ARTICLE: The federal budget 2020-21 envisages a provincial surplus of 242 billion rupees, an amount credited to its receipts to reach the projected budget deficit for next fiscal year of 7 percent of the Gross Domestic Product (GDP).
Punjab budget, the only provincial budget that meticulously adhered to the Centre's projection, showed a 2020-21 budget surplus of 125 billion rupees - or 51.6 percent share in the projected surplus by the federal government based on 51.74 percent share of the province in the divisible pool as agreed under the seventh National Finance Commission (NFC) award.
Sindh, governed by the opposition Pakistan People's Party (PPP), with a perceptible widening of the trust deficit with each passing week between the ruling Pakistan Tehreek-e-Insaaf (PTI) and the PPP, felt little compulsion to show a surplus of 59.4 billion rupees calculated on the basis of 24.55 percent share in the divisible pool as per the NFC award; and instead projected a deficit of 18 billion rupees. While Sindh's decision was expected and understandable as it is ruled by an opposition party what should have stumped the federal government is the fact that neither Khyber Pakhtunkhwa (KPK) nor Balochistan government presented budgets that would support the Centre's provincial surplus targets based on their share of the NFC award.
KPK's share in the projected 242 billion rupee surplus comes to 35.3 billion rupees given its share in the divisible pool of 14.62 percent however it presented a balanced budget while Balochistan's estimated share in the provincial surplus is 22 billion rupees based on its share in the divisible pool of 9.09 percent but it presented a budget deficit of 87.6 billion rupees as per its budget document titled budget at a glance 2020-21.
Assuming that Punjab achieves the envisaged budget surplus next year, and given that KPK envisages a balance in revenue and expenditure and the remaining two provinces have projected budget deficit targets the Centre's deficit would be higher by at least 117 billion rupees. While this amount is not significant in a 7.294 trillion rupee budget but it reflects the first chink in the budget 2020-21 projections even before 1 July - the first day of the current fiscal year.
The federal budget documents perhaps anticipating this noted that "the need to project/expect large provincial budget surpluses in future points to a broader problem with the fiscal landscape of the country. With the province taking a substantial share of national revenues, and federal government being liable for almost the entire national debt, the structural fiscal balance has become lopsided. The situation is unsustainable unless an appropriate adjustment occurs in the structural fiscal balances of federal and provincial governments. The government has formed the tenth NFC with the view to deliberate on options leading to fiscal harmonization."
This statement can be challenged on multiple counts. First, the federation also receives resources from sources other than the divisible pool including other taxes with the petroleum levy budgeted to generate 450 billion rupees next year, privatization proceeds budgeted to generate 100 billion rupees and State Bank of Pakistan's profits budgeted at 620 billion rupees. In actual projected terms for 2020-21, non-tax revenue (not shared with the provinces) is budgeted to generate 1.1 trillion rupees and other taxes, again not part of the divisible pool, are budgeted to generate 501 billion rupees or a total of 1.6 trillion rupee revenue will not be shared with the provinces. This amount must be viewed against the budgeted 2.8 trillion rupees (from divisible pool taxes) in which the Centre's share is 46.5 percent as per the applicable NFC award.
Second, the share of the Centre is not appreciably lower than before the seventh NFC (2010) if one adds the federal government's request to provinces not to impose zila and octroi in return for an additional 3.75 percent from the Centre's share of the divisible pool. In other words, the share before the seventh NFC was around 50:50.
It is worth noting with respect to the claim made by the Centre in the budget that it is somehow unfairly 'liable for almost the entire national debt'. The question is why not as it is the Centre that procures loans to meet its rising expenditure, with current non-development expenditure accounting for an ever increasing percentage of total expenditure, including continuing on spending on devolved ministries; the centre has also failed to reform the tax structure which is generally acknowledged as unfair, inequitable and anomalous and has also persistently failed to deal with power sector inefficiencies.
The section under grants and transfers in budget documents 2020-21 disturbingly show contingent liabilities of 323 billion rupees, defined as off budget transactions (primarily guarantees issued on behalf of loss making public sector entities, with the federal government extending sovereign guarantees of 1.4 trillion rupees domestically and 478 billion rupees externally with 59 percent share of power sector followed by 11 percent aviation and 22 percent for 'others' - a substantial percentage not defined in the budget. This is not misspending by the provinces but by the Centre.
The sentiments in the budget document do not therefore reflect a situation that can be supported and the architects of the eighteenth amendment as well as the negotiators of the seventh NFC award further argue that: (i) a one percent increase in tax to GDP ratio per year was envisioned, a realistic target that would have expanded the pie enabling the federal government to generate sufficient resources to meet its expenses; and (ii) a limit was imposed in the 18th Amendment that the new NFC would not be less than the previous one because during the periods of martial laws the share of the provinces was drastically reduced from 50 percent to around 40 percent, generating considerable angst amongst the smaller provinces that may have contributed to civil disturbances.
What may surprise the public is the fact that the subsidy section includes 10 billion rupees under the heading 'bill deferment (Corona)', a bill still pending approval that seeks to enable the government to impose surcharge on electricity tariff including charging consumers for interest payable on loans taken by the sector that reflect massive sectoral inefficiencies. This amount was allocated in the outgoing year as a stop gap measure and is parked in the revised estimates of the current year as part of subsidies allocated under the Corona relief 1.2 trillion rupee package. And disturbingly no tax reduction (retaining petroleum levy of 30 rupees per litre, the maximum possible, and sales tax of 17 percent) or subsidy was given to shave-off part of the rise in petroleum prices announced on 26 June.
To conclude, one would urge the Prime Minister to be more hands on with respect to decisions taken by his economic team instead of taking weekly briefings by the same people who are managing the economy and who may inadvertently, or deliberately as feared by a growing number of their detractors, be misguiding him about the true state of affairs.
Copyright Business Recorder, 2020
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