EDITORIAL: In a landmark move, the federal and four provincial governments have agreed on a National Fiscal Pact (NFP) with a wide-ranging 19-point agenda that seeks to achieve fiscal discipline, eliminate resource duplication at the federal and provincial levels, and enhance provincial revenue generation by streamlining and harmonising agriculture and several other areas under the provinces’ tax jurisdiction.
The historic initiative, inked last week, is part of the government’s effort to meet stringent IMF conditions associated with the $7 billion Extended Fund Facility, requiring a transformation of how government finances are managed through, among other measures, tax reforms and prudent expenditure practices.
Ever since the passage of the 18th Amendment, numerous critical voices have cited it as the main reason for the immense financial strain the federal government has faced and for the lopsided nature of resource allocation between the centre and the provinces.
An argument can be made, however, that it wasn’t necessarily its passage but the failure of successive federal and provincial governments to implement it in its true spirit that has led to our precarious financial position. As has been well documented, the 18th Amendment devolved numerous subjects previously under federal or dual (under the concurrent list) control to the provinces, while there were significant changes made to the National Finance Commission (NFC) Award, allowing provincial shares of federal taxes to increase to 57.5 percent.
However, this increase occurred without a corresponding on the ground transfer of additional responsibilities to the provinces, while the Constitution also prohibited reducing this share. It must be noted that the 18th Amendment had also envisaged that its passage would ultimately result in sustainable economic growth, increased tax collection in the provinces and the abolition of those ministries at the federal level on subjects that had been transferred to the provinces. All this clearly did not happen, belying the spirit of the Amendment.
Instead, we face a situation where the centre can barely cover its debt obligations and defence expenditure from the taxes it collects while needing to borrow substantial sums to finance its current expenditure, further adding to our crippling debt burden.
Furthermore, the failure to eliminate federal ministries for subjects that come under provincial purview due to political compulsions and resistance from the bureaucracy has led to needless duplication of resources, unnecessarily increasing the federal government’s expenses, which are again financed through borrowing.
This reckless use of public finances, the lack of political will to tax under-taxed segments of the economy and the considerable overlap of resources at the federal and provincial levels have ultimately forced policymakers’ hands, resulting in the inking of the NFP.
Among its major stipulations is the requirement for provincial governments to amend agriculture income tax laws to align with federal personal income tax rates for small farmers and corporate income tax rates for commercial farming. This element of the agreed conditions of the IMF seems to have received a setback as the finance minister has issued a statement that tax collection on income from agriculture shall commence from next fiscal year.
This has triggered confusion as the NFP envisages that provincial governments shall amend their agriculture tax laws to align them with the federal income tax laws by end October for implementation from 1st January 2025. It appears that there has been a pushback from the provinces under pressure from the agriculture lobby and the federal government has buckled under.
Additionally, provinces must enhance their tax collection efforts in sales tax on services and property tax while assuming financial responsibility for PSDP (Public Sector Development Programme) projects that exclusively benefit their jurisdictions.
Moreover, they will also aim to increase spending on health, education and social protection projects. Importantly, the federal government will attempt to reduce its footprint by identifying overlapping programmes, although transferring federally-funded provincial projects to the provinces has been linked to gaining approval of the National Economic Council.
The objective of the 18th Amendment was to ensure a more equitable allocation of resources between different tiers of government, as well as to promote autonomy. However, the provinces failed to effectively utilise the considerable autonomy granted to them for raising their own revenues, preferring to depend on the federal government’s largesse.
The NFP, therefore, provides a crucial opportunity that could mitigate the effects of the NFC Award by harmonising fiscal responsibilities, motivating provinces to increase their revenue streams and transforming long-established lavish spending patterns that have wreaked havoc on the ideal of fiscal sustainability.
Copyright Business Recorder, 2024
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