Budgetary system & fiscal governance

Pakistan’s budget process, while clearly defined in the 1973 Constitution, subordinate legislations like the Public Financial Management Act (PFMA), 2019 and guided by detailed manuals e.g. Budget Manual 2020, suffers from several strategic and procedural inefficiencies that hinder fiscal sustainability.

Despite the existence of a well-structured framework, the budgetary mechanism remains predominantly reactive and lacks a strategic top-down approach. The current methodology involves a bottom-up budget process that relies heavily on outdated fiscal projections and resource ceilings, often disregarding economic fluctuations and emerging fiscal pressures. Consequently, this leads to budgetary submissions based on past figures rather than forward-looking assessments, exacerbating economic vulnerabilities and resulting in misaligned fiscal priorities.

‘Technical Assistance Report Pakistan—Improving Budget Practices’ (August 2024) by International Monetary Fund (IMF) highlights one glaring weakness that is the disconnect between budget preparation and timely dissemination of macro-fiscal data. The Mid-term Budget Strategy Paper, containing vital projections and fiscal policies, is only released three months after budget formulation begins, creating a misalignment with economic conditions.

The delay in strategic planning not only compromises the accuracy of budget allocations but also affects the federal government’s ability to make informed decisions. Coordination lapses between the Budget Wing and the Macro-Fiscal Policy Unit (MFPU) hinder real-time data integration, limiting the efficacy of economic forecasts. There are also challenges in ensuring efficient inter-ministerial collaboration, with ministries often working in silos rather than towards cohesive fiscal objectives, further weakening budget execution.

The current budgets of federal and provincial governments amplify concerns as these have set ambitious revenue targets for tax and non-tax sources without adequately assessing their strategic viability and collection capacity. Consequently, reliance on multilateral and bilateral financial assistance to address fiscal deficit, especially at federal level, has been an historic impediment, rather a necessary evil, from the outset, reflecting a persistent and concerning vulnerability in public finances.

In the wake of autonomy granted to provinces under the Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] along with right to levy many progressive taxes, a significant share of national revenue is allocated to provincial governments every year.

This allocation leaves the federal government with inadequate financial resources, insufficient to meet essential expenditures, including those related to defence. As a result, the federation continues to grapple with substantial fiscal pressures, high borrowing, and constrained financial flexibility, emphasizing the urgent need for a more balanced and sustainable revenue-sharing framework.

Instead of levying agricultural income tax as per the 1973 Constitution and imposing progressive taxes like inheritance tax (estate duty), gift tax, wealth tax, property tax and capital gain tax on the wealthy class, the four provinces collectively received Rs 5264 billion in fiscal year 2023-24 from the federal government under the 7th National Finance Commission (NFC) Award.

At their own, they collected a meager amount of total revenues of Rs 997 billion, with tax revenue of only Rs 774 billion. Collection under the head of agricultural income tax by all provinces in total tax collection of the country in FY 2024 was mere 0.3 percent!

During the last decade the provincial governments in Pakistan have performed poorly in streamlining their tax collection, which does not align with their economic potential. While they have been very keen to launch projects for political gains, the mismanagement of taxpayers’ money and short-term funding has resulted in discontinuation of many projects or incurring enormous overrun costs. The real sufferers are citizens as no worthwhile social welfare programmes were implemented and there was complete apathy in empowering local governments as envisaged in Article 140A of the Constitution.

In Punjab, though tax collection increased from Rs 98,054 million in 2014-15 to Rs 326,282 million in fiscal year (FY) 2023-24, it was through regressive sales tax on services rising significantly from Rs 58,662 million in 2015-16 to Rs 224,440 million in FY 2023-24.

However, property tax witnessed a decline from Rs 7,812 million in FY 2014-15 to Rs 6,335 million in FY 2019-20. It disappeared as an independent head in fiscal operations reported by Ministry of Finance from FY 2020-21 onwards—merged under “others” showing total collection at Rs 35,504 million in FY 2023-24. Similarly, excise duties and stamp duties grew modestly, reaching Rs 4,058 million and Rs 41,793 million, respectively, by FY 2023-24.

In Sindh, the total tax collection grew from Rs 93,807 million in FY 2014-15 to Rs 363,733 million in FY 2023-24, with sales tax on services rising from zero to Rs 222,750 million in the same period. Property tax stagnated, and excise duties grew from Rs 3,820 million to Rs 7,004 million.

