ISLAMABAD - Pakistan Tehreek-e-Insaf (PTI), which is all set to form a coalition federal government, would have to remove the flaws in National Finance Commission (NFC) award to control the soaring budget deficit of the country.

Under the NFC award, the federal government has to transfer 57.5 percent of federal taxes to the four provinces. The federal government has to meet the expenditures of debt servicing, defence, development, pensions, salaries and others through remaining 42.5 percent of the taxes. Ultimately, the federal government had to borrow to meet the deficit, which goes out of control.

"The new government would have to control the budget deficit, which is sharply widening. Fiscal stability cannot come until the government remove the defects in the NFC award" said Dr Ashfaque Hasan Khan, an eminent economist and former Adviser to Ministry of Finance.

He further said that the new government should remove the flaws in NFC without violating the Constitution of the country.

In 2009, the PPP government had passed the 7th NFC award that devolved the highest ever proportion of the funds in the federal divisible pool to provinces. The 7th NFC was expired in 2015.

However, the previous PML-N government had failed to constitute fresh revenue sharing formula between federal government and provinces and extended the 7th award for consecutive three years.

The federal government had struggled to keep the fiscal deficit within target during last one decade, after constitution of the NFC award. The budget deficit is expectedly to go beyond 7 percent of the GDP (Rs2.5 trillion) during FY2018. Initially, the government had set budget deficit target at Rs1.48 trillion (4.1 percent of the GDP) for the ongoing financial year 2017-18. Similarly, the budget deficit recorded at 5.8 percent of the GDP during 2016-17, 4.6 percent of the GDP during 2015-16, 5.3 percent of the GDP in 2014-15, and 5.5 percent of GDP in 2013-14, 8 percent of the GDP in 2012-13 and so on.

The government had not brought the deficit to sustainable level of 4 percent of the GDP in last one decade.

The International Monetary Fund (IMF) and former finance minister Dr Miftah Ismail had already expressed reservations over the NFC award, a resource sharing formula between federal government and provinces. According to the IMF, overall, the 7th NFC Award has resulted in an unbalanced and less flexible intergovernmental fiscal framework. It recommended that next NFC should aim to strengthen macroeconomic stability and increase efficiency, flexibility, and responsiveness of the fiscal framework.

Although the Constitutional nature of some parameters of Pakistan's fiscal decentralization framework constrains near-term options, improvements can be considered within the current legal framework. In this context, the NFC may better account for the anticipated consequences of the next Award on public debt, the effectiveness of fiscal policy, nation-wide efficiency of public expenditure across all levels of government in light of the uneven quality of PFM frameworks, as well as strategies to cope with unanticipated shocks.

The next NFC award should minimize federal borrowing needs, the report emphasises, by reducing the vertical imbalance (eg through assumption of additional expenditure responsibilities by the provinces) or consider a burden-sharing arrangement for the impact of its design on public debt, especially given the fiscal surpluses at the provincial level.