Of provinces and deficits

Here we go again! The fiscal year 2014 has not even started and the federal fiscal deficit target for the year has already been breached by roughly 0.3 percent.
The federal fiscal managers had budgeted a combined fiscal surplus of Rs23.1 billion. But apparently Punjab and Sindh weren listening. The two big provinces have budgeted a combined deficit of Rs51 billion, where Punjab led from the front by posting a gap of Rs30 billion.
The big brother had budgeted a similar deficit in FY13, but its actual deficit was less than one-third of that amount. In absence of detailed information at the moment, this trend may provide some hope.
Then again the more-than-budgeted fiscal imbalances by Khyber-Pakhtunkhwa and Sindh in FY13 lead one to believe that come June 2014 and the centre will be left scratching their heads once again for nth year in the row (See Its the provinces, stupid!, published June 18, 2013).
There are two ends to this issue. The shorter end is concerned with the sagacity or the intentions of the federal managers, depending upon what the situation is. At the longer end, the issue raises questions about the revenue distribution between provinces.
There are two possibilities to the shorter end. Federal managers should know that they are not in a position to dictate provinces as to how should the latter balances its resources and expenditures. So when they budget a combined provincial surplus, it is assumed that they are in close coordination with the provinces, which as the numbers suggest they are not.
The alternate possibility, according to Muhammad Sabir, Principal Economist at Social Policy and Development Centre, is that federal managers show combined provincial surpluses in federal budget just to brush up their books. This helps look good in front of the IMF, a lender whom Pakistan tends to need time and time again.
The question is that how can the provinces even think of posting a deficit, when they know that they do not have borrowing mandate, aside from overdraft facility of small amounts to ensure smooth cash flows. And this, knowing full well that provincial fiscal imprudence affects the centre.
Yet on the other hand, why should federal managers expect provincial surpluses in the first place. Its not as if the developmental needs of the provinces are going to be over anytime soon. Even if provincial revenues boost substantially, they ought to be spent on developmental requirements.
The key, therefore, lies in posting balanced provincial budgets. But in order to ensure this, there has to be some tweaking in how the revenues are distributed between the provinces.
At the time of last NFC award, fiscal discipline and provinces own revenue-generation was being considered as one of the basis of revenue distribution, says Dr Ayesha Ghaus-Pasha, Director at Institute of Public Policy. But somehow it got lost in the tiring discussions that followed.
As the current NFC award draws closer to its end in 2014/15, the debate to include such criteria in the revenue distribution formula should begin now. Failure to do so, will lead to status quo in the formula, and the saga of combined provincial deficits will continue.