Fiscal federalism
It took a while, but finally the IMF has also noticed how fiscal devolution under the NFC award is not quite getting the job done as planned. Signing off on ‘substantial fiscal resources from the centre to the provinces’ is one thing, but equipping the provincial machinery to raise taxes – while expanding the overall tax net to include agriculture and real estate – is quite another. This fiscal federalism system, which was supposed to increase the tax-to-GDP ratio to 15 percent by mid-2015, never actually got off the ground, and now it has also made its way to the Fund’s list of grievances.
Many urged the central government to make provisions for the FBR to provide requisite training to provinces so the political initiative could be translated into quick on-ground progress. As it were the provincial machinery had no experience of raising revenue, something that is still lost on the central government. However, there is a natural roadblock to such a process that embarrasses the government; hence little progress. The FBR is hardly in a position to teach the complex art of collecting taxes to smaller units. Its performance has never been up to the mark. Under the present government, especially, tax collection has worsened after intense campaigning on promises of improving revenue through tax reforms come what may.
As usual the finance ministry has tried to sidestep the real issue. Focusing on the deficit figure of the outgoing year alone misses the point. Granted, the government has won precious brownie points for reducing the deficit by 3.1 percent. But a lot of it owed to the international Brent collapse and very little improvement came about from government policy, which has hardly budged. The finance ministry must, instead, accept its failure on the revenue, especially tax, front. And, as it tried to promise, it must immediately revamp not only the FBR, but also help the promises with the essential capacity building for improving revenue collection and putting some life in the NFC.
