Why the new budget is over ambitiousIt fails to rein in on scattered projects to enhance allocative efficiency and promote fiscal prudence.
Finance Minister Yubaraj Khatiwada presented the incumbent government’s second annual budget on May 29 to a joint assembly of the federal Parliament. He argued that the fiscal year 2019-20 (FY2020) budget focuses on institutionalising the achievements made since FY2019’s budget, ensuring fair distribution of resources, and strengthening the social security regime. In reality, the budget was designed to satisfy disgruntled Nepal Communist Party (NCP) leaders who had censured the finance minister for not increasing their constituency development fund and social security allowance as promised in the party’s election manifesto.
Drawn between placating the NCP leaders and the need to stick to fiscal discipline and allocative efficiency, the finance minister chose the former. In effect, he again squandered an opportune moment to consolidate social security schemes; streamline scattered and incoherent projects and enhance the allocative efficiency of capital spending; rationalise recurrent spending; institute a sound governance regime while awarding and implementing projects; take transformative measures to bring about growth-enhancing structural changes in agriculture, labour and industrial markets; and institute fiscal discipline. This was warranted given the deteriorating fiscal, financial and external sectors.
The increase in budget for cash-based social security allowance, the constituency development programmes (to ensure elected representatives have money to fund pet projects), and the salary of public employees led to an outsized expenditure outlay for the next fiscal year. Almost two-thirds of the Rs1.53 trillion budget (an estimated 38.8 percent of GDP)—which is 27 percent higher than the revised expenditure estimate for FY2019—consists of recurrent spending. Within recurrent spending itself, half of the money is earmarked as fiscal transfers or grants to subnational governments. The federal government’s capital spending constitutes 26.6 percent of the budget. It is used to build roads, bridges, airports and other infrastructure that are crucial to increase the productive capacity of the economy.
The government is planning to meet 64 percent of total expenditure need in FY2020 by mobilising domestic revenue, 12.7 percent from domestic borrowing through sale of its treasury bills and bonds, and the remaining 23.3 percent from foreign grants and loans. The total federal revenue target of Rs981.1 billion (after deducting revenue sharing) is about 29 percent higher than the revised revenue estimate for the fiscal year 2018-19.
The federal government is earmarking Rs130.9 billion to be shared with provincial and local governments. As per the Constitution, the federal government is mandated to share a portion based on monthly collections, 30 percent of VAT and internal excise duty, and 50 percent of royalties from natural resources. This is in addition to fiscal transfers (fiscal equalisation, conditional, complementary and special grants) and unconditional grants out of the federal government’s expenditure outlay.
The budget has three notable features. First, the government increased cash allowance for citizens who are 70 years and above by Rs1,000, making it a total of Rs3,000 per month (plus Rs1,000 medical benefit). Considering about 1.3 million people are registered to receive this benefit, the government will have to additionally allocate at least Rs15 billion for this purpose. Similarly, single women (60 years and older, either divorced or unmarried), fully and partially disabled, and indigenous people will also get an additional Rs1,000 per month, making it a total of Rs2,000 per month for these groups.
Second, the finance minister succumbed to intense pressure to increase cash allowances and funds for parliamentarians that are used to finance incoherent pet projects without much governance and oversight. He increased such discretionary funds to Rs60 million, up from Rs40 million in the current fiscal year. Each directly elected representative will now be able to spend Rs60 million in projects of over Rs1 million. Even senior party leaders from NCP itself were against allocating funds to the parliamentarians, terming it a waste of taxpayers’ money and a breeding ground for misappropriation.
Third, the increase in public employees’ wages and compensation (adjusted every two years) put pressure on the budget envelope. Salary went up by 18 percent (for gazetted officers) to 20 percent (for non-gazetted officers). However, this increase is far higher than the average inflation during the same period. Raising public sector wages drastically affects private sector wages too and exerts inflationary pressures.
Although the budget does not include specific new projects—except for universities or roads named after past leaders—it also does not do enough to consolidate scattered, wasteful pet projects introduced in the past. In fact, increasing the funds available to federal parliamentarians exacerbates the problem and perpetuates allocative inefficiency, which is one of the major causes of the chronically low capital spending. This kind of piecemeal funding to construct substandard youth clubs, temples, covered halls, playgrounds, dirt roads, and bridges, among others without coordination with other agencies and projects is an utter waste of taxpayers’ money. Indirectly, this is an avenue to distribute money to party supporters and party-affiliated contractors. Similarly, increasing elderly allowance is another bait to attract voters at the cost of fiscal prudence.
Furthermore, as in previous budgets, a robust, credible and time-bound implementation plan to spend the earmarked money is missing. This raises doubts over timely budget execution in FY2020 as well. Even with a two-thirds majority in Parliament and introduction of the budget one-and-a-half-months prior to the start of the fiscal year, the government is unable to change the pattern of capital spending, which tends to bunch toward the last quarter (over 40 percent of actual capital spending happens in the last month of the fiscal year).
Similarly, there are no measures to check the alarmingly high fiscal deficit, which stands at over 10 percent of GDP. Higher deficit exerts inflationary pressure, raises interest rates, crowds out the private sector and fuels imports, which in turn exacerbates the current account deficit. The government needs to rationalise recurrent spending—especially streamlining subsidies and allowances, and needs to avoid duplicate, incoherent and wasteful projects—to check the rising fiscal deficit since there is little that can be done to proportionally increase revenue from the usual sources. This could have been transformative in setting the course of budget formulation.
The finance minister has also set an ambitious GDP growth target of 8.5 percent even when knowing that this is unattainable due to the forecast of an unfavourable monsoon, which affects agriculture output. Prospects of high growth in the industrial sector (thanks to projected additional hydroelectricity generation and pick up in construction activities) and continued robust services sector growth alone are not going to push GDP growth that high. Similarly, the revenue target for the upcoming fiscal year may still be high given that the government will not meet its own target for the fiscal year 2018-19.
Overall, the budget is not too bad given the demand for Rs100 million for discretionary spending by parliamentarians and higher social security allowances (around Rs5,000 per month). It has given continuity to previous programmes and projects, including a commitment to improving the investment climate and government operations. However, it fails to rein in on scattered projects to enhance allocative efficiency and promote fiscal prudence given the alarmingly high fiscal deficit.
Sapkota is an economist.