NFC: Federalism over macros

The passing of a new NFC Award – that decides the distribution of tax revenues between the centre and the provinces, and among the provinces – has been pushed back for the last few years. Nor is an award likely any time before the next government has comfortably taken the reigns, saving for the outside chance of incorporating new population numbers. But recent series of events offer some hope, even if a very weak one, that at least the discourse of getting a new award will catch traction in the months after the general elections.

Recall that the Islamabad-based think tank Prime Institute had been holding consultative meetings across the federal and provincial capitals throughout 2017 to discuss the way forward for the NFC, which in the immortal words of Senator Raza Rabbani is the “basis of the federalism”.

Those consultative meetings resulted in the endorsement of many previously floated ideas such as having a two-tier specialised structure, and the linking of provincial distribution with provincial fiscal discipline and with socio-economic objectives.

Those meetings also brought about a slew of ideas that were not part of the NFC discourse before as such. These include the notion that transparency, inclusiveness should be the hallmark of the NFC Award and that the FBR should be given incentive to increase tax collection.

Meanwhile, Raza Rabbani was working on a ruling that he announced in the House on November 17, 2017. Drawing on the letter of the law, the original intent of the law, and lessons from India, Raza argued in that ruling that the notion that the extension of NFC Award beyond the period of five years is constitutional is in fact not true.

And now local media reports that the IMF is very much concerned about the current structure of the NFC and its delay. It is concerned because the current NFC puts pressure on Islamabad’s kitty and adds to macroeconomic risks.

Reportedly, it has proposed, inter alia, the government to set up a technocratic fiscal council under the Council of Common Interests (CCI). This is similar to the technocratic solution offered by PIDE scholars – Dr Idrees Khawaja et al – who propose the formation of a two-tier structure (first tier of experts; second tier political) to bring evidence-based fiscal sanity to the whole Award awarding process.

The IMF also reportedly proposed the creation of a contingency fund under a joint supervision of the federal and provincial governments. The idea of joint supervision is perhaps to allay the concerns of the provinces over their disagreement with Islamabad’s desire for 7 percent allocation prior to the vertical distribution of the divisible pool to meet its spending needs on security, and developmental allocations for FATA and GB/AJK.

Joint supervision or not, the idea is not likely to fly with the provinces since they are very clear that the responsibility of security, and GB/AJK lies with the centre. The centre should learn how to fix its revenue house in order. In fact, the IMF should know better that the provinces are demanding their ‘constitutional right’ over GST on goods. In such an environment, the 7 percent pre-divisible-pool allocation seems far from happening.

Local media also reports that the IMF wants the next NFC to aim towards the strengthening of macroeconomic stability and increase efficiency, flexibility, and responsiveness of the fiscal framework. The IMF recognizes that the constitution does not currently allow for this change, and therefore suggests a change in current legal framework.

This column contends that NFC or its equivalent structures ought to be limited to the cutting of the fiscal cake and not macroeconomic stability. The NFC’s “aim” should not be macroeconomic stability for it might risk limiting political choices and economic decision making of any sitting government.

The basis of revenue distribution – the NFC - ought to be the basis of federalism rather than a basis of macroeconomic stability. No technocratic proposals should trump political or economic choices available to any government. There can be many other tools for macroeconomic stability. The IMF should be cognizant that first man makes tools and then tools make man. However, if the IMF has specific ideas it would do well to make public what it means by ‘NFC should aim to strengthen macroeconomic stability’.

Let’s not forget that the NFC is a political affair; it lies at heart of how federalism works or not works. There is a limit to which it can be subjected to technocracy – such as having a body of experts spell out various proposal and calculations on that table. But at the end of the day, it will and should be what politics is made of up. Macroeconomists should resist the temptation to put everything in a neat equation and learn to appreciate the beauty of politics for a change.