ISLAMABAD: Despite severe fiscal constraints, the federal government is still spending over Rs710 billion annually by retaining 17 devolved ministries and financing development projects in areas that, as per the Constitution, come under the provincial domain, the World Bank has said.
The huge spending is causing the public debt to soar besides keeping many initiatives of the Centre under-funded. Prior to the devolution, the federal government was spending 0.39% of the GDP on these 17 ministries that were subsequently devolved to the provinces under the 18th Amendment in the Constitution in 2010.
However, after some time, the Pakistan Peoples’ Party (PPP) government and its successors, revived all those ministries – leading to a duplication of the expenditures.
The spending on these 17 ministries has surged to 0.59% of the GDP or Rs328 billion per annum as of 2022, said Derek Chen, a senior economist at the World Bank.
In its recent publications, the global financial institution has advised the federal government to realign its expenses only to those subjects, which the Constitution declares its responsibility.
Under the 18th Amendment, the Centre had increased the provincial share by 11% to 57.5% of the federal divisible pool on the grounds that additional resources would be needed after the transfer of new subjects to provinces.
Later on, all these ministries were reinstated to accommodate ministers and bureaucrats.
However, the Centre still criticises the 18th Constitutional Amendment for its own flawed policies.
Derek said half of the federal Public Sector Development Programme – valued Rs315 billion – was also spent on projects that fell under the provincial domain.
Another Rs70 billion is also given to the Higher Education Commission every year.
The federal government spent Rs3.179 trillion on debt servicing alone during the first eight months of the ongoing fiscal year – an amount that was Rs17 billion more than its net income – meaning all expenses are now being sustained by the Centre which is doing so by aquiring more loans. They will be repaid with an interest of over 22%.
The average budget deficit over the past 10 years was 6.8% of the GDP. Chen said this persistent high deficit has led to the accumulation of a massive public debt.
“The strong expansionary fiscal policies also drove the higher imports and the consequent higher current account deficits,” he added.
For the current fiscal year, the government will again compromise on its budget deficit target that the World Bank has now projected to surge to 6.9% of the GDP or Rs5.4 trillion.
Rich avail subsidies as poor bear hardships of poverty
The World Bank’s findings also highlighted how the rich in Pakistan were availing subsidies meant for the impoverished class.
In 2019, the bottom 40% people of the population was availing only 24% of the subsidies while the rest availed 64% of them, according to the World Bank staff’s statistics.
This trend has now been reversed after the latest round of electricity price hike.
In the fiscal year 2019, the poorest one-fifth segment of the population was receiving just 9.8% of total subsidies, whereas the richest were availing 32.1% of them, the World Bank stated.
Now the poorest segment is availing 28% of the subsidies while the richest people are receiving 4.9% of them.
The World Bank noted that Pakistan did not have much room available to cut its expenditures since 70% of them were rigid in nature and being spent on employees, pensions, operating expenses and interest.
There is not much space to reduce rigid expenses unless deeper reforms are introduced like withdrawal of untargeted subsidies.
Flawed taxation policy
The World Bank also emphasized on sales tax exemptions being provided to affluent groups that were placing a heavy burden on the compliant taxpayers.
In 2019, the GST collection equalled 3.3% of the GDP.
GST collection has a potential of nearly 4% provided tax exemptions are withdrawn.
However, the primary issue was the GST registration exemption threshold that is maintained by the Federal Board of Revenue (FBR) to register traders above this Rs5 million annual turnover limit.
The collection potential will rise to 6.53% of the GDP in case the Rs5 million GST registration threshold is removed, according to the World Bank.
At this year’s expected size of the economy, this will translate into Rs5.1 trillion GST collections which indicates that Rs2 trillion are lost every year amid the exclusion of traders from the tax net.
The sales made by retailers below this threshold are also not included in the formal economy.
In October 2019, the traders major were given major concessions when the then government increased the exemption limit for sales tax registration for them.
