Punjab Fiscal Resources Review

Abstract

Abstract This study raises policy issues arising from the fact that the present tax-expenditure policies and institutional set-up at both the provincial and local government levels of the Province of the Punjab are dated and need revision. There is now an active awareness within the Punjab Province that substantial changes are necessary. The broad outlines of these required changes which have been identified in this study, as follows: i) The Provincial Government needs to recognise that the 1997 National Finance Commission (NFC) Award’s projected high level of Federal Divisible Pool Revenues are unlikely to materialise in the light of the substantial changes made in tax policies by the post 1997- Award Federal Government as well as by the depressed state of the economy. As a result the historical pattern of Federal Transfers covering more than 85 per cent of consolidated Punjab Provincial and Local Government expenditures is unlikely to be ever repeated. In fact the 1997-98 coverage of 75 per cent is likely to go down even further and this gap needs to be filled by active resource mobilisation and expenditure curtailment measures. ii) The decline in Federal transfers has meant that the revenue surplus (Federal Transfers plus own resources minus current expenditures) available for funding the Punjab’s development expenditures have also declined – from 75 per cent in 1996-97 to an estimated 13 per cent in 1997-98. This gap has been filled (in roughly equal proportions) by a massive increase in Cash Development Loan (CDLs) from the Federal Government, Foreign Debt onlent by the Federal Government, (primarily from the World Bank) and Draw-down of Provincial Reserves. The first carries a market rate of interest (about 17 per cent per annum) while the foreign loans (largely under SAP) carry concessional rates of interest. Here the proposed strategy would be to increase the revenue surplus, phase out the relativvely more expensive CDLs and borrow foreign funds (through the Federal Government) only on concessional IDA terms (i.e. 0.25 per cent interest, 50 years repayment plus foreign exchange risk). 60 The Lahore Journal of Economics, Vol.3, No.2 iii) Debt service (on both domestic and foreign debt) to the Federal Government is increasing rapidly (9 per cent of provincial revenues in 1997-98) and needs to be monitored carefully. In addition unfunded pension liabilities of the provincial government to present and future retirees have the potential to create substantial problems. The provincial pension scheme needs to be amalgamated with the provident fund scheme (which is also unfunded since the provincial government has used these employee funds) and turned into a defined contribution scheme i.e. to a fully funded individual pension account scheme. Otherwise pension liabilities which are about 8 per cent of Punjab current expenditures and 35 per cent of Provincial own consolidated revenues in 1997-98 are likely to reach unsubstainable levels in the foreseeable future. iv) The Tax-Expenditure structure needs to be rationalised between the Provincial Government and the Local Governments. Tax collection heads must be directly linked to expenditure responsibilities. The Provincial Government should only collect and retain the following existing taxes: (a) agricultural income tax, (b) ‘land revenue’ associated fees - primarily mutation fees - for transfer of agricultural land, (c) stamp duties on urban-property and non-property transactions, (d) motor vehicle taxes, (e) provincial excises and (f) electricity tax. It should also introduce its own Punjab General Services Sales Tax by adding it onto the proposed Federal Sales Tax and have it collected for the Provincial Government by the Federation. The last proposed tax would compensate for the taxes proposed to be transferred to the ULBs/RLBs. All other Provincial Taxes with the exception of the Cotton Fee which is used to fund research should be abolished. All these tax policy changes, together with improvements in the agricultural income tax, provincial excises, electricity tax and non-property related stamp duties will ensure a simple healthy taxation structure at the provincial level. v) Provincial non-tax revenues can be increased substantially by increased cost recovery and efficiency improvement from the provision of community services and social services – particularly health and education (which show cost recovery percentages of 3 per cent and 5 per cent respectively). The economic services – particularly irrigation – have a cost recovery factor of about 40 per cent instead of providing a substantial surplus (or at least 100 per cent cost recovery) since irrigation water is substantially underpriced (currently about 20 per cent of the cost of tube-well water). Shahid Amjad Chaudhry 61 vi) At the Provincial level, substantial efficiency gains are possible in general administration, law and order (particularly the functioning of the courts) and provision of community services including health and education and economic services particularly irrigation. Reducing unnecessary regulations will increase public welfare and reduce administrative costs. The courts need massive productivity improvements through revision of procedures and increasing the costs of litigation which will only be adopted if ‘financial autonomy’ is given to the Provincial Judiciary. In education, the province should stop expanding its infrastructure and focus on improving the efficiency of its existing schools and colleges and introduce a transferable voucher system (encashable in both public and private institutions). In health it should deal mainly with curative medicine (i.e. hospitals) which should have administrative and financial autonomy. In the economic services increased efficiency through user associations, cost recovery and expropriation of surpluses through taxation in monopoly areas such as irrigation would result in both substantial welfare gains as well as increased revenues. vii) All taxes relating to the direct functional areas of local bodies ULBs/ RLBs/DAs – should be transferred to these local bodies and collected by them directly. The major taxes here would be on: (i) Property Taxes to be collected by ULBs and RLBs; (ii) Full Cost–Recovery for provision of water supply, sanitation and waste disposal services (iii) A new Local Government Petroleum Tax (to be collected by the petroleum companies) which would fund new roads and related infrastructure (bridges, elevated expressways etc.); and (iv) Octroi/Export Taxes which would be used in part for funding the maintenance of major roads but in large part meeting the needs of the poor for slum and Katchi Abadi up- gradation. The Professional and Calling Tax should be transferred from the Provincial Government to the Local Bodies and be used to fund infrastructure for the use of such professional bodies. The remaining existing local government taxes are minor, save for nuisance value and extracting rents, and should be abolished except when they serve as user fees. viii) To meet these increased revenue/expenditure responsibilities the ULBs/RLBs/DAs would have to be re-organised. The fundamental administrative change proposed is that all major cities (i.e. Municipal Committee and larger) should comprise a number of Municipal Committees (which should be the effective urban management unit). All areas developed by DAs (either in the past or the future) should be converted into a municipal committee or a number of municipal committees (depending on the size) and these should all be grouped on 62 The Lahore Journal of Economics, Vol.3, No.2 the pattern of Karachi into a metropolitan corporation with separate mayors for each of the Municipal Committees and a Lord Mayor as envisaged in the recent new Punjab Legislation. Thus all the Punjab’s Municipal Corporations will become Metropolitan Corporations. The Municipal Corporation as a tier is being recommended for abolition on the grounds that it is too large and unwieldly as an administrative unit. The WASAs should become an autonomous part of the Metropolitan Corporation (shifting from the DAs). The DAs should be expanded to cover more cities but also be subjected to more financial discipline.