Macroeconomic framework2 and how an optimal level of receipts and expenditures can be achieved at federal and across provinces is one of the fundamental issues the prevailing National Finance Commission (NFC) negotiation is figuring it out. The optimal level of receipts and expenditures can help the provinces to maintain fiscal balance. Similarly, the optimal level of receipts and expenditures will also help to develop the homegrown macroeconomic framework. To avoid the complexities involved in the macroeconomic framework, and remain in line with NFC discourse we focused our discussion on the fiscal side of the macroeconomic framework. Over the years, narrow tax base, heavy concessions and exemptions, challenges in tax administration and inadequate tax compliance have resulted in a low tax-to-GDP ratio. To address these challenges and weaknesses, there is a dire need to introduce necessary fiscal measures. Fiscal reforms are needed to ensure a fair and efficient tax system to generate sufficient revenues, which however seems a big challenge in the presence of substantially low tax-to-GDP ratio.
Maintaining a fiscal balance at the provincial level can be the first step towards country fiscal stability, which however is not the case in Pakistan. Four important and relevant questions were brought to the table during provincial meetings to contemplate on the homegrown macroeconomic framework and to have an optimal level of receipts and expenditures.
First: Do the provinces need an expenditure framework?
Second: In order to have transparency and accountability do the provinces need public expenditure and financial accountability assessments? Own revenues as a share of provincial expenditures are falling.
Third: how the provinces can be incentivized to have greater access to own tax bases, and produce stronger tax collection performance? At present, there is no framework for the fiscal responsibility of the whole federation. Existing Federal Debt Limitation Law (2016) is only binding on federal government.
Finally: Do the provinces need fiscal responsibility law?