Invigorating fiscal management – I

Since the introduction of the 18th Constitutional Amendment, incorporated in the Constitution of Islamic Republic of Pakistan [“the Constitution”] on April 10, 2010, fiscal management, both at federal and provincial levels, is causing serious challenges. The federal government, having all buoyant and broad-based taxes, is not collecting adequate taxes while the provinces, which are highly dependent on the divisible pool under the National Finance Commission (NFC) Award, have failed to raise their own resources for their ever-growing needs of development, maintenance of infrastructure and providing people with the facilities of education, health, transport and universal entitlements (clean drinking water, electricity, transport, accommodation etc). Besides the challenges on the fronts of resource mobilisation, fiscal deficit, burgeoning debt and poor allocation for social sectors, crucial issues like persistence of rent-seeking structures, non-availability of impersonal market relationships, lack of competitiveness, perpetual and gross violations of rule of law, non-acceptance of the norms of fair play, reckless borrowing and ruthless spending continue to bleed the economy and undermine democratic dispensation.

The 18th Constitutional Amendment also requires fiscal and administrative decentralisation at the local government level [Article 140A of the Constitution] but even after six years no provincial government ever bothered to establish functional, self-reliant and effective local governments. There is no desire on the part of political leaders to implement Article 140A in letter and spirit. As the fiscal scene, both at federal and provincial levels is gloomy, people are being deprived of fundamental economic rights and not getting the constitutional right of municipal self-governance as envisaged in Article 140A of the 18th Constitutional Amendment.

Federal Board of Revenue (FBR) has been persistently failing to realise the real revenue potential, which is not less than Rs 8 trillion. The track record of FBR shows remote possibility of collecting even Rs 6 trillion in the next five years to give enough fiscal space both to the Centre and the provinces to come out of the present economic mess, thus providing some relief to the poor, as well as trade and industry. Under the given scenario, neither fiscal deficit will recede nor dependence on external and internal debts decease. People will face more tax burden, and further deterioration in quality of life.

As things stand, Pakistan will remain in debt enslavement and more and more people will be pushed below the poverty line. It is not possible to overcome perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenue and exclusive right to utilise it for the welfare of their denizens. Fiscal decentralisation and municipal self-rule should essentially be linked with a social policy based on the principle of universal entitlements for all residents in terms of access to social benefits and social services. Taxation without representation also means denial of spending for the essential entitlements guaranteed in the Constitution.

The principle of universal entitlements seeks to prevent the formation of inequalities and the foundation of the poor as a separate social group, whereas residualism/marginalism, through assisting the poor and needy, implicitly defines them as certain types of social groups. In a nutshell, for achieving the goal of fiscal decentralisation, local governments’ financial resources must commensurate with the responsibilities provided for by the constitution and the law to ensure both welfare of the people and sustainable growth at grass root level.

Managing high fiscal deficit (root cause of many economic ills) coupled with massive debt burden is the toughest challenge faced by fiscal managers of Pakistan. The well-admitted solution is: a substantial increase in resources and a drastic reduction in spending is easier said than done.

An analysis of fiscal performance of the last few years reveals that high subsidies constituted a major burden on fiscal account combined with falling tax-to-GDP ratio. Tax revenue as a percentage of GDP stood on average at 13.7 percent during 1992-96, has decreased to an average of 9.4 percent during 2008-2016. A low tax-to-GDP ratio has also translated into falling total revenue to GDP ratio, as it decreased from an average 18 percent during 1992-96 to 13.2 percent during 2008-16. Policy Co-ordination Office in Debt Policy Statement 2015-16 claimed that “after hefty repayments in 2013-14, public external debt servicing witnessed a decline of 25 percent during 2014-15 and recorded at US $4,475 million as compared with US $5,995 million in the last fiscal year. The decline in external debt servicing during 2014-15 was mainly due to lower repayments to the IMF that peaked out in 2013-14.

In budget speech of 2016-17, the Finance Minister claimed a growth rate of 4.7 percent. This was contested by independent and renowned economists. According to Social Policy & Development Centre, it was 3.1 percent. In article (Who is the ‘Spin Doctor’, Business Recorder, June 16, 2016), Dr Ashfaque H Khan, explained “why we believe that the growth as reported by the government (4.7%) for the year 2015-16 is grossly exaggerated?” He said that firstly, the finance minister wanted to state in his budget speech that “We have achieved the highest growth rate in the last eight years”. He did the same thing in his budget speech of 2014-15 when he had stated that “We have achieved the highest growth rate in 2013-14 in six years”. For this to say, he manipulated the growth statistics of 2011-12 which were brought down from 4.4 percent to 3.8 percent and as such became lower than 2013-14 (4.0%). Secondly, growth rate in 2015-16 was overstated in ten out of 18 sectors of the GDP, as reported in the SPDC report (An Evaluation of Federal Budget 2015-16). Whenever agriculture registered a negative growth (like this year), real GDP never registered a growth that exceeded 4 percent in the last four decades. How come with a negative growth in agriculture, the real GDP growth accelerated to 4.7 percent, he asked?

Fiscal Policy Statement for 2015-16, released by Ministry of Finance, admits that going forward, both spending and revenue measures have important implications for the economy and these need to be taken into account if the ongoing fiscal consolidation efforts are to be sustainable”.

There is a need to reconsider the role of the Planning Commission. With the devolution of a large number of subjects to the provinces since the 18th Amendment, the deletion of the subject of national planning from the exclusive domain of the federal government, and the placing of the National Economic Council (NEC) in the list of subjects mandated to be the joint responsibility of the federal government and the provincial governments, these moves raise fears of re-centralisation and reopening of settled issues. On their part, the provinces have not helped matters by neglecting the enhancement of their capacity to plan and implement, mobilise greater provincial resources and the effective and judicious utilisation of a higher share of resources made available by the 7th NFC Award. Centralised planning was an important factor in the breakout of the country in 1971. The planning, in the post-18th Amendment period has to be federalised rather than centralised. The Amendment has redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of the Chapter 3 of the Constitution entitled Special Provisions. Before the 18th Amendment, Article 156 related to the NEC had two clauses. Clause (1) described the composition and clause (2) its functions. These clauses have undergone important changes after the 18th Amendment. The pre-amendment clause (1) read as follows:

“The President shall constitute a National Economic Council consisting of the Prime Minister, who shall be its Chairman, and such other members as the President may determine:

Provided that the President shall nominate one member from each Province on the recommendation of the government of that province.” While the apex planning body, the NEC, has been federalised, Planning Commission continues to be centralised. The spirit of the Constitution can be satisfied by (1) making Planning Commission, in place of the Cabinet Division, the Secretariat of the NEC and (2) by reducing the number of its members to five, one each from the Provinces and the Federal Government. Prime Minister chairs the NEC and there is no need for him to Chair the Planning Commission. The Chairman should be appointed by the CCI to represent the Federation.

Pakistan Institute of Development Economics (PIDE) is now a University under the administrative control of the Planning and Development Division. With Planning Commission moving to the CCI/NEC, the Planning and Development Division can continue to deal with the development issues of the Federal Legislative List, Part I. PIDE can play the role of a think-tank for the Planning and Development Division. There is an urgent need for restructuring the planning mechanisms in the provinces. At present, only Punjab has a Planning and Development Board, with members in charge of the main sectors. Other provinces have their respective Planning and Development Departments. An important reason why the centralised role of planning and the Planning Commission continues, is the weak capacity of the provincial planning mechanisms. The devolution under the 18th amendment has overwhelmed them with the large segments of education and health left with the Federal Government highlighting this point.

After the 18th Amendment, the Planning Commission could no more be a centralised body. Federal Legislative List, Part I, contains subjects which lie in the exclusive jurisdiction of the Federal Government. Before the 18th Amendment, its item 32 related to planning – “National planning and national economic co-ordination including planning and co-ordination of scientific and technological research.” After the Amendment, the subject was included in the Federal Legislative List, Part II. The last-mentioned list of subjects is neither exclusively federal nor provincial; it is an area of joint responsibility. In the Constitution, a special institution, the Council of Common Interests (CCI), has been created to supervise the affairs of the Federation listed in Part II of the Federal Legislative List.

Article 154 (1) states: “The Council shall formulate and regulate policies in relation to matters in Part II of the Federal Legislative List and shall exercise supervision and control over related institutions.”

Article 154(1) of the Constitution provides that the CCI [since the introduction of the 1973 Constitution on 14th August 1973, only 24 meetings of the CCI were held-11 meetings in 37 years from 1973 to 2010 before, and 13 meetings in 3 years from 2010 to 2013, after 18th Amendment. After 18th Amendment, the Council considered and decided on 76 items out of which around 64 decisions were implemented. CCI [still not working as required under the Constitution that is at least once in 90 days] shall formulate and regulate policies in relation to matter enumerated in Part-II of the Federal Legislative List and shall exercise supervision and control over related institutions. By abolishing the Concurrent List and deleting certain items from the Federal Legislative List Part-I, the 18th Amendment has substantially increased the quantum of provincial autonomy. Second, the role of provinces in decision making of the federation has been substantially enhanced by the enlargement of the Federal Legislative List Part-II. Provinces now have more subjects to deal with than was the case before the 18th Amendment. In the first place, they have been given full and effective control of the social sector, especially education, health, population, labour, social welfare, Zakat, Auqaf, environment, tourism, print media and cinematograph films, culture and archaeology etc. Other than standards of higher education, research and international student’s exchange, the provinces are now entrusted with education policy formulation, planning, and curriculum standards.