Budget and the NFC

The budget for the fiscal year of 2021-22 has followed the constitutional provisions for the distribution of resources among the four provinces of Pakistan. Punjab will get the largest share from the federal divisible pool. The other three provinces will get their shares which will be collectively equal to what Punjab will get. From what the federal government will get in the shape of taxes, it will transfer Rs3410 to the provinces. Nearly 50 percent of this amount will go to Punjab which will have at its disposal nearly Rs1700 billion as compared to Sindh’s Rs848 billion. The share of Sindh is nearly half of what Punjab will receive and nearly one-fourth of the total divisible pool coming from the federal government. Khyber Pakhtunkhwa and Balochistan will receive Rs559 billion and Rs313 billion respectively. This is pretty much in accordance with the procedure for distribution of resources among the provinces as outlined in the constitution. Article 160 of the Constitution is fairly clear in this matter that provides for the setting up of the National Finance Commission (NFC).

But the issue has been the reconstitution of the NFC that must take place at intervals not exceeding five years. This reconstitution is significant as the NFC has the mandate to make recommendations for distribution of resources between federal and provincial governments and among the provinces. Another issue has been the allocation of one percent of the net proceeds from the divisible pool taxes to the government of Khyber-Pakhtunkhwa to meet the expenses of the ‘war on terror’ that has been going on for years. After the passage of the 18th Amendment, in 2010-11, the government assigned 56 percent to the provinces and the next year it was raised to 57.5 percent from the financial year 2011-12 onwards. Since multiple weights are used for the province-wise allocation as agreed upon nearly a decade ago, population is not the only criterion for this calculation. Other yardsticks such as backwardness and a share in revenue generation are also taken into account.

The credit for the strict application of the 7th NFC Award in the recent budget goes to Finance Minister Shaukat Tarin who was one of the key architects of the award for federal finances. In the past three years, some leaders had voiced their reservations about the NFC Award, but it seems Tarin has stuck to his position. It must be clear to all that the fiscal troubles at the federal level are not the making of the provinces which contribute their due shares to actually run the federal government. It is essentially the public debt that the federal governments fail to control for various reasons. And this inability has been noticeable throughout the decades. What the government needs now is to focus on increasing the country’s tax-to-GDP ratio as envisaged in the NFC Award. The government needs to increase the size of the financial pie, rather than eyeing the provincial shares from the divisible pool.