Stamp duties showed an impressive rise from Rs 6,550 million to Rs 17,122 million. In Khyber Pakhtunkhwa, tax collection increased from Rs 11,369 million in FY 2014-15 to Rs 53,787 million in FY 2023-24, with sales tax on services reaching Rs 35,911 million. However, property taxes fluctuated, and excise duties remained modest.

In Balochistan, tax collection grew from Rs 2,593 million in FY 2014-15 to Rs 30,392 million in FY 2023-24, with sales tax on services rising from zero to Rs 21,516 million. While the growth is commendable, collection still falls short of the province’s economic potential. Reliance on a narrow range of taxes, particularly sales tax, highlights inefficiencies in the tax system across the provinces, with all of them underperforming relative to their economic capacity.

The performance of the present government of Punjab in managing its economy and administrative duties has been a subject of significant concern, despite ambitious goals set for FY 2024-25. The provincial revenue target of Rs 960.3 billion, with Rs 471.9 billion from taxes and Rs 488.4 billion from non-tax sources, is termed a bold attempt to boost the financial capacity having current population of 128 million. However, the early signs of fiscal year have raised doubts about the feasibility of these targets.

The Punjab government posted a deficit of Rs 160 billion in the first quarter, only to later on revise it into a surplus of Rs 40 billion. While this may appear to be an improvement, it is important to note the alarmingly high statistical discrepancy of Rs 177 billion reflected in the revised figures pointing to the Punjab government’s continued inability to generate accurate and reliable financial information. The continuous existence of such discrepancies highlights a fundamental weakness in the province’s financial management, which raises questions about the government’s ability to meet its long-term revenue goals.

The Punjab government also struggled with poor law and order management, as seen in its failure to control student protests that escalated into violence, highlighting a lack of administrative competence. The government’s response to health crises like smog and Dengue remains inadequate, with reactive measures like lockdowns and no long-term solutions, such as tackling crop burning or promoting green initiatives.

Additionally, the government has shown a lack of preparedness and foresight in managing these recurring issues. Despite ambitious fiscal targets, the government’s reliance on short-term solutions, overwhelming reliance on federal receipts, and its inability to generate reliable financial data undermine its capacity to effectively govern and maintain public trust.

Performance of Khyber Pakhtunkhwa government under Pakistan Tehreek-e-Insaf (PTI) has been sharply criticized by political figures, particularly regarding management of the substantial Rs 1200 billion allocated under the NFC Award. Critics argue that the government has failed to provide transparency about the use of this money, raising questions about its effectiveness and accountability. Additionally, the PTI government, which once positioned itself as an advocate for provincial rights, did not take essential steps to assert those rights when they held power at the federal level, undermining their credibility on the issue.

Sindh’s performance has raised concerns with the IMF, particularly due to its failure to implement the National Fiscal Pact, despite discussions, thus, undermining fiscal accountability. Similarly, despite its vast resources and strategic location, Balochistan has faced significant challenges under its government, including a deteriorating law and order situation and widespread illiteracy.

Mismanagement and a lack of effective governance have hindered the province’s ability to capitalize on its economic potential. This failure to utilize its financial capacity and geographic advantages has left the people underserved and unable to reap the benefits of its position and resources.

The challenges are substantial and cannot be effectively tackled by the federal government alone. Rather than focusing on short-term political projects, provincial governments should prioritize long-term structural reforms aimed at building sustainable cash flow, embracing digitization, and curbing wastage across all sectors.

Additionally, as outlined in IMF’s technical assistance report on improving budget practices in Pakistan, the federal government must adopt a more strategic, top-down budgeting approach that emphasizes policy coherence and data-driven decision-making. One key recommendation is to release the Budget Strategy Paper concurrently with the Budget Call Circular, integrating up-to-date macro-fiscal projections and establishing binding budget ceilings. This would provide ministries with a clearer resource envelope and promote discipline in budget submissions.

Strengthening of coordination between the Budget Wing and MFPU, enhancing data exchange protocols, and regularly updating fiscal forecasts are also vital steps. Furthermore, increasing the Budget Wing’s involvement in development project negotiations would ensure that capital expenditure is aligned with national priorities and fiscal realities.

Expanding the Budget Call Circular’s scope to include best international practices, and issuing it jointly with the Planning Division, could create a more comprehensive budgeting framework. Organizational reforms within the Finance Division to reduce fragmentation and improve decision-making are crucial for strengthening fiscal governance. These strategic reforms are fundamental to building a resilient, transparent budgetary system that supports sustainable economic growth.

(Huzaima Bukhari & Dr Ikramul Haq, lawyers and partners of Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2024