Finance Minister Swarnim Wagle presented the Rs 2,124.34 billion budget for fiscal year 2026-27 aiming 7 percent of growth in the next FY against a difficult backdrop, growth that the government’s own figures put well at 3.85 percent for the current fiscal year, inflation imported through the West Asia crisis, weak private-sector confidence, a decade of chronic under-spending of the capital budget, and a debt stock that has nearly doubled in six years. This fiscal policy clearly identifies the economy’s structural problems and suggests a cleaner tax system than before.

First, it’s important to acknowledge the positive aspects of the budget. The overhaul of personal income tax is the smartest revenue reform in a generation. By raising the exemption threshold to Rs 1 million and taxing income up to that ceiling at a nominal 1 percent, the government has done something subtler than a giveaway. This 1 percent is not truly a tax; it is more like an invitation. It costs salaried workers very little while bringing many informal incomes into the formal system. As a result, individuals gain a permanent record and, eventually, access to formal credit. Economists refer to this base-broadening, which expands the number of taxpayers rather than squeezing those already paying.

The same clarity runs through the rest of the package. The 11-tier customs structure has been compressed to seven, excise on 360 goods removed, and the old ambiguity over capital gains tax on shares has been settled by making it a final tax. Each reduces the friction and the discretion in the system, these gaps where both inefficiency and rent-seeking thrive. Keeping customs on raw materials a tier below finished goods is a textbook move to protect domestic value addition. The abolition of 31 agencies, and a partial divestment of Nepal Telecom, which keeps 66 percent in state hands while raising capital for a technology push. Another reform the budget signals is the sunset law. This is utilised in public policy and contracts to force periodic review of programmes and ensure laws do not remain active indefinitely without ongoing justification.

The issues arise when trying to add up these good ideas. A budget represents a single constraint; spending must be financed. The government proposes to spend Rs 2.12 trillion while raising Rs 1.4 trillion in revenue, and it makes that revenue promise in the same breath as it cuts the rates that generate revenue. Recall the minister’s own figures: Average annual revenue growth halved from 14.9 percent before 2019-20 to 8.7 percent after; revenue-to-GDP slid from 21.5 percent to 19.3 percent in four years, still one of the highest in South Asia. To hit the new target on a shrinking rate base requires a buoyancy Nepal has not shown in a decade. This is the budget’s most fundamental asymmetry.

The way this gap is bridged is where prudence gives way to politics. The Rs 657 billion deficit is to be financed by Rs 247 billion in foreign loans and Rs 410 billion in domestic borrowing, the largest domestic figure in the country’s history. Of the domestic borrowing, some Rs 246 billion merely refinances maturing debt, leaving net new borrowing of about Rs 164 billion. In other words, the state is now borrowing largely to repay what it already owes. In the last fiscal year, debt servicing consumed 35 percent of federal revenue and 24 percent of all federal spending. A country that spends a third of its revenue servicing past borrowing has less room to manoeuvre than its 44 percent debt-to-GDP ratio suggests. This is the early grammar of a domestic-debt trap. While it may not be an immediate concern, this will narrow the room for manoeuvre until borrowing is predominantly used to cover previous loans.

The government will say, fairly, that it courts the middle class, disposable incomes rise as the income-tax exemption threshold doubles to Rs 1 million, and the nudge toward formalisation is real. But a budget should be judged by whom it lifts, not whom it pleases. For the roughly one in five Nepalis below the poverty line, squeezed by inflation, the budget does little to cushion; there is sympathy, but no ladder. The lower-middle-class household hoping to climb needs jobs, affordable living and better public services far more than a tax cut on income it does not earn. But now, the same household pays more for the electricity it was told to switch to, more for its children’s schooling, and more for health services. That last point is its own incoherence: one cannot subsidise a transition and tax it at the same time.

A budget arrived, and with it a longer tax slab, VAT on higher electricity consumption, an equity levy on private education, health, capital-gains tax on shares, and customs reshuffled onto electric vehicles alongside the largest pile of foreign and domestic borrowing in the country’s history. One wonders whether this is a budget that hands the poor a ten-rupee rebate, takes a hundred from their pocket, and returns thirty in concessions to the rich.

For the businesses that actually create jobs, the budget offers more gestures than substantial changes. Micro, small, and medium enterprises account for over 90 percent of Nepal’s businesses, and most of its non-farm jobs don’t receive meaningful support. The measures that would genuinely lower the cost of doing business and allow these firms to scale into manufacturers are absent. The heavy taxes affecting growth remain unchanged, with unreliable power, delays at customs, slowed VAT refunds, and contracts that take years to finalise. A firm hampered by these issues cannot grow to a point where productivity and competitiveness can improve. The industrial sector has shrunk to less than a tenth of the economy, and a firm that cannot grow cannot invest in the equipment and skills necessary to boost worker output and competitiveness.

The irony is that Nepal’s Banks are sitting in excess liquidity, the credit-to-deposit ratio has fallen to about 74 percent against a 90 percent ceiling, leaving over Rs 1.1 trillion idle. The profitable reason to borrow is missing in the economy; this budget has not yet given confidence to the private sector. If the budget were serious about jobs, it would have spent its energy on lowering the cost of production.

Ultimately, everything rests on the seven percent growth target. To grasp how bold it is, recall that growth in the outgoing year was under five percent, and the West Asia shock has slowed activity further. Nearly doubling the rate in a single year would require an investment surge that the public sector has shown no capacity to deliver, and the private sector little confidence to attempt.

Nepal’s growth issue isn’t that there is too little allocated for development; it’s that the government can’t spend what it allocates. Capital expenditure has hovered near 20 percent of the budget for a decade, often dropping below a third before the usual last-month scramble. This rush typically prioritises quantity over quality. The reasons for these challenges are well-known and remain unaddressed. They include poor project planning, slow procurement, land and forest clearances, ineffective contract management, and fragmented execution across three government levels. The budget discusses what will be built but neglects to explain how it will be done.

The budget’s tax and tariff changes take effect immediately, impacting firms and households from day one. Its spending and reform commitments, however, will only become a reality if implementation improves, if projects are ready, procurement is timely, and the three tiers of government cooperate effectively.

We are told that infrastructure will operate under ‘mission mode’, but what that means in practice, specifically which projects, who oversees them, and how bottlenecks will be addressed, is unclear. The label is there, but the plan is not. This gap is evident throughout the document. A budget should clarify how spending quality will improve against the constraints that have hindered us for a decade.

Furthermore, for a budget relying heavily on less scrutinised instruments like the sovereign wealth fund and off-balance-sheet financing, the absence of a fiscal risk statement is a significant shortcoming. When asking the public to trust new and untested approaches, a straightforward explanation is necessary.

The honest assessment is mixed. This budget exudes real optimism and ambition, and ambition is an important factor, not an end result. Its reform signals are the most serious since 1991, and the government deserves credit for this. However, Nepal's real challenge has never been the creativity of those drafting its budgets. It has always been the state's ability to implement them.