This paper proposes a formula for resource distribution between provinces-horizontal distribution- under the upcoming National Finance Commission (NFC). We maintain that the formula offered in 7th NFC is predominantly need-based and the (equity) indicators, whatsoever it has, by very construct, fall short of capturing full essence of equity. Further, we argue that existing indicators of efficiency, the size of provincial tax revenue, is not adjusted for size of the provincial economy thus fails to capture the efficiency part of resource collection, the tax effort.
Accordingly, this paper suggest some solutions which include
- adjustment in weights of respective indicators,
- alternative composition of existing indicators, and
- inclusion of new indicators.
The underlying idea for the choice of new indicators is a gradual shift from need-based approach to efficiency-based resource distribution. Based on existing literature on the issue and the regional consultations, we also identify the major challenges to overcome the deadlock on NFC negotiations at the official level. It seems imperative to note here some of the challenges facing the introduction of further efficiency in horizontal distribution of pooled resources. The first argument we faced was that NFC is a political question and any changes in the formula may create political tensions. It will be difficult to earn the consensus on any new formula so we should not even think towards discussing it at an intellectual level.
Second, after 18th amendment federal government must not intervene in the provincial matters. It is provinces choices how much revenues they collect and how do they spend the resources.
Third, given the demographic structure and weak state of the local economy in several parts of the country we cannot ignore the need-based distribution so any discussion on changing the weight of related indicators, for example, ‘population’ in case of 7th NFC, is not required .