Challenges to Intergovernmental Fiscal Relations in Pakistan: The Revenue Assignment Dimension

Fiscal decentralization may be a popular political rhetoric, but it is not any easy policy sell. The share of total public expenditures made by subnational governments in developing countries has barely increased over the past three decades (Bahl and Wallace, 2005). Even in countries where expenditure decentralization had taken place (e.g. Indonesia), there has been far less movement toward revenue assignment to subnational governments. This chapter is focused on the obstacles to success with this dimension of fiscal decentralization. We use the case of Pakistan where 35 percent of government expenditures are made by provincial and local governments but only 7 percent of taxes are raised by subnational governments. At a time when central government taxes are only about IO percent of GDP, there is a premium on increased revenue mobilization at all levels of government. The federal government has called on the provinces to double their tax-to­GDP ratio in the medium term (Government of Pakistan, 2007). The literature on fiscal decentralization is by now quite rich with a great deal of focus on intergovernmental transfers. The subject of revenue assignment, and the explanation for why countries hold back on giving taxing powers to local governments, however, is much more limited. This case study of the obstacles to revenue decentralization in Pakistan sheds some new light on this question. In the next three sections of this chapter we describe the structure of governance and the fiscal and socio economic disparities among the provinces. These disparities are themselves an important constraint on the structuring of the fiscal decentralization strategy. Then we take up the issues of revenue assignment and intergovernmental transfers, and the role that each has played in constraining Pakistan from capturing the full benefits of fiscal decentralization. A fourth section deals with the broader context by describing the more general intergovernmental fiscal problem that faces Pakistan. Finally, we consider the subject of property taxation as a route to effective revenue assignment in Pakistan. The contribution in this chapter, we think, is in showing how much revenue potential is to be realized with structural and administrative reforms to a system that has, in some respects, been a failed decentralization. In this chapter, we focus on the provincial level of government and use two of the provinces, Punjab and North West Frontier Province, as case studies