Pakistan is a constitutional federation with a three-tier system of government; federal government in the center, provincial governments in the provinces and local governments at the districts and lower levels. All these three tiers of government are managed through a fiscal federalist framework where functions are assigned to different levels of government with appropriate fiscal instruments. The federal government has the basic responsibility of macroeconomic stabilization & income redistribution through taxes and expenditures while provincial/local governments are entrusted with decentralized provision of socio-economic services to maximize welfare.
Revenue generation is highly centralized in the federal government while expenditure has been decentralized, largely, to the provincial governments. For example, during the last fiscal year which ended in June 2017, consolidate fiscal account of federal and provincial governments shows that 92% of total resources were collected by federal government while provincial governments spent around 38% of these resources. The increased spending space of provincial governments, well above their own resources, is provided by federal transfers through National Finance Commission (NFC) Awards.
The purpose of NFC Award is, thus, to achieve fiscal equalization to fill the gap between revenues and expenditures in the provinces. In case of Pakistan, the true spirit of fiscal federalism was first introduced in 1973 constitution. That spirit was then further strengthened in 2009-10 through 7th NFC Award where provinces share in total divisible pool taxes were considerably increased to 57.5% from 45%, which help all provinces. A special clause was inserted in constitution through 18th amendment that the share of provinces in each NFC award shall not be less than the share given to the provinces in the previous award. Further, a multi-indicator formula was devised in the 7th NFC award to horizontally distribute these increased resources among provinces. Population as a sole criteria of resource distribution among provinces was discarded and other indicators such as poverty, inverse population density and revenue generation capacity were introduced. This revised horizontal distribution formulae thus increased the fiscal space in Balochistan province where its share rose from a mere 5.11% to 9.09%. Research on the impact of 7th NFC award show that the award did improve fiscal equalization matrix among federating units as compared to previous awards. This, in turn, helped in improving budgetary allocation by provinces to vital social services such as education, health, rural and urban infrastructure.
7th NFC Award is truly historic for the four provinces but it misses out three ‘special status’ regions namely Gilgit Baltistan (GB), Azad Jammu & Kashmir (AJK) and Federally Administered Tribal Areas (FATA). These three regions of Pakistan receive only a one-liner block allocation in the federal budget, which is an arbitrary number not based on some rule or formula. The dream of fiscal equalization is thus unfulfilled for the Pakistanis inhabiting these regions. Out of these regions, FATA is integral part of the federation while GB and AJK are ‘autonomous’ regions as per our constitution. The true spirit of fiscal equalization in Pakistan can only be achieved by including these regions in the NFC award.
Moreover, 7th NFC Award given for fiscal year 2010-11 onwards, used poverty figures which were as old as 1998-99. Specifically, the award used an average of three poverty figures derived in 1998-99, 2003 and 2008. Using old poverty figures has serious implications for the fiscal equalization efforts in the 7th NFC award. Luckily, we now have two latest poverty figures calculated by UNDP & World Bank, which were owned by the federal government. Poverty figures of the UNDP capture the multi-dimensionality of poverty while the ones by World Bank captures the monetary side of poverty. These new poverty figures coupled with new population numbers of the recently concluded 2017 census should be used which will ensure fiscal equalization across different regions.
What will be the fiscal equalization impact of a new NFC award if FATA, GB and AJK are included as constituent parts of the next NFC Award? While provisional figures of 2017 census are out for the four provinces, Islamabad and FATA regions, we have to wait for the regional governments in AJK and GB for the population figures for these two regions. However, by plugging in new census & poverty figures in the old 7th NFC Award formula, we can derive an estimated NFC share for FATA. As per calculations of the author, FATA’s share in NFC award comes to around 5.2% of the total divisible pool taxes using the new population census with UNDP poverty figures. This is higher than the demand of an arbitrary figure of 3% NFC share for FATA as approved by Federal Cabinet on the recommendations of the Committee on FATA Reforms & is well above the current amount FATA receive as a one-liner block grant. FATA & FR regions were allocated a total of Rs 55.5 billion in 2017-18 federal budget. In contrast, a 5.2% share in NFC for FATA will translate to Rs 118 billion, even if we do not include FATA in other state transfers. Besides due share in NFC awards, FATA, GB & AJK also deserve Royalty from various dams like the other four provinces.
Being constituent parts of NFC, the four provinces receive regular annual fiscal transfers from the federal divisible pool taxes. In contrast, FATA, GB & AJK receive ‘gifts’ from the federal government in terms of block allocations which need to be converted to a due right of these regions. To achieve fiscal equalization among all regions of the federation of Pakistan, the next NFC award need to remove these anomalies. The new award should also correct the historical neglect of these regions by allocating a specific percentage of resources to regions over & above their due share. Regional inequalities has serious implications for the future of our federation and a higher economic growth can only be achieved by a balanced and equal growth across Pakistan.