Finance Minister Barsha Man Pun on Tuesday presented a budget of Rs1,860 billion for Fiscal Year 2024-25, a 6.2 percent increase from FY 2023-24. The FY 2023-24 budget was Rs1,751 billion, but mid-year adjustments reduced it to Rs1,530 billion. As of Tuesday, only Rs1,116 billion (63.72 percent) had been spent, with just a month and a half remaining of the current fiscal year. This raises concerns about meeting expenditure expectations and the rationale behind such a large budget.

The National Planning Commission's resource committee had set a budget ceiling of Rs1,800 billion, but the government did not consider revenue trends, expenditure capacity or the commission's suggestions. The finance minister has projected Rs1,260 billion in tax revenue for FY 2024-25. For FY 2023-24, the expected tax revenue was Rs1305 billion, but only Rs777 billion (60 percent) had been collected as of Tuesday. Given this, the projected tax revenue is unlikely to be met, indicating that the budget size is not appropriate or based on sufficient evidence.

Regarding federalism in Nepal, functional responsibilities are constitutionally devolved, while revenue remains centralised. There is a provision to balance this fiscal gap through fiscal transfers. However, the current budget is not favourable to provincial and local levels, as it does not reflect their actual budgetary needs. The total size of fiscal transfers, including revenue sharing to the sub-federal level, has decreased from Rs574 billion in FY 2023-24 to Rs567 billion in FY 2024-25. This is unfortunate in terms of the budget ratio; it was 33 percent in FY 2023-24 and dropped to 30 percent in FY 2024-25.

Federalism sidelined

Post-federalism budgets in Nepal have hardly done justice to the sub-federal levels. According to the principle of fiscal transfers, the fiscal equalisation grant should increase proportionally to the budget size. However, its ratio is declining every year. For example, in FY 2018-19, the share of the fiscal equalisation grant to the budget for the sub-federal level was about 10.5 percent, which declined to 8.3 percent in FY 2023-24. In the latest budget, it further declined to 7.9 percent.

The ratio of conditional grants comprises the lion's share of overall grant distribution. In FY 2023-24, out of the total grant distribution, the share of conditional grants to the local levels was 65 percent. This ratio increased to 67 percent in the FY 2024-25 budget. This is distressing for the local level.

Even within the jurisdiction outlined by the constitution, the tasks handled by various ministries during the pre-federalisation period should gradually be relinquished and delegated to sub-federal levels. However, judging by the trend of conditional grants, this transition does not seem to be occurring. While some institutional structures have been left intact, there is a concerning trend of authority consolidating under the guise of conditional grants. Federal ministries are establishing numerous sub-federal level project offices, ostensibly under the pretext of conditional grants. Looking at yesterday's budget, it seems that most of the sectoral ministries are gradually eroding the authority of the sub-federal levels in the name of various projects.

Sub-federal levels lack autonomy on conditional grants. Projects and programmes must be implemented according to the conditions and standards set by the federal government. Conditional grants should empower sub-federal levels to execute programs and projects in alignment with national policies. However, the definition of a conditional grant outlined in the law has been ignored. Conditional grants are being distributed without consideration for the criteria set by law, instructions from parliamentary committees, and decisions of the fiscal commission.

Although Prime Minister Dahal promised not to reduce equalisation grants for sub-federal levels, he has failed to follow through. A few weeks ago, the Ministry of Finance sent a letter reducing the equalisation grants allocated to the local level by 26 percent, amounting to Rs24 billion. The same situation applies to the provinces. The Office of the Auditor General's 61st report, released just two days ago, also stated that not only the fiscal equalisation grant but all grants, including revenue sharing, have been reduced towards the end of the fiscal year. For example, matching and special grants to the sub-federal levels were decreased by 25 percent in FY 2022-23. The revenue-sharing figure declined by 21.4 percent.

The ratio of the fiscal equalisation grant to the total budget for sub-federal levels was 8.34 percent in FY 2023-24, which declined to 7.96 percent in yesterday's budget. In FY 2018-19, it was 10.27 percent. This is really unfortunate for the sub-federal levels.

Regarding the government policy and programmes, President Ramchandra Paudel spoke for about two hours, emphasising the implementation of the constitution and the strengthening of federalism, among other priorities. However, an important issue, the adjustment of the police security force at the provincial level, which is crucial for the strengthening of federalism, is not included in the policy and program. It was not included in the FY 2023-24 policy and program either.

Point 396 of the FY 2023-24 budget speech stated that the police security force would be adjusted in the provinces. Despite this mention, the issue of police adjustment in the provinces has not been addressed yet. This year, the problem is neither included in the policy and program nor the budget speech. Last year, although the police adjustment policy was included in the budget speech, the budget wasn’t allocated for it in the Ministry of Home Affairs' budget line item. This year, it is excluded from the policy, programme, and budget speech.

Consequently, it is also not included in the budget line item of the Ministry of Home Affairs. Out of this ministry's total budget of Rs1.99 billion, 99.8 percent is allocated to the federal level. Once again, the government has bypassed the provinces.

Lopsided priorities

One of the government's stated priorities is strengthening federalism, but the policies and programmes don’t reflect this. The budget's five priorities include economic reform, promotion of the private sector, agriculture, energy, information technology, tourism, industrial development, and infrastructure construction. However, strengthening federalism is not mentioned among the budget priorities.

The biggest problem in the FY 2023-24 budget was that the budget limits for the federal ministries' programs and projects were minimal. For example, in the Ministry of Physical Infrastructure, there were 2,829 projects, with 66 percent of them being up to Rs5 million. In the Ministry of Urban Development, the Ministry of Water Supply, and the Ministry of Youth, the percentages of projects up to Rs5 million were 98 percent, 84 percent, and 99 percent, respectively.

Most federal ministries, including these, had not embraced the spirit of the constitution. They had violated not only the constitution but also the 'Government of Nepal (Allocation of Business) Rules, 2017'. According to these rules, the role of most federal ministries is to formulate and regulate policies, laws, and standards. However, these ministries were found to have gone beyond their role and scope. The role of federal ministries and agencies in selecting and implementing projects is to focus on national pride, game-changing, and other strategic projects. Instead, most of the ministries allocated their budget for small projects.

After widespread criticism, the federal government decided not to operate projects smaller than Rs30 million. For a thorough analysis, the details of the allocations of the sectoral ministries are needed, as they cannot be estimated based on the budget speech text alone. However, there is a risk that the federal government will forward all the small-scale programs and projects to the local level. More and more small-scale programs and projects are being sent to the local level, but staffing issues remain unresolved. Even now, staffing at the local level is a significant problem.

A quick review of the ministries' allocation budgets reveals that most ministries have centralised all resources. For example, the total budget of the Ministry of Physical Infrastructure, amounting to Rs0.50 billion for FY 2024-25, is kept at the central level, with not a single pie allocated to the sub-federal level from this ministry.

Finally, this budget does not support federalism or favour provincial and local levels. Fiscal transfers and equalisation grants have decreased, centralising resources and undermining sub-federal autonomy. Despite government priorities, the budget fails to reflect a commitment to strengthening federalism.