Editorial
The National Finance Commission (NFC) Award in Pakistan determines how resources are distributed between the federal government and the provinces. Recently, there have been increased demands to revise the current NFC award. The federal government’s budget is under pressure due to high debt servicing costs, defense spending, and development needs, which has left it with limited resources for other essential areas. The 7th NFC Award, implemented in 2010, increased the provinces’ share in the national resource pool. While this aimed to strengthen provincial autonomy, critics argue that sufficient tax collection efforts from the provinces didn’t accompany it. This has resulted in a situation where the federal government borrows heavily to meet its obligations.
The 7th NFC Award envisioned a significant increase in the tax-to-GDP ratio to support the higher provincial share. However, this target has yet to be achieved, further straining federal finances. Miftah Ismail, a former finance minister, argues that the current situation disincentivizes provinces from collecting taxes on property and agriculture income, which are constitutionally their responsibility. This, in turn, puts the burden of taxation on the federal government, impacting sectors like manufacturing and the middle class. Ismail also points out a significant increase in provincial spending, particularly on development projects, compared to a more modest rise in federal development expenditure. He questions the effectiveness of these provincial spending sprees, citing examples of non-operational schools built in recent years. The Pakistan Peoples Party (PPP) has rejected any revision to the NFC Award, likely fearing a reduction in provincial autonomy.
The debate surrounding the NFC Award highlights the challenges of balancing federal and provincial finances in Pakistan. While strengthening provincial autonomy is crucial, ensuring responsible fiscal management and tax collection efforts at all levels is equally important. Finding a sustainable solution requires a comprehensive approach that addresses the federal government’s and the provinces’ concerns.
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