EDITORIAL: In these times of an extremely tight fiscal position where the federal government’s net revenues are not even enough to service its debt, let alone incur any other expenditure, there are still cases where the federal government is financing Public Sector Development Programmes (PSDP) that are actually the responsibility of the provinces.
There must be an end to this unsustainable policy. Ever since the announcement of the 7th NFC award and the passage of 18th Constitutional Amendment, the federal share in the divisible pool of federal taxes has reduced due to the abolition of the concurrent list in the constitution and devolution of subjects therein to the provinces.
Retaining ministries/divisions/departments of devolved subjects within the federal government, thereby incurring the unnecessary expenditure, has worsened the already unsustainable fiscal position of the federal government. The ever-increasing federal deficit with runaway current expenditure has now brought the country to the verge of public debt default.
The spirit of devolution in the 18th Amendment was to pass the responsibilities along with additional financing through the 7th NFC award to the provinces. And the eventual goal was to pass these on to the third tier for better governance and service delivery. Alas, that did not happen.
The subjects being devolved to the provinces remained alive on paper as an expense of the federal government resulting in unnecessary duplication in spending. That has only exacerbated the problem.
The provinces upon getting higher share of revenues accelerated their spending sprees both in terms of having higher employment (mostly politically motivated) and development spending. The pie has expanded on the consolidated expense side while the revenues remained subdued. That has resulted in piling of debt with the structure becoming unsustainable.
Thus, the onus of revenue generation kept on falling on the federal government when the real juice lay in extracting from land-based and agriculture taxes which are part of the provincial domain. The incentive for provinces to generate revenues is little as they are getting huge sums of money. All they did was to expand the employment base and jack up development.
On the other hand, the federal government kept on increasing taxes on its small base where the prime focus was to impose higher direct taxes on manufacturers and increase sales tax on goods. On the other hand, taxes on retailers and wholesalers remained close to nothing.
Meanwhile, direct and indirect subsidies, over the past decade or so, in the power and gas sectors, fell on the federal government as well. Direct subsidies are being budgeted but indirectly these have resulted in growth of the circular debt which is eventually is passed on to the end consumers in the form of an increase in tariffs or become part of the budget.
The bulk of the circular debt and subsidies are attributed to poor performance of power and gas distribution companies (discos) where the transmission and distribution losses are higher than the permissible limits. The best solution for these discos and other public sector entities is to privatise them. However, if that is not happening, the control and losses should be passed to the respective province where the amount should be deducted on the development and other expenditure being doled out.
In a nutshell, the federal fiscal arrangement is completely unsustainable. And skewed taxation burden has only increased the informality in the economy. Plus, higher development spending by the provinces has immensely added to cash in circulation.
This can only be dealt with by acting in accordance with the letter and spirit of the 18th Amendment through which provinces should assume the responsibility and devolve the development and tax collection to the third tier of governance for service delivery.
Copyright Business Recorder, 2023
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