Finance Minister Shankar Prasad Koirala presented the budget for fiscal 2013/2014 on July 14, 2014, the first budget in three years to be announced right at the start of new fiscal year. The new budget made history also from another—more important—perspective, which is that this is the most expansionary budget ever presented. The budget sets the total spending target at Rs 517.2 billion, which is a 39.75 percent gallop over past year’s Rs 370.1 billion. The budget forecast is based on 8 percent inflation rate, which means that total spending adjusted for inflation would grow by 32 percent.
With the national economy projected to expand at 5.5 percent (a highly unlikely scenario), this speed of expansion of government sector would overtake the entire economy in about six years. In other words, the national economy growing at 5 percent real rate would increase from about Rs