To formulate federal and provincial budgets necessitates engagement between the federal government and its federating units on two critical items: projected share of each province from the divisible pool and the provincial surplus for the forthcoming fiscal year – an engagement that in the 2024-25 budgets is evident in the former but appears to be lacking in all provinces except Punjab in the latter.
Provincial surplus began to be an item in the federal budgets subsequent to the 2010 passage of the National Finance Commission (NFC) award and eighteenth constitutional amendment with the former envisaging the raising of the provincial share from the divisible pool (hailed at the time as devolution to empower the federating units –a long-standing provinces’ demand) while the amendment devolved key social sector subjects, education and health in particular as well as agriculture that would have automatically reduced federal outlay on these subjects.
During the foreseen transition period - defined as a time when these landmark decisions remained unimplemented as they required the provinces to develop the capacity to deal with these subjects that would then trigger disbanding/abolishing of associated departments/ministries by the federal government - there was agreement that provinces would show a surplus to be used by the federal government as a revenue source.
Subsequent to the 2010 NFC award, which is constitutionally mandated to be negotiated every five years, there was no further negotiated award with the federal government continuing to maintain departments/ministries of the devolved subjects while the provinces have not yet increased capacity to administer the devolved subjects.
In addition, during the past decade and a half successive finance ministers have been intimating to the International Monetary Fund (IMF) that there is an urgent need to revisit the 2010 NFC award (which accounts for its inclusion in the Fund documents) though this would be violative of Article 160 (3A) of the constitution that stipulates that the share of the provinces in each award of the NFC shall not be less than the share given to the provinces in the previous award.
Fourteen years later, the provinces’ share remains stagnant at 57.5 percent of the divisible pool (raised from 46.25 percent prior to the 2010 NFC award), with the federal government’s share at 42.5 percent effective since 2011-12. This award was agreed after much negotiation and envisaged new multiple indicator criteria inclusive of (i) reducing the population criteria to 82 percent which reduced Punjab’s share, (ii) 5 percent allocation on the basis of revenue generation, which benefited Sindh, and (iii) poverty 10.3 percent and inverse population density at 2.7 percent, which benefited the two smaller provinces.
The federal budget 2024-25 earmarks 1.217 trillion rupees as provincial surplus for next year against the revised estimates of 539 billion rupees this year – a rise of 126 percent.
Next year’s target may be wishful thinking some critics argue while others maintain that it could be a way to divert attention away from Federal Board of Revenue (FBR) budgeted to raise collections by an unrealistic 38 percent, and non-tax revenue by nearly 65 percent (with more than a quarter sourced to raising the petroleum levy, an indirect tax, from 60 to 80 rupees per litre in the finance bill 2025); yet there is agreement that the extent of the shortfall in this budgeted amount will have repercussions on the budget deficit, which is an inflationary policy.
The federal government clearly shared data with the Khyber Pakhtunkhwa (KPK) government (as it presented its budget two and a half weeks after the KPK announced its budget) as KPK accurately identified federal transfers (based on the federal finance bill for next year) as follows: receipts from the divisible pool taxes at 1010 billion rupees (inclusive of 1 percent for war on terror) and with the addition of royalty/profit/ grants the federal government would transfer 1472 billion rupees to KPK - identical to what was projected in the federal budget.
It is unclear whether the KPK government reached an agreement on its surplus for next fiscal year with either the federal government team or the visiting IMF mission last month, or simply ignored it.
KPK budgeted a surplus of 100 billion rupees for next fiscal year – which given its share as per the 2010 NFC award at 14.2 percent should have been 178 billion rupees (out of 1.217 trillion rupees budgeted for all provinces) - or a shortfall of 78 billion rupees.
Sindh budget also correctly cited federal transfers of 1901 billion rupees; its share of the divisible pool is 24.55 percent which implies the province had to show a surplus of nearly 299 billion rupees for next year.
Sindh’s budget was no surplus no deficit for 2024-25, which implies a projected shortfall of the entire amount. Critics of the party may accuse it of using its considerable leverage in the current dispensation to dismiss/disregard the compulsions facing the Centre however Sindh can legitimately ask the Centre to revisit its severely flawed budgeted expenditure priorities that envisage a raise in current expenditure of 21 percent and federal development outlay by 80 percent from the revised estimates of last year.
Balochistan budget envisaged a surplus of 25 billion rupees. Given the 9.09 percent share of the province in the divisible pool, one would project its share in the federal government’s budgeted provincial surplus at 110.6 billion rupees – or there was a shortfall of 85.6 billion rupees.
Punjab government has shown a surplus of 630 billion rupees - 51 percent of the entire amount budgeted by the federal government, which is precisely in synch with Punjab’s share in the divisible pool of 51.74 percent. One would be compelled to assume that the Punjab government has followed the specific instructions of the federal government in this regard, though whether it will actually follow through till the end of the fiscal year remains to be seen.
Thus between KPK, Sindh and Balochistan the shortfall is budgeted at 462.6 billion rupees – a shortfall that would imply the federal government would either have to raise taxes by more than what it budgeted and, if reliance on indirect taxes continues as indicated in the budget, then it would mean higher taxes on the public of all provinces.
And the IMF’s successor programme would also consist of contingency tax measures that would become operational as and when there is a shortfall.
To conclude, at present assuming that all the four provinces will achieve their budgeted surplus or in the case of Sindh zero deficit zero surplus, the federal government will have to generate a whopping 462.6 billion rupees from other sources. And if past precedence is anything to go by one would be forced to assume that the government would (i) raise the petroleum levy to the maximum 80 rupees per litre as per the Finance Bill 2025, (ii) widen sales tax ambit and (iii) raise customs duties on some high-end luxury items – measures that would hit the poor harder than the rich.
Copyright Business Recorder, 2024
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