A few days ago, the federal government was struggling to get the budget approved. One major reason was the need to meet IMF conditions. Another was the disagreement between the Centre and the provinces over the distribution of tax revenues. Since the 18th Amendment, the provinces’ share in national resources has increased, while the federal government’s share has declined. This has remained a source of tension for some time. Before this budget, too, there was no significant progress on a new National Finance Commission award.
For the first time in this budget, the provinces helped the federal government meet its expenses through grants as federal govt is facing difficulties in meeting defence and debt related expanses. To make this possible, cuts were made in provincial Annual Development Programmes, or ADPs. Punjab faced the largest reduction in its development budget, while Sindh and Khyber Pakhtunkhwa also saw cuts in their ADPs.
The 18th Amendment, the NFC Award and the financial resources available to the provinces are now once again at the centre of national debate. One important reason for this renewed discussion is the World Banks’s report “Strengthening Fiscal Federalism in Pakistan”. The report says that after the NFC Award, provinces did receive greater financial resources, but a large part of this increase was spent on government expenses, salaries and pensions rather than development.
According to the report, current expenditure remained around 75 per cent of total provincial expenditure on average. Between fiscal year 2009 and fiscal year 2023, nearly 82 per cent of the additional resources transferred to the provinces went into current expenditure. The main driver of this increase was higher spending on salaries and pensions.
On development spending, the report says that between fiscal year 2009 and fiscal year 2023, provincial development expenditure increased by around 60 per cent in real terms. However, it still remained a limited part of overall provincial spending. Development expenditure stood at 19 per cent of total provincial spending in fiscal year 2009. It rose to 31 per cent in fiscal year 2017, but then declined again to 23 per cent by fiscal year 2023.
By comparison, spending on salaries and pensions grew far more rapidly. According to the report, between fiscal year 2009 and fiscal year 2023, real provincial spending on salaries increased by 250 per cent, while spending on pensions and retirement benefits rose by 330 per cent. In other words, a major part of the additional resources received by the provinces after the NFC Award was absorbed by salaries and pensions instead of development projects.
Will reducing the provinces’ share and increasing the federal government’s share solve the Centre’s problems?
The report strengthens the impression that the funds received by the provinces were not spent on development in the way they should have been. This is why the debate is once again moving towards a possible review of the NFC Award. But the more important question is this: will reducing the provinces’ share and increasing the federal government’s share solve the Centre’s problems? Will giving more money to the federal government automatically lead to a new wave of development projects across the country?
Anyone who thinks so should think again. There is no doubt that despite receiving greater resources, the provinces have not delivered the level of public services and development outcomes that were expected. But this does not mean that the entire system of transferring powers and resources to lower levels should be reversed.
The real need is to transfer authority further down to the local level, empower local governments, and strengthen systems of accountability and oversight. Only then can public money be spent where it is needed most and produce real results. At the same time, both the federal government and the provinces need serious reforms in tax collection. Provinces, like the Centre, have failed to expand the tax base. Agriculture tax is a clear example. This year, provincial governments failed to collect meaningful agriculture income tax, raising only Rs5.62bn out of Rs306bn declared by taxpayers, less than 2 per cent of the declared agricultural income.
In a country where the tax-to-GDP ratio is around 10 per cent and the tax base remains weak, the issue of resource distribution will not go away. The reason is simple: expenditure will continue to rise, but revenue will not increase at the same pace. In the coming days, the World Bank report is likely to be used to fuel debate on constitutional amendments and possible changes to the NFC Award. But unless basic reforms are carried out, changes in constitutional formulas alone will not produce the desired results.
The debate on resource distribution is important, but it should not become a tug of war between the federal government and the provinces. Its real purpose should be better governance, transparent spending, stronger local governments and improved public services. At the same time, one point should also be acknowledged: increases in salaries and pensions may have provided some relief to government employees and pensioners during a period of high inflation. That relief matters. But it cannot be a substitute for development, service delivery and structural reform.