Cash surplus of provincial govts

The role of the four provincial governments has increased after the 18th Amendment. They have also become entitled to a larger share in the Federal Divisible Pool of taxes after the 7th NFC Award. Consequently, their share in public expenditure has increased. It was 28% in 2009-10 and has since increased to 32% in 2021-22.

In particular, the provincial governments now have a dominant share in development spending which has risen substantially from 50% in 2009-10 to 74% in 2021-22.

The provincial governments play a major role in the process of human development in the country. They account for 87% of the public education spending and 92% of the public health expenditure. Therefore, an improvement in their access to finances augers well for rise in literacy and life expectancy in the country. However, there is a large imbalance in the mobilization of resources.

As per the constitutional allocation of fiscal powers, the Provincial Governments have access to two large tax bases. The first is the agricultural sector through the agricultural income tax and the second is the services sector through the sales tax on services. But both taxes remain grossly underdeveloped and the share of provincial governments in total national tax collection is only 9%.

The increased access to federal tax revenues has led to the understanding that the Provincial Governments will contribute to a reduction in the national budget deficit by generating cash surpluses. However, this contribution has also progressively declined. In the immediate aftermath of the 7th NFC Award, Provincial cash surpluses brought down the consolidated budget deficit by 12%. This contribution has declined to only 6% in 2021-22.

There is also a significant variation in the fiscal status of the four provincial governments. The 7th NFC Award included multiple criteria for horizontal sharing of the revenue transfers. Consequently, the per capita transfer is the highest for Baluchistan, followed by Khyber Pakhtunkhwa, Sindh and Punjab.

The year 2021-22 saw a somewhat lacklustre performance of the four Provincial Governments combined in the generation of revenues from own sources with a growth rate of 20%, as compared to the growth of 29% in Federal tax revenues, which contributed to a big increase in transfers to the Provincial Governments of 31%.

The consequence was bloated spending by the four Provincial Governments rather than big increases in cash surpluses. Total expenditure of these four Governments jumped up by as much as 27%, while there was an increase of only 12% in the overall cash surplus. In particular, there was a binge in development spending which went up by as much as 58%. Consequently, Provincial PSDP expenditure rose to three times the level of development expenditure by the Federal Government.

This profligate spending by the Provincial Governments and the lack of generation of sizeable cash surpluses despite big increase in federal transfers has led to the setting of tougher targets for these Governments in the on-going IMF program of Pakistan. These targets are mentioned in the IMF Staff Report of September 2022, released following the finalization of the seventh and eighth reviews.

Accordingly, the Provincial Governments are expected to show a growth in their own revenue sources of 36% in 2022-23, especially in non-tax revenues which have also remained grossly underexploited. Current expenditures are expected to show only modest growth of 11%, while development spending is targeted at only 3% above last year’s level. Consequently, the expectation is that there will be a big increase of 79% in the combined cash surplus and this will contribute to bringing down the consolidated budget deficit by over 15%.

Unfortunately, the opposite has happened. The first quarter of 2022-23 has witnessed an increase in Provincial tax revenues of only 10%. Current expenditures have shown double-digit increases, due also to flood related relief spending. Development expenditure has remained at close to the level in the first quarter of 2021-22. The most worrying development is the contraction of the cash surplus of the four provincial governments combined of 21%, as opposed to the targeted increase of 114% for 2022-23.

An examination of the first quarter budgetary outcome of each provincial government reveals that the big deviant behavior has been by the province of Punjab. The biggest increase in current expenditure of 25% is observed in Punjab while in the case of the other three provincial governments it has shown no increase. This indicates that the government of Punjab has launched a programme of probably expanding employment and setting up new administrative units at a time when there was need for economizing on spending like the other three governments.

The same profligate behaviour is observed in development spending by the government of Punjab, with an increase of 18%, while there has been a decline in such expenditure of 14% by the other three provincial governments combined. In a recent advertisement in this newspaper the government of Punjab has proudly claimed that it is implementing the ‘biggest Annual Development Programme in the history of Punjab’ of Rs 726 billion. This is even higher than the approved size of the Provincial ADP of Rs 686 billion in the Provincial Budget of 2022-23.

The advertisement also highlights that ‘record funds worth Rs 196 billion have been utilised within the short span of 4 months’. The MoF fiscal operations estimate reveals that development spending by the Government of Punjab in the first quarter of 2022-23 was Rs 72 billion. The implication thereof is that there has been truly a splurge in development spending of Rs 124 billion in only one month of October 2022 in Punjab. In this an exercise in massive ‘pork- barreling’ prior to the elections in 2023?

The consequence of this deviant behavior by the Government of Punjab is that the overall cash surplus of the four Provincial Governments combined has actually declined by 21%, as shown in the table below.

The annual target, as highlighted above, is an increase of 114%. therefore, if the recent trends continue there will be a big shortfall in the cash surplus of almost Rs 470 billion in 2022-23. Needless to say, this shortfall will be highlighted by the IMF in the impending ninth review process and the Federal Government may be asked to find ways to make up this large shortfall along with the emerging shortfall in FBR revenues.

Copyright Business Recorder, 2022