The provincial budgets for 2024-25 have all been presented last month in the respective Provincial Assemblies. However, they have not received much attention in the media because of the exclusive focus on the Federal budget and the imposition of additional taxation of the highest-ever magnitude.

There is need to realize that the four Provincial governments combined will account for almost 36% of the total public expenditure in 2024-25. The total proposed outlay is Rs 10,456 billion, equivalent to 8.5% of the projected GDP this year.

The projected growth rate of expenditure in 2024-25 by the four Provincial governments is estimated at almost 33%. This is significantly higher than the anticipated increase in Federal expenditure of 24.5%. The total level of public expenditure is expected to rise to 15.1% of the GDP from 14.6% of the GDP in 2023-24.

The size of the Provincial budgets for 2024-25 ranges from Rs 930 billion of the Balochistan government to Rs 4816 billion of the Punjab government. However, the targeted spending per capita is the highest in Balochistan and the lowest in Punjab. This reflects the horizontal sharing formula from the divisible pool of federal taxes in the 7th NFC Award.

The targeted growth rates in expenditure also vary significantly. The Balochistan government has increased the size of the budget in relation to the level last year by 49%. The smallest increase is in the budget of the Khyber-Pakhtunkhwa government of 21%.

There was, in fact, a breach of the standard practice of presentation of budgets this year. The normal process is for the Federal budget to be presented first followed by the four Provincial budgets. This is necessary because the Federal budget has estimates of the transfers to each Provincial government in the next financial year. These transfers account for almost 80% of Provincial revenues. As such, knowledge of the magnitude of Federal transfers is essential for finalization and presentation of a Provincial budget.

However, the government of Khyber-Pakhtunkhwa presented its budget for 2024-25 before the Federal budget. In retrospect, this has been to the disadvantage of the Provincial government. It assumed that the increase in Federal revenue transfers will be 13.8%. It is now apparent from the Federal budget that the NFC-based transfers to the Khyber-Pakhtunkhwa government are projected to increase much more by as much as 36.6%. Therefore, the Khyber-Pakhtunkhwa government will need to present a revised budget for 2024-25 if it wants to increase various expenditures in light of the availability of more revenues.

There is a need to highlight the budgeted increase in own-revenues to get a measure of the proposed level of fiscal effort by the four Provincial governments.

There is a big variation in the targeted increase in own-tax revenues. It is as high as 56% in the case of the Sindh government and as low as 12% by the Khyber-Pakhtunkhwa government. In fact, the Sindh government is the only government, which has explicitly presented a taxation proposal for generating more tax revenues. This is from the sales tax on services.

Overall, the combined target for own-tax revenues in 2024-25 is Rs 1202 billion. This will raise, if achieved, the provincial tax-to-GDP ratio to 1% from 0.8% currently. However, it will still represent only 9% of the total tax revenues in the country.

There has been a major development recently. An agreement has been reached with the IMF on the development of the agricultural income tax by the Provincial governments from January 2025 onwards. The expectation is that agricultural income will be accorded the same tax treatment as non-salary income, with the highest marginal tax rate of 45%.

There are serious issues of the motivation and capacity to collect this tax. If these are resolved then it could lead to a sizeable increase in Provincial tax revenues.

Turning to the projected growth in current expenditure, the Provincial governments have had to build in the impact of a similar big increase in salaries and pensions as announced by the Federal government. The only Provincial government which has not done this yet is of Khyber-Pakhtunkhwa. Overall, the combined current expenditure of the four Provincial governments is expected to reach Rs 7918 billion, with the growth rate of over 27%.

Provincial development expenditures are expected to show an unprecedented combined growth rate of 53% in 2024-25. In fact, the Sindh government has targeted for an increase of 81%. Consequently, the ADP of Sindh at Rs 959 billion is expected to be even larger now than that of Punjab at Rs 842 billion. Combined the Provincial development spending is targeted to reach Rs 2538 billion, higher than the size of the Federal PSDP by over 80%.

We come finally to the bottom line of the Provincial budgets of 2024-25. This is the likely level in 2024-25 targeted level of cash surpluses. The expectation in the Federal budget of 2023-24 was that the four Provincial governments would generate a combined surplus of Rs 600 billion. According to the revised estimates for 2023-24, the combined cash surplus is likely to be only Rs 197 billion, thereby implying a shortfall of over Rs 400 billion. This has raised the consolidated budget deficit by 0.4% of the GDP and largely eliminated the primary surplus.

The outcome is not likely to be different in 2024-25. The Federal budget is based on the expectation that the combined cash surplus of the Provincial governments will Rs 1217 billion. The reported cash surpluses in the four Provincial budgets for 2024-25 add up to Rs 755 billion, implying a shortfall already of Rs 462 billion.

The provincial government of Sindh has taken pride in declaring that it has produced a ‘balanced’ budget, implying thereby a zero cash surplus. The only Provincial government which has committed to a large cash surplus of Rs 630 billion is that of Punjab. Khyber-Pakhtunkhwa projects a cash surplus of Rs 100 billion, while the targeted level is Rs 25 billion by the Balochistan government.

The need to move towards provincial tax reforms, especially in the agricultural income tax and the sales tax on services, and the result thereby in larger cash surpluses, has led to the talk of a National Fiscal Pact between the Federal and Provincial Governments. This has already been highlighted by the Federal Finance Minister and is mentioned in the 12th of July press note by the IMF on staff level agreement on a new IMF Programme.

There is need for the dialogue for changes in the fiscal structure of the Federation of Pakistan to proceed within the framework constitutionally of a National Finance Commission. The 10th NFC should be activated and talks proceed on a new fiscal framework of the Federal and the Provincial governments.

Copyright Business Recorder, 2024