The upcoming National Finance Commission (NFC) award, with its first meeting set for December 4 seems to be structured around a single, misguided belief.
That belief is now well known, because of all the propaganda peddling it. In simple terms: “Pakistan’s fiscal problems are because too much money has been given to the provinces, and this has left the federal government broke. If the NFC award is restructured to take back resources from the provinces, all will be well.”
Needless to say, this belief is wrong. All we need to do is look at the facts. There are four key questions to consider.
- Is 57.5% really too high an NFC share for the four provinces, and is this what leaves the federal government broke?
The answer is no, absolutely not. The truth is that provinces do not receive anywhere near 57.5% of what should be the divisible pool. Certainly, what they are allowed to spend is a lot less.
Hafiz Pasha, in his excellent article in the Business Recorder on October 7 (Link) proved this. If the current NFC award is adjusted to include the impact of the forced provincial surpluses that the provinces cannot spend (Rs921 billion in fiscal year 2024-25; Rs1,500 billion in fiscal 2025-26), and the Petroleum Levy Collections (Rs1,220 billion in fiscal 2024-25, Rs1,468 billion in fiscal 2025-26), the effective provincial shares reduce to 45.8% for 2024-25, and to 42.3% for 2025-26. This is a far cry from the marketed 57.5% provincial share at which so much outrage is expressed.
- But regardless, don’t the provinces have too much to spend?
No, they do not. It can be argued that they can spend much better, but this critique will apply equally to the federal government. However, the story that provinces are flush with cash despite all of their spending needs being fulfilled is complete fiction.
Just take the state of education and health outcomes in the country and the fact there is near unanimous agreement that spending in both sectors is abysmal compared to global benchmarks for developing countries. Doubling government spending on education, from less than 2% of GDP to an agreed 4% of GDP would require provinces to spend Rs2,000 billion more annually. This is needed to get our 25 million out of school children into school, or to improve abysmal learning levels.
Doubling government spending on health, from less than 1% of GDP to 2% of GDP, still below global benchmarks, would require another Rs1,000 billion. That is Rs3,000 billion annually just between education and health that the country has long said it needs to spend.
Beyond this, any number of sectors, from security to rescue services, to municipal services and local governments, to family and population planning, to road and infrastructure maintenance and upkeep, all need greater spend than current provincial resources allow.
Remember that all of this is not factoring in the fact that the share of ex-FATA, and the national commitments to ex-FATA of committing 3% of the NFC post-merger to address the development lag there, have not even been incorporated into the NFC.
Now, instead of increasing that funding for provinces, think of the impact of reducing it by another Rs1,000 billion to contribute towards federal government debt. There will be a significant impact on service delivery budgets and on development, and it will be the people of Pakistan that suffer.
So again, it is not that the provinces have too much to spend, but that all of Pakistan, including the federal government and the provinces, have too little to spend. That is the problem the NFC needs to try and solve.
- But won’t restructuring the NFC will solve the federal government’s financial issues?
Figures show that what provinces can give up to the federal government will hardly make a dent in the federal government’s deficit, but what it may do is create a complacency, and yet another excuse to delay the sort of economic reform that Pakistan desperately needs.
The federal government will spend over Rs8.2 trillion this year on servicing debt; Rs2.5 trillion plus on defence; Rs2 trillion in grants; Rs1.1 trillion on subsidies; Rs1 trillion on the federal government; Rs1 trillion on unfunded pensions; and Rs1 trillion on a very ineffective and inefficient Development Budget.
This is close to Rs17 trillion in spending, of which Rs 6.5 trillion is financed through additional debt. Any provincial contribution in an NFC that attempts to give a greater share of resources to the centre can only really be to the tune of Rs500 billion to Rs1,000 billion; between a sixth and a tenth of the additional debt incurred. That is really not a huge dent at all, and one that will become meaningless unless, as both the IMF and World Bank have said, our economic and governance models change drastically.
Again, what this proves is that it is not that the provinces have too much money to spend, but that the country doesn’t have enough.
- What should be done then?
Instead of sob stories about how the 18th Amendment and the NFC award have made the federal government broke; what the NFC should be doing is to work on a formula that prioritizes fiscal equalization, as NFC awards the world over do above all else, and builds in performance criteria that incentivize good government.
What it must also do, and this must be non-negotiable, is to tackle difficult issues, but issues that are commitments to the constituent parts of the federation; in KP’s case, this implies the financial merger of ex-FATA, and a resolution to the issue of net hydel profits.
Because the NFC cannot be structured in a silo or in a vacuum, it must also tackle fiscal and economic issues including the national revenue generation model, and the structure and cost of government, including controlling pay, financing pensions, and reforms such as in procurement.
However, having said all that, we know that the NFC will do none of this. We know this, because we know that unrepresentative governments neither understand the interests of the country, nor care about them. And if we allow that to happen, it will be all of Pakistan that will pay the price.
