FISCAL REVIEW 2011 - KP budget: Ill-defined Priorities

For a province marked with large scale devastation and deprivation on multiple accounts, one would expect that the government of Khyber Pakhtunkhwa would have focused better on social development in its first post-18th Amendment fiscal budget. Yet, the reality appears far from what circumstances necessitate.
Somewhat similar to Punjab, Khyber Pakhtunkhwa also showed an improvement in general revenue receipts during 2010-11 and 2011-12. The 7th NFC Award transferred greater resources to provinces by increasing their share in the divisible pool to 56 percent during 2010-11, and 57.5 percent during the remaining years of the Award compared to 49 percent under the previous distribution formula.
Khyber Pakhtunkhwa thus benefited from additional transfers on three accounts. First, recognising its role as frontline province against terrorism, one percent of the net proceeds of the divisible pool has been earmarked for the province during the entire period of the award. Second, the province also benefited from more than 10 percent weightage given to poverty and backwardness in horizontal distribution of divisible pool. And finally, the 7th NFC Award resolved the long standing issue of net hydel profits, which has further improved the fiscal health of the province.
As a result, the general revenue receipts of the province reached almost Rs 233 billion from Rs 200 billion in 2010-11and Rs 133 billion in 2009-10, indicating a growth of 16 percent and 74 percent respectively. But if federal transfers, profit for hydroelectricity and GST services are excluded from provincial receipts, the provincial tax and non-tax revenues will remain at less than Rs 10 billion. This indicates an over reliance on federal transfers, which creates uncertainties in implementing the fiscal policy.
The federal government, in its present budget, has overestimated tax revenues in order to bring the budget deficit within the IMF targeted framework. Consequently, federal transfers from the divisible pool to all provinces in general, and to Khyber Pakhtunkhwa in particular, are on the higher side. Given the 15 percent over estimation, the federal divisible transfers are, therefore, likely to decline by Rs 22 billion in the planned fiscal period.
NO RATIONALISATION IN EXPENDITURES One of the positive developments reflected in the budget documents is the more than 30 percent share of development expenditures in the total outlays during 2010-11 and 2011-12. The higher share of development outlay for the new physical and social infrastructure may generate higher employment opportunities and provide greater scope for the province's economic growth.
Despite higher transfers and implementation of the 18th Amendment, the non-development (current) expenditures do not show much dynamism. Current expenditures - that refer to the recurring operational costs to provide for and maintain a range of government services - grew from Rs 139.5 billion in 2010-11 to Rs 149 billion in 2011-12.
The provincial budget documents clearly indicate that 68 percent of the non-development budget has been spent on the wage bill (pay and pension) which is constantly increasing. Given that a 15 percent increase has been announced in salaries and considering a full year impact of devolution under the 18th Amendment, only 6.8 percent growth in non-development expenditures seems to be an underestimation.
The low growth in non-development expenditures and comparatively high growth in revenues indicates a revenue surplus of more than Rs 83 billion leading to a budget surplus of Rs 2.5 billion. However, achieving these two surpluses would be a daunting task for the provincial government. Equally important is to quantify the impact of devolution on non-development expenditures and fiscal planning.
The budget documents for the devolved ministries indicates that out of eighteen departments, only eight will have an impact in terms of provincial expenditures, whereas ministries such as local government and rural development, special education and manpower show no budgetary impact of devolution. Surprisingly, the devolved expenditures of departments, including livestock/dairy Development, minorities affairs and statistics division have not been reported in the documents. Table 2 shows the sector-wise impact of devolution on budget 2011-12.
The budget documents indicate a meager Rs 0.5 billion impact of devolution of services on non-development expenditures. In relative terms, this indicates an increase of only 0.3 percent of non-development outlays. In monetary terms, an impact of Rs 0.17 billion is estimated for the health sector, followed by population welfare and education sectors.
Population welfare is the only department that shows a marked increase in expenditures due to devolution. The expenditures of this department increased from Rs 12 million in 2010-11 to 170 million in 2011-12 indicating an increase of Rs 158 million. Similarly, the education department will have financial implications of roughly Rs 70 million, whereas the remaining (devolved) departments collectively show a financial implication of Rs 014 billion.
An alarming feature of the budget 2011-12 is the neglect of social sectors in non-development expenditures, even after the devolution of social services. More than two-thirds of the non-development outlay is allocated to general public services, which includes expenditures of local governments, administrated departments, MPAs, provincial assembly, debt servicing and pensions.
Moreover, due to serious security challenges, 16 percent of the expenditure is allocated to public order and safety affairs. Education and health have been given low priority in provincial planning as reflected by their share of 6 percent and 4 percent respectively.
Since no information is available in the budget documents about the sectoral priorities of the local government, the computation of the exact outlays on education and health is difficult. In brief, the share of key social services reflected in budget documents is insufficient to address the abysmally low social indicators of the province.
Muhammad Sabir works as Principal Economist at the SPDC. He can be reached at muhammadsabir@spdc.org.pk Ms Mehak Ejaz is a researcher at Social Policy and Development Centre. She can be reached at mehakejaz@spdc.org.pk.

====================================================================

OVERALL BUDGETARY POSITION OF KHYBER PAKHTUNKHWA GOVERNMENT

====================================================================

                                         2010-11             2011-12

Rs (bn)                                   BUDGET   REVISED    BUDGET

====================================================================

Total General Revenue Receipts (A)         198.6     200.7     232.8

Total Current Revenue Expenditures         128.0     139.5     149.0

Revenue Surplus/Deficit (A)                 70.6      61.2      83.8

Current Capital Receipts                     0.4       3.3       0.3

Current Capital Expenditures                11.0      10.3      15.0

Net Capital Receipts (B)                   -10.6      -7.1     -14.8

Public Accounts Receipts                   244.7     284.3     263.5

Public Accounts Disbursement               244.7     294.4     261.0

Net Public Accounts Receipts-C               0.0     -10.1       2.5

Total Provincial Contribution (A+B+C)       60.0      44.1      71.5

Total Outsource Funding (G) Total            9.3      15.9      16.1

Development Resources Total                 69.3      59.9      87.7

Development Expenditures                    69.3      65.0      85.1

Budget Deficit (-)/Surplus (+)               0.0      -5.0       2.5

====================================================================

Source: Author's estimates based on Annual Budget Statement 2011-12, Government of Khyber Pakhtunkhwa

============================================================================================

TABLE 2: IMPACT OF DEVOLUTION AND PRIORITIES IN NON-DEVELOPMENT EXPENDITURES

============================================================================================

                                             2010-11            Budget 2011-12

Rs(bn)                              Budget   Provincial   Devolved   Total Amount      Share

============================================================================================

General Public Services               82.3        99.36        0.0          99.36        67%

Public Order and safety Affairs      24.76        23.16        0.0          23.16        16%

Economics Affairs                     9.13         9.97       0.03             10         7%

Education                             6.23         8.93       0.07           8.99         6%

Health                                4.24         5.26       0.17           5.43         4%

Population Welfare                    0.01         0.04       0.13           0.17         0%

Other Current Expenditures             1.3         1.94       0.11           2.05         1%

Total                               127.96       148.66       0.51         149.18       100%

============================================================================================