Avoidable recentralisation

By Dr Pervez Tahir

Published: November 2, 2018
The writer is a senior economist. He can be contacted at pervez.tahir@tribune.com.pk

The passage of permanent Constitution in 1973, the signing of charter of

democracy in 2006, the 7 th NFC award and the 18 th amendment in 2010 are
important milestones on the road to a true federal republic. Taking the process
further, the PTI government is working on the hitherto missing link of
devolving political and fiscal powers to the local level. This encouraging
development is, however, clouded by the disturbing statements of some
government functionaries suggesting the reopening of the settled issues.
Recentralisation and local governance are a piece reminiscent of the
nondemocratic episodes of our history. A democratic government is expected
to take democracy forward.

The first hints of the desire to recentralise came from the misgivings about the
7th NFC award and the financing difficulties of the federal government. The
miltablishment has felt the strain from day one. Donors, used to one-window
operation in the security of Islamabad, were also unhappy. Lately, the IMF has
joined the band. Instead of making the next award, the PML-N found it safe to
continue with the existing award. Let it be said that the federal share in the
divisible pool of taxes was reduced from 55 per cent in 2009-10 to 42.5 per
cent since 2011-12. In effect, the share was further reduced by the assignment
of one per cent of the net proceeds of divisible pool to Khyber-Pakhtunkhwa
for expenses on war on terror, protection of the projected share of Balochistan
and continued funding of vertical health programmes and the HEC.

There is no denying that the federal government has a problem. But to hold the
provinces responsible for it is a bit of a stretch. The 7th NFC framework
required the federal and provincial governments to “streamline their tax
collection systems to reduce leakages and increase their revenues through
efforts to improve taxation in order to achieve a 15% tax to GDP ratio by the
terminal year ie 2014-15.” While the provinces trebled their contribution from
0.4% to 1.2 % by 2017-18, the federal government inched from 8.9% to 11.8
% of GDP or by 33%. The total remains 13% of GDP, less than the target that
federal government should have achieved three years ago. Failure at tax reform
should have led to prudence in federal spending. Far from it. Not only that the
federal government continued to spend in areas devolved to the provinces, it
forced the later to show surpluses to lower the overall fiscal deficit. Now that
provinces are approaching the assumption of full responsibilities under the
18th amendment, deficits have occurred in the last two years. However, they
have not crossed the borrowing limits set by the National Economic Council.

The latest challenge to the fiscal federalism is presented by the merger of

erstwhile FATA with K-P. The implementation committee for FATA reforms
demanded 3% of the gross federal divisible pool for a period of 10 years.
Reportedly, the provinces are reluctant to accept a cut in their share. There is a
constitutional bar on reducing their percentage share anyway. A simpler way
will be to just stick to the law. From the provincial share in the divisible pool,
FATA as part of K-P will in any case receive 2% plus on the basis of
population and backwardness. This will be topped up by the increase
attributable to 1.6 increase in the population of K-P, resulting mainly due to
the migration from FATA. The gap remaining should be bridged from the
federal share in the divisible pool. Tax reform to enlarge the cake, not
constitutional deviation, should be the way forward.

Published in The Express Tribune, November 2 nd, 2018.