Money talks

AT PENPOINT

The 11th National Finance Commission holds its inaugural meeting today under the chairmanship of Federal Finance Minister Muhammad Aurangzeb. The government is working in some haste, though it does not have to, because only one month of the current financial year has passed, though this meeting, which will be introductory, as the five participating governments present their respective views, will not produce an Award. The Award must be finalized by around mid-March, or ideally a month earlier, so that it can be incorporated into the next budget.

The present Award was made in 2010, and expired in 2015, after which the resource distribution has been carried out in accordance with the previous Award Basically, as mandated by the Constitution, the Award determines a ‘divisible pool of taxes’, which consists of those taxes collected by the federal government but which are distributed. The first decision is the division between the federal government and the provincial, which is presently set at 35 percent for the provinces, and 65 percent for the federal government. Then there is the decision of how the share of the provinces is to be divided among them.

This is not the easiest of processes, and it is symptomatic that while the 11th NFC will meet, it will deliberate on the Eighth Award, showing that three commissions have met, but failed to declare an Award. It should be remembered that the Commission consists of the five finance ministers, one expert each from the provinces; and the decision is by consensus. That means that any one province may well hold out and refuse to let the Award agreed by the rest to go through.

At the best of times for the federal government, with all four provincial finance ministers belonging to the same party, the discussions are usually acrimonious and positions taken are maximalist, because money is involved. Also, though the Award is supposed to only last for five years, martial laws have meant that Awards have been extended beyond their intended span. This has meant that Awards have been pretty ragged by the time they are replaced. Perhaps the 7th Award is something of an outlier, for it has lasted 15 years, which is the second longest there has not been an Award. Though the NFC was an old pre-Partition concept, the present series was only started under the 1973 Constitution, with the only Award made by the Bhutto Government in 1974 holding the field. And the Commissions formed under the Zia and Juenjo failing to produce awards. It was not until the 1991 Award under the first Nawaz government that an Award was produced.

It should not be assumed that the present NFC will give an Award.00 NFCs have met before without a consensus being reached on an Award, The chances of an Award because there are two governments which will try to make political capital out of opposition. The KP government is controlled by the PTI, which is opposed tooth and nail to the PML(N)-PPP coalition at the Centre, and has little incentive to reach a consensus. Though the PPP supports the government, it has not joined it, while it rules in Sindh on its own. As it has always claimed the NFC Award is unfair, and that Sindh has not been given the money promised under the Award, there will be an incentive to continue this obstructionism. It should be noted that the last time there was an Award, the PPP was in office in the Centre as well, and the Sindh government joined in the consensus.

That Award had seen a very important change made. For the first time ever, criteria other than population were included in the formula for the distribution of the provincial share among the provinces. As Sind had always argued that other factors should be included, apart from party affiliation it had become difficult to maintain opposition to the Award.

The new criteria included

This Award will also operate under the provision of Article 160(3B), which provides that the share of the provinces would not be less than in the previous Award. In other words, the federal-provincial division, also called the vertical distribution, would not be changed downwards, so as to increase the federal share. Correspondingly, the federal government will not agree to any reduction in its share, because that would mean a permanent commitment.

The NFC has not got an easy task ahead of it. While the money for both the centre and the provinces is scarce, the needs are apparently unlimited. Minor tweaks may not be enough.

It is interesting that going into this Award cycle, one of the federal government’s targets is to ultimately have population eliminated entirely as a criterion for the horizontal distribution of the provincial share within the provinces. The reduction it will propose in the current Award will thus be meant to commit the provinces to a Multi-Award plan.

There are three objections to this. First, it means there can be no slippages between Awards, as seems more the rule rather than the exception. A slippage will mean that the reduction will be put off, raising the question, when the NFC does convene, of whether the reduction is to be fully implemented, or how exactly it is to be implemented. Second, what happens if one or more members of a future Commission refuse to implement that Award’s planned reduction: in short, can one Commission bind future Commissions? There is the possibility of a combination of these factors. What if, because of a shift in party affiliation for example, one finance minister objects, and thus stops it, and a successor is willing. This would turn the reduction formula unto a stop-start process it is not meant to be.

Finally, the NFC tries to look into the future while determining its Award. It tries to estimate the government’s revenues and its expenditures. Those projections have often been thrown for s loop by events. With climate change causing more frequent extreme weather events, suddenly occurring needs might spike. Projections involving Multiple-Award periods are going to be decidedly wonky.

There is also going to be the issue of whether the Federal Capital Territory, Azad Kashmir and Gilgit Baltistan are to be funded. So far, the federal government has been funding them out of its share, but that share has gone down from 80 percent in 1974 to the present 42.5 percent. FCT, AJK and GB funding done out of a larger share.

It is not a case of a poor centre and extravagant provinces. The provinces are also poor. However, two of the anticipated developments on which the last Award was premised have not occurred. First, the provincial finance commissions have not made awards, under which provincial governments were supposed to devolve revenues to local governments, along with functions. Second, departments repatriated to the provinces have not been fully integrated.

The federal government now wants to tie provincial shares to outcomes in such basic functions as health and education.

The NFC has still to handle the legacies of the past. There will be an attempt, backed by both the establishment and the IMF, to reverse the caps set by the Eighteenth Amendment. Though the tax-GDP ratio has increased, the federal government has not benefited enough. It is likely that it will need to borrow to pay salaries. Unless it can keep more of its collections, it will have difficulty servicing its debt. That is why certain parts of the budget, like the Benazir Income Support Programme are likely to come from the provinces.

The NFC has not got an easy task ahead of it. While the money for both the centre and the provinces is scarce, the needs are apparently unlimited. Minor tweaks may not be enough.