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 18 th Amendment 2010 DefenseFFF International TradeFFF External affairsFFF CensusFFF Nationality, CitizenshipFFF Posts and TelegramsFFF TelecommunicationsFFF RailwaysFFF National HighwaysFFF Major PortsFFF Stock ExchangesFFF Nuclear EnergyFFF Oil & GasFFF Population PlanningF/P P

ALLOCATION OF FUNCTIONS AMONG DIFFERENT LEVELS OF GOVERNMENT Contd. Service* According to 1973 Constitution and 1979 LGO After 2001 Devolution Plan After 18 th Amendment 2010 ElectricityF/P P CurriculumF/P P Centers of ExcellenceF/P P TourismF/P P Social Welfare & ZakatF/P P Vocational TrainingF/P P LaborF/P P Law & OrderPPP JusticePPP Sub-National HighwaysPPP IrrigationPPP Distribution of InputsPPP

ALLOCATION OF FUNCTIONS AMONG DIFFERENT LEVELS OF GOVERNMENT Service* According to 1973 Constitution and 1979 LGO After 2001 Devolution Plan After 18 th Amendment 2010 Agricultural ExtensionsPP/L Higher EducationPP/L School Education (Secondary)PLL School Education (Primary)PLL Preventive HealthPLL Curative HealthPLL Farm-to-Market RoadsLLL Water SupplyLLL SanitationLLL DrainageLLL Solid Waste ManagementLLL Fire FightingLLL Parks & PlaygroundsLLL

Vertical Imbalance among Governments in Pakistan Revenue Share (%) Expenditure Share (%) Surplus (+) /Deficit(-) Federal Government Provincial + Local Governments630-24

Extent of Fiscal Decentralization (Share in Public Expenditures) (%) * Post NFC Federal Provincial Local Total100.0 *Budgeted

History of Intergovernmental Transfers Since Partition, eight revenue sharing awards – Raisman Award of 1951 – National Finance Commission Awards of ,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 ( ) Post NF 1996 ( ) Post Presidential Order, 2006 ( ) NFC 2009 ( ) Divisible Pool Transfers Straight Transfers Grants/Subventions Total100

Evolution of Divisible Pool and Sharing % Transferred to Provincial Governments NFC 1974 NFC 1990 NFC 1996 Presidential Order, 2006 NFC 2009 Income Tax Sales Tax Excise Duties a Customs Duties

Share of Provinces in Total Federal Transfers % (first year after Award) NFC 1990 NFC 1996 Presidential Order, 2006 NFC 2009 Punjab Sindh Khyber-Pakhtunkhaw Balochistan Total

Criteria of Distribution of Divisible Pool among Provinces % Prior to the NFC, 2009Post NFC, 2009 Population Poverty and Backwardness-10.3 Revenue Collection and Generation-5.0 Inverse Population Density-2.7 Total100

Implications of the NFC Award, 2009 in 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 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 7 th 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.