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Fiscal Federalism and Decentralization: Case of Pakistan By Dr. Aisha Ghaus Pasha Director Institute of Public Policy Beaconhouse National University, Lahore ALLOCATION OF FUNCTIONS AMONG DIFFERENT LEVELS OF GOVERNMENT Contd. Service* According to 1973 Constitution and 1979 LGO After 2001 Devolution Plan After 18th Amendment 2010 Defense F F F International Trade F F F External affairs F F F Census F F F Nationality, Citizenship F F F Posts and Telegrams F F F Telecommunications F F F Railways F F F National Highways F F F Major Ports F F F Stock Exchanges F F F Nuclear Energy F F F Oil & Gas F F F F/P F/P P Population Planning ALLOCATION OF FUNCTIONS AMONG DIFFERENT LEVELS OF GOVERNMENT Contd. Service* According to 1973 Constitution and 1979 LGO After 2001 Devolution Plan After 18th Amendment 2010 Electricity F/P F/P P Curriculum F/P F/P P Centers of Excellence F/P F/P P Tourism F/P F/P P Social Welfare & Zakat F/P F/P P Vocational Training F/P F/P P Labor F/P F/P P Law & Order P P P Justice P P P Sub-National Highways P P P Irrigation P P P Distribution of Inputs P P P ALLOCATION OF FUNCTIONS AMONG DIFFERENT LEVELS OF GOVERNMENT According to 1973 Constitution and 1979 LGO After 2001 Devolution Plan After 18th Amendment 2010 Agricultural Extensions P P/L P/L Higher Education P P/L P/L School Education (Secondary) P L L School Education (Primary) P L L Preventive Health P L L Curative Health P L L Farm-to-Market Roads L L L Water Supply L L L Sanitation L L L Drainage L L L Solid Waste Management L L L Fire Fighting L L L Parks & Playgrounds L L L Service* Vertical Imbalance among Governments in Pakistan 2009-10 Revenue Share (%) Expenditure Share (%) Surplus (+) /Deficit(-) Federal Government 94 70 +24 Provincial + Local Governments 6 30 -24 Extent of Fiscal Decentralization (Share in Public Expenditures) (%) 2000-01 2005-06 2009-10 2010-11* Post NFC Federal 71.9 63.8 69.4 63.1 Provincial 23.0 23.6 30.6 36.9 Local 5.1 12.6 Total 100.0 100.0 100.0 100.0 *Budgeted History of Intergovernmental Transfers • Since Partition, eight revenue sharing awards – Raisman Award of 1951 – National Finance Commission Awards of 196162,1964,1970,1974,1990 and 1996 • Transfer Takes Three forms-”Divisible Pool” transfers, Straight Transfers and grants/subventions Share of Different Forms of Transfers (% of Total Transfers) Post NFC 1990 (1991-92) Post NF 1996 (1997-98) Post Presidential Order, 2006 (2008-09) NFC 2009 (2010-11) Divisible Pool Transfers 72.2 79.0 78.8 79.6 Straight Transfers 24.8 15.4 14.6 15.4 Grants/Subventions 3.0 5.6 6.6 5.0 Total 100 100 100 100 Evolution of Divisible Pool and Sharing % Transferred to Provincial Governments NFC 1974 NFC 1990 NFC 1996 Presidential Order, 2006 NFC 2009 Income Tax 80 80 37.5 41.5-46.25 56-57 Sales Tax 80 80 37.5 41.5-46.25 56-57 Excise Dutiesa - - 37.5 41.5-46.25 56-57 Customs Duties - - 37.5 41.5-46.25 56-57 Share of Provinces in Total Federal Transfers % (first year after Award) NFC 1990 NFC 1996 Presidential Order, 2006 NFC 2009 Punjab 55.3 47.0 47.3 42.9 Sindh 24.0 23.8 29.8 27.9 Khyber-Pakhtunkhaw 12.7 17.8 14.8 18.5 Balochistan 7.9 11.4 8.0 10.7 Total 100 100 100 100.0 Criteria of Distribution of Divisible Pool among Provinces % Prior to the NFC, 2009 Post NFC, 2009 100.0 82.0 Poverty and Backwardness - 10.3 Revenue Collection and Generation - 5.0 Inverse Population Density - 2.7 100 100 Population Total Implications of the NFC Award, 2009 in 2010-11 Budget • Federal Government has to transfer more revenues to the provinces which leaves net revenue receipts at last year’s level • To curtail the deficit, federal current and development expenditure have also been restricted to last year’s level • Federal fiscal deficit target of 5% of GDP • Rapid expansion in combined provincial budgets in 2010-11 with increase of 20% in current expenditure and 50% in development expenditure • Provincial development activity now 53% of national public sector development program. • Consolidated deficit could rise to 5-6% of GDP as compared to target of 4% of GDP Medium term Consequences • • • • For the medium term consequences to be favorable, following conditions need to be fulfilled: Provincial governments do not slacken own fiscal effort Provincial governments avoid profligacy in expenditure Proper planning and management of spending to maximize impact on the level and quality of service provision Prioritize spending on backward regions and social services Implications for the Federal Government • Sharper Prioritization of Federal PSDP • Transfer of Vertical Programs in transferred Concurrent List Functions to Provinces • Enhance Tax-to-GDP ratio (e.g. by comprehensive VAT ) • Effective functioning of NFC secretariat Overall Conclusion The 7th NFC Award of 2009 will usher in a new era of fiscal federalism in Pakistan and improve prospects of higher investment on the people, but could contribute to increasing the underlying fiscal deficit and thereby exacerbate macroeconomic imbalances.