An Appraisal of Fiscal Decentralization in Pakistan

Article excerpt

ABSTRACT

Fiscal federalism is a controversial issue in Pakistan. Because the major heads of the revenue collection are in the federal government control, from divisible pool, these resources are then distributed between federal government and provinces. Over time, federal government has taken most of the functions that were earlier assigned to provincial governments. This hunger of power has created the controversy between federal government and provincial governments and also among the provinces over distribution of resources. Present study analyzes this issue by using the provincial data of the revenue and expenditure. Study finds that Punjab the most populous province enjoys fiscal decentralization, followed by Sindh. However, the other two smaller provinces Khyber Pakhtoonkhwa and Balochistan are dependent on the central government because of their relatively small population and hence they get low revenue share from the divisible pool. It is suggested that smaller provinces should enhance their efforts to further stimulate the provincial revenue collection; moreover, the federal government should give more control over the natural resources to the provinces.

Key Words: Fiscal Decentralization, Revenue, Expenditure, Co-integration, Granger causality

JEL: H11; H71; H72; C22

Acknowledgement: The authors are highly indebted to Dr Syed Nawab Haider Naqvi for his encouragement and providing research oriented environment at the FSES, FUUAST Islamabad.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Over the years in Pakistan, distribution of powers between the federation and provinces is the most controversial issue. Although the 1940 Lahore Resolution and 1973 Constitution give autonomy to the provinces, but due to political confusion created by military dictatorships and authoritarian democratic regimes it has not been implemented in its true spirit. Lack of provincial autonomy had caused dismemberment of the country in 1971 and latter on eroded the people's trust on the Federation. The distribution of the powers has many dimensions and the distribution of the federal resources is one of them. The eighteenth amendment, in the constitution of Pakistan, approved by the parliament on April 19, 2010 is also another attempt to enhance the provincial autonomy. Eighteenth amendment enhances provincial autonomy by increasing provinces' fiscal authority, for example, collection of one of the most revenue generating tax i.e. sales tax is transferred from federal to provincial governments.

In any federation; fiscal federalism is a critical issue. Fiscal federalism is defined as "the understanding, which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government" (Oates, 1999: 1120). The sub-central governments know better about the demands of voters, therefore, mostly the central government provides share of its revenue to provinces/states to meet their spending requirements. If the provincial authorities are able to arrange its spending requirements through their own resources and the share provided by the central government, it depicts the situation of fiscal decentralization. On the other hand, if they are unable to meet their revenue requirements and seek towards central government for funding of their spending requirements, such a situation would be referred as a situation of fiscal centralization.

Historically, in Pakistan, the only criterion for distribution of resources was population of the provinces. But in the seventh National Finance Commission (NFC) award (current), for the first time, other factors like revenue generation, poverty and inverse population density, are also accounted for, in the distribution of resources among the provincial governments. In Pakistan most of the revenue generating taxes are collected by federal government, while provincial governments besides collecting less revenue generating taxes, mostly rely on the federal government transfers through NFC award. …