Fuzzy federal math

November 5, 2017 01:30 AM Sukhdev Shah

Neither will the central government agree to downsize, as local units want, nor will local governments be self-reliant on funds, at least in the foreseeable future.

While we are basking in the glow of thus far successful efforts at consolidating a federal government structure, little attention has gone into how we can meet expenses for all levels of government—federal, provincial and local. On the surface, it looks like not much has changed in terms of government operations, which are now to be shared by three levels of government. But governments at local and provincial levels would like to work independently from the central government and thus be obligated to meet their own needs, as per the federal guidelines.

This constitutes a departure from old ways of governing when almost all initiatives and directives were the prerogatives of bureaucrats at central secretariat in Sigha Durbar. This type of centralized government meant that even the lowest ranking administrators, security officials and teachers had to be hired by central administrative staff. 

Now, under a federal system, works and responsibilities would have to be shared among three levels, with a sizeable amount of responsibilities assigned to provincial and local jurisdictions. Federal responsibilities will now be narrowed down to clearly defined national issues, such as defense, foreign relations, currency and finance, foreign trade, foreign aid and loans, national infrastructure, and environmental issues.

While the list of federal responsibilities is long and will require great amounts of money, public services undertaken at provincial and local levels will be as extensive—and as expensive. These (should) include primary healthcare and education; public sanitation and water supply; electricity and phone services; public security and welfare assistance; crop protection and land improvement; irrigation and flood control; public transport and roads construction, etc. The duties and responsibilities on these fronts are clear enough. Not so obvious is the likely controversy over staffing and funding, ultimately resulting in deadlock, and possibly, even the derailment of the federal train. 

No easy way out 

Even if there is an agreement on separation of public service items among central, provincial, and local government units, the next issue will be staffing. Will those currently in government service be assigned to provinces and local jurisdictions? Or will the provinces and local units recruit their own employees, preferably from their own provinces and localities? Both the choices are problematic. 

On the surface, it looks as if transferring workforce from central to local and provincial government units would be easy—most would as good as ‘carry’ their jobs with them. Indeed, some employees would not mind working in provinces and local government units. But many will be unhappy with their transfer, especially those whose home is in Kathmandu and are used to living in the city’s mild climate. They would resist transfers by using all their connections, particularly when they are asked to move to a place they don’t want to go. It is hard to imagine how all personnel transfers can be achieved without a drawn-out resistance and disruptions in government services.

The other (and easier option) will be to leave all employees now working for government in their place and let provincial and local governments do their own recruiting. This probably would be a more preferable option to cultivate worker loyalty and discipline and match jobs with interest and education qualifications. Most importantly, recruiting locally would meet the old axiom that government personnel should ideally come from the geographical region they serve.

It isn’t easy to figure out the number of new recruits needed to fill local and provincial level positions but the new number should roughly match the number currently in relevant ministries. Currently, government workforce is some 700,000-strong, including defense and security personnel, of which at least half are involved in work that will in the future be under local and provincial governments. We can also assume that the central government will be reluctant to trim its own workforce, except through retrenchment and early retirement when applicable. Most likely, the number of employees at all levels together will rise by a third or close to a million.

Where’s the money? 

In this background, we can now assess the fiscal impact of federalism. Because at this time all sources of revenue—tax and nontax—are concentrated at the center, financing needs of local and provincial governments will have to be met from central government budget for personnel expenses as well as for setting up government infrastructure. We are talking about billions of rupees to house administrative, legislative, and judiciary of new government units; new utilities and road connections; and new furniture and equipment. An estimated Rs 100 billion will be needed to fund new government organizations, probably spread over 2-3 years.

How many staffs do local and provincial governments need? This is anyone’s guess but assuming 200,000 to 300,000 new recruits locally, at Rs 1 million worth of annual remuneration and benefits per employee, this would amount to an annual cost of Rs 200 to 300 billion.

Since local funding sources at this time are minuscule or nonexistent, new government units would need to be funded—both current and capital expenditures—from central budget, amounting to at least Rs 400 billion a year, or about a third of total spending allocated in 2017/2018 budget. The options: local and provincial governments get this transfer from central budget, or they raise their own funds locally, or a combination of two.
As noted above, as a contingency measure, the central government is unlikely to scale down—in terms of staffing and funding—immediately. This means that local governments would go slow on expansion of their activities, and only to the extent, they can fund themselves. Local funding, however, is difficult, for two reasons. First, the system of levying and collecting local taxes is practically unknown and where it exists is rarely enforced. Second, even if local government is serious about raising taxes, there will be little scope for levying new taxes as central government taxation remains high, among the highest in South Asia when measured in terms of GDP.

According to the IMF, tax and nontax revenues make up 20 percent of GDP in Nepal, compared with 9.3 percent in Bangladesh and 12.8 percent in India excluding state level taxes. Including state taxes, total revenue collection in India amounts to 16.5 percent of GDP, still much lesser than Nepal.
Federal Catch 22

With this revenue profile, there is little scope of central or local governments raising more revenue. This means that the central government must downside to the extent local governments assume new expenditure and revenue collection responsibilities, or give up on its federalism gobbledygook. The problem is: neither will the central government agree to downsize nor will local governments be self-reliant on funds, at least in the foreseeable future. The outlook then is that if local governments decide to go their own way on taxes and spending without central government’s retrenchment, the country will face a tax revolt and disruptions large enough to junk the entire federalism experiment. 

The author teaches economics at NOVA College in Virginia, USA.



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