While much public debate focuses on the cost of provincial structures, the cost structure of local governments has received far less attention. Key aspects such as the total fiscal envelope, resource mobilisation and allocation, sectoral priorities and the split between recurrent and capital spending remain underexamined.

Since the advent of federalism, local governments have become major fiscal actors. The 62nd report of the Office of the Auditor General (OAG) shows that in FY2023-24, local governments had total revenue of Rs641.76 billion. Fiscal transfers from federal and provincial governments accounted for the largest share (47.89 percent), followed by revenue sharing (13.31 percent), cash balance (14.73 percent) and miscellaneous sources (18.44 percent). Of this, expenditures amounted to Rs560.56 billion.

According to the recent Financial Comptroller General Office (FCGO) data, the total expenditure of local governments in FY2023-24 stood at Rs437 billion, of which 65.24 percent was recurrent expenditure and 34.67 percent was capital expenditure. This composition reveals a fundamental characteristic of local government spending: It is heavily skewed towards consumption rather than investment. Nearly two-thirds of every rupee spent by local governments goes towards recurrent costs, leaving only about one-third for capital formation.

Within recurrent expenditure, a striking 48.76 percent is spent on salaries and remuneration of staff and local government representatives. This heavy administrative overhead raises serious concerns about fiscal space for direct service delivery. When this figure is compared across all three governments, an even more revealing picture emerges. Out of the total Rs310 billion spent on salaries and remuneration across all tiers, local governments account for 44.84 percent, the federal government for 50.47 percent and provincial governments for only 4.69 percent. This fact entirely rejects the argument that the provincial structure is expensive. The data clearly shows that the provincial tier operates with remarkable administrative efficiency, consuming a negligible share of the total salary burden.

A critical examination of local government recurrent expenditure reveals a structure dominated by administrative costs, with a significant but often overlooked role in education. The largest share of recurrent expenditure, nearly half, is consumed by salary and allowances, with employee remuneration alone accounting for 42.91 percent. This leaves limited room for other essential recurrent functions. Goods and services constitute the second-largest category at 34.87 percent of recurrent expenditure. Within this, programme expenses account for 14.41 percent, indicating that local governments are actively implementing development programmes. However, the substantial allocation to contract services at 6.14 percent and the combined 12.85 percent for utilities, maintenance and travel point to high operational and outsourcing costs that warrant scrutiny for efficiency and value for money.

Perhaps the most significant and often underappreciated finding is the role of local governments in education. Subsidies account for 7.45 percent of recurrent spending, and within this, subsidies to educational institutions alone represent 6.62 percent of total recurrent expenditure. This reveals that local governments are primary funders of school-level education, a function frequently overlooked in public discourse. When citizens think of local government, they often envision roads and infrastructure, but the data suggest that local governments are, in fact, major financiers of human capital development, a role that is consistent with their constitutional mandate for secondary-level education.

Turning to capital expenditure, the picture becomes more complex. Public construction accounts for nearly 64 percent of total capital expenditure, underscoring that infrastructure development is indeed the primary capital function of local governments. This aligns with their constitutional mandate for local-level physical infrastructure. However, within public construction, two categories dominate. Roads and bridges account for 33.71 percent of total capital expenditure, while ‘other public construction’, a vaguely defined category, absorbs another 32.15 percent. Together, these two categories account for nearly two-thirds of all capital spending. While the focus on roads reflects a traditional infrastructure bias, the enormous size of the ‘other public construction’ category is problematic. Greater disaggregation in future reporting is needed to understand exactly which projects are being funded under this broad heading.

What is most alarming is the neglect of basic utilities. Despite being fundamental to public health, hygiene and the constitutional right to clean water, water supply receives only 4.35 percent of total capital expenditure, and sanitation receives a mere 0.76 percent. Combined, these two critical sectors receive just over 5 percent of the capital budget. This is disproportionately low for sectors that directly impact the daily lives of citizens and are essential to preventing disease and promoting human dignity.

Similarly, agriculture and the environment receive minimal investment. Irrigation, critical for agricultural productivity and rural livelihoods, accounts for only 3.28 percent of total capital expenditure. Forest and environment conservation receives a negligible 0.64 percent, despite extreme vulnerability to climate change and the importance of forests for watershed protection and biodiversity. Investment in machinery, equipment and vehicles totals 4.43 percent of capital spending, while capital advisory and research account for only 1.25 percent. Most concerning is the investment in software and technology, which stands at a mere 0.14 percent. This near-absence of digital infrastructure investment is particularly alarming, given national priorities for digital transformation and the imperative to modernise local governance.

Investment in buildings presents a mixed picture. Non-residential buildings, such as schools, health posts and offices, receive 9.92 percent of capital expenditure, which is substantial and appropriate. However, residential buildings, likely for staff housing, account for nearly 3 percent of capital spending. While this may be a necessary commitment, it represents a significant ongoing liability that could constrain future fiscal flexibility.

Several critical findings emerge from this analysis. First, there is a road-centric infrastructure bias, with over one-third of all capital expenditure going to roads and bridges. Second, water and sanitation receive only 5.11 percent of capital spending, posing serious risks to public health and sustainable development. Third, the vaguely defined ‘other public construction’ category, at 32.15 percent of total capital, is far too large and suggests a need for better expenditure classification to ensure accountability. Fourth, investment in agriculture is minimal, with irrigation receiving only 3.28 percent of capital funds, which is inadequate for an agrarian economy. Fifth, the technology deficit is glaring, with investment in software and digital infrastructure at a negligible 0.14 percent, potentially hampering efforts to modernise local governance and deliver services efficiently. Sixth, non-residential buildings receive substantial investment, a positive sign of commitment to public infrastructure such as schools and health posts.

These findings carry significant policy implications. First, capital priorities must be reallocated. A greater share of capital expenditure should be directed towards water supply, sanitation and irrigation to address basic needs and support livelihoods. Second, reporting standards should require a detailed breakdown of the ‘other public construction’ category to enhance transparency and enable better policy analysis. Third, local governments need dedicated capital budgets for software, digital infrastructure and equipment to support efficient service delivery and digital transformation. Fourth, given Nepal’s climate vulnerabilities, capital allocation for forest conservation and environmental protection must increase significantly.

Local governments in Nepal have made significant progress since federalisation, but current expenditure patterns show that their full potential remains unrealised. The challenge is no longer just to spend more, but to spend better, aligning resources with priorities and outcomes.