During the much delayed meeting of the National Finance Commission (NFC), due for a consensus agreement since the last one expired in 2015, the federal government floated the idea of raising its share by 3 percent in the divisible pool under the guise of security. The obvious objective behind this move is to increase the share of the Centre, backed by the strong belief held by Federal Finance Minister Ishaq Dar and the civilian establishment that the federal package post-8th NFC award is simply insufficient to meet the Centre's expenditure needs; and to do so without violating Article 160 (3A) of Constitution that stipulates that "the share of the provinces in each award of NFC shall not be less than the share given to the provinces in the previous award."
The rationale for additional revenue request by the Centre is two-fold. First, that the federal government is carrying much of the funding weight of the subjects devolved under the 18th Constitutional Amendment; such as education, health, etc, because of the lack of capacity in the provinces; and secondly, the expenditure needs of the Centre are rising due to security concerns - concerns that relate to the ongoing operation Zarb-e-Azb and those associated with the China Pakistan Economic Corridor (CPEC); in the latter case, it is significant that Nepra turned down the government request to raise electricity tariffs for new projects by one percent for security given that existing tariffs have a security cost component.
An argument against the proposal to raise the Centre's share by 3 percent is that law and order is a provincial subject and a province like Sindh, for example, is paying the additional cost associated with the deployment of rangers and therefore merits an additional percentage of the divisible pool for meeting its security costs. Be that as it may, the Centre provides funding for defence, which launched the costly but extremely necessary operation Zarb-e-Azb in 2014 and bears the cost for internally displaced persons (IDPs). Defence allocation rose by nearly 58 percent during the three years of the Sharif administration - from the budgeted 545,386 million rupees in the budget for 2012-13 to 860,169 million rupees in the current year's budget; and significantly the increase in allocations for operating expenses associated with Zarb-e-Azb was 50 percent - from 143,544 million rupees to 216,149 million rupees during the two years.
However, two elements need to be highlighted in this context: (i) reports indicate that Zarb-e-Azb is near completion and hence a decline in operating costs may be projected; and (ii) the need for greater resources by the federal government is more marked due to a dramatic rise in mark-up entirely attributable to heavy borrowing by the government - from 925,775 million rupees in 2012-13 budget to 1,360,000 million rupees in the current year's budget - a rise of 47 percent. It appears unlikely that the federal government would be able to convince the provinces to agree to a 3 percent increase in its share especially considering that the bulk of this may well be earmarked for debt repayments rather than defence.
The NFC award has to be approved by a consensus of all the participants or, in other words, a simply voting majority does not prevail and hence it is critical for the federal government to convince all the provinces to agree to the proposal of an extra 3 percent share to the Centre. Under the 8th NFC award 2010, spearheaded by the then Finance Minister Shaukat Tarin with invaluable support from the then Chief Minister Punjab Shahbaz Sharif, the share of the provinces was raised to 57.5 percent from 2011-12 onwards and the remaining 42.5 percent was to be allocated to the federal government.
Unfortunately, though there appears to be growing mistrust between the federal finance ministry and provincial finance ministries on a number of issues which, as per the provinces, reflect the centre begrudging provinces their due share. An example is the attempt by the federal finance ministry to disallow input adjustment of sales tax paid to the provinces while another is the gradual increase of provincial surplus to fund the federal government's budget deficit. In the last year of the PPP-led coalition government 2012-13, the budgeted provincial surplus was 80 billion rupees which, in the current fiscal year, has been budgeted at 339 billion rupees, an amount that provinces including Punjab has indicated they will be unable to meet. Be that as it may, 3 percent of the budgeted divisible pool of 2,044,143 million rupees is 61,324 million rupees additional revenue - in addition to the provincial surplus - subject of course to the realization of the taxes as envisaged in the budget - an amount that trumps the provincial surplus figures.