostly redirected ‘additional’ money they earned due to their increased share of the federal divisible tax pool under the 7th National Finance Commission (NFC) award to build jobs, pay fat salaries to their favourites, and buy cars and other luxuries instead of increasing their room In addition, they were deprived of opportunity to lift their own provincial tax and other revenues through expanded federal payments.

He did not mention the names, but it was evident that the minister targeted Sindh, the province controlled by the opposition Pakistan People’s Party (PPP), the main supporter of the landmark 18th amendment and the 7th NFC award, when he said it was not sure where the billions granted to a specific province were being used.

Islamabad has struggled to increase the tax-to-GDP ratio, because of political factors, continues to invest a lot of money to retain devolved ministry systems and functions, and is not prepared to slash its existing spending

In favour of his statement, the minister argued that the provinces were still required by the federal government to chip in significant sums to help them cope with the harmful impacts of natural disasters and pandemics, as well as to build infrastructure. The centre is thus not left with adequate capital to fund its own budget and is required to borrow to cover its expenditure. In view of this condition, the minister continued, the federal government is considering developing a system to introduce accountability and impose financial discipline in the manner in which the provinces invest funds, as well as connecting federal transfers to their social and e

The plan to create some sort of system to make the federating units responsible for how, where and where they invest their money by imposing fresh curbs on their spending choices seems to be a continuation of the center’s previous efforts to somehow cut their disbursements from the divisible pool of taxes and raise its own share. It is also uncertain if Islamabad plans to enforce the new strategy through improvements to the current NFC system or through the implementation of a process outside of its framework. In this case, to make room for any such process, the government would be forced to change the constitution.

Instead of spinning the arms of the provinces, the central government will serve the citizens by making itself honest and responsible.

“In the current constitutional scheme of things, there is no room for such mechanisms or curbs on the provinces,” a person who has been part of the ongoing NFC talks in recent years told this correspondent. ‘NFC’s sole duty is to split the tax receipts collected by the Federal Board of Revenue (FBR) vertically between the centre and the provinces for the whole federation (both the centre and the provinces) and horizontally between the federating units for the whole federation (both the centre and the provinces). If a province spends its money and where its respective legislature decides it. How can regional legislatures be dominated by the centre or twist their arms? That will be the Federation’s negation. Instead of twisting the arms of the provinces, the central government will provide a service to the people by keeping itself honest and accountable, he added on the condition of anonymity.

The plan calls for desperation on the part of some elements in the government and the security apparatus to overturn the 18th amendment and transfer the blame as decided in the award for federal incompetence and failures to increase the tax to GDP ratio to 15% (in its five-year term to 2015). To raise the size of the financial slice, the PTI government is doing everything but raising tax collections. After the award’s finalisation, the provinces have greatly expanded their infrastructure budget and their own tax collections. It is the federal government that has not succeeded in reducing its existing budget and rising FBR tax collections. It has to blame itself for its growing budget deficit and not the provinces,” he concluded.

Analysts accept that blaming the increased territorial share of federal revenues on the federal budget deficit is completely false. Different analyses performed by independent organisations and regional governments on the real effect on the center’s spending of expanded federal payments to federal units indicate that the decrease in the federal share of the tax pool led to its shortfall by just 0.8 pc to 1 pc of GDP. “The real reason for the deficit lies elsewhere: Islamabad has failed to raise the tax-to-GDP ratio, continues to spend a lot of money on maintaining departmental and functional structures for political reasons, and is not prepared to cut its current expenditure,” noted a provincial official who was active in planning the Punjab case for the NFC talks.

Nonetheless, he accepted that the provinces, like the centre, also needed to urgently strengthen their financial and tax governance in order to reduce their non-essential spending, to cope with financial leaks and to build a wider fiscal room for social and economic growth. We ought to grant assemblies more control over how, where and where public funds are invested in order to make the provinces fully responsible to their people. In addition to the mechanism of administrative and financial devolution initiated after the 18th amendment to the lowest levels of the municipal government, this would entail significant improvements in the expenditure mechanisms and substantial developments in infrastructure at every level of the government.

Tags: tax