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Fiscal profligacy or NFC

The remedy for the federal fiscal disease lies not in squeezing provincial finances further, but in reining in federal expenditures

Fiscal profligacy or NFC

An insidious campaign appears to be underway to demonise the 7th NFC Award as the principal culprit for the fiscal difficulties faced by the federal government, including in meeting its security obligations. An explicit and formal expression of this situation was made at the last inconclusive 9th NFC meeting held in the fourth quarter of 2016; whence the federal Finance Ministry sought 7 per cent of the Divisible Pool to be set aside at the outset for meeting federal expenditures on security and development funding for Fata, Gilgit-Baltistan and Azad Kashmir. The provinces are being asked to surrender this amount on the grounds that the 7th NFC had devolved “excessive” amounts to them, which had left the Centre woefully short of funds.

The fact is that the executive branch of the federal government is itself responsible, and solely so, for the fiscal crises that it is facing; with unchecked fiscal profligacy in executive governance. On their part, the provinces are already bearing the burden of federal fiscal irresponsibility. Following the IMF conditions, provinces are required to generate budget surpluses in order to cancel out part of the large federal budget deficit. For example, if the federal deficit is Rs100 and the combined provincial surpluses are Rs40, then the national deficit is reduced to Rs60. That makes IMF and Islamabad — in that order — happy. However, what this means is that if A is unable to control his wasteful expenditures, B should forgo her dinner!

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One opportunity that the federal government was presented with to reduce its current expenditure was post-18th Amendment. At the time NFC deliberations were underway, the 26-member all-party special parliamentary committee on constitutional reforms, headed by Raza Rabbani, was also holding court. A common link between the two was Haji Adeel from then NWFP, who was a member of both bodies. NFC members were abreast of where the Raza Rabbani committee was headed and vice versa perhaps; and it was clear that the Concurrent List was likely to be abolished.

One understanding in the NFC was that the reduction in the Centre’s vertical revenue share would be balanced by the abolition of Concurrent List Ministries and Administrative Divisions and the corresponding reduction in federal current expenditures.

That understanding has remained just that and the failure to downsize the federal government and reduce federal current expenditure is at the root of federal fiscal ‘crises’. There are three categories of federal Administrative Divisions that are questionable. They number 15 and need to be abolished or reverted to their original divisions in order to effect significant cost savings

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The first category of Administrative Divisions that should have been abolished in the wake of the 18th Amendment, but have been renamed, are Education & Training, Housing & Works, Human Resource Development, Industries & Production, and National Food Security and Research. The second category of Divisions are outright spurious: Climate Change, National Harmony, National Heritage and Integration, and National Regulation and Services. The third category of Divisions have been created by separating them from ‘parent’ Divisions. They are: Defence Production detached from Defence, Information Technology & Telecommunication detached from Communications, Postal Services detached from Communications, Revenue detached from Finance, Statistics from Finance, and States & Frontier Regions detached from Kashmir & Gilgit Baltistan Affairs.

While there is a justifiable case for elimination of unnecessary civil expenditures, a review of federal current expenditure data reveals where culpability primarily lies. The table below shows current expenditure for eight post-7th NFC years – 2009-10 to 2016-17 – for three heads of expenditure: (1) debt, (2) defence and (3) civil administration, including subsidies, etc. It is clear that the real villains of the pieces are debt servicing and defence.

Read also: The federation question

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While overall current expenditure has grown at less than 10 per cent, debt servicing and defence expenditure has increased by over 12 per cent. By contrast, civil expenditure has grown at less than 6 per cent. The debt servicing share trend indicates that the line was held at 36-38 per cent till 2013, but began to balloon 2014 onwards, reaching 46 per cent. Defence expenditure share has risen consistently and steadily from 18 per cent in 2009-10 to 21 per cent in 2016-17. The data clearly shows the remedy for federal fiscal disease lies not in squeezing provincial finances further, but in reining in federal expenditures where it matters.

 

The writer is an economist and was Sindh’s Technical Member on the 7th NFC. He currently represents Balochistan

Kaiser Bengali

The writer is an economist and was Sindh’s Technical Member on the 7th NFC. He currently represents Balochistan

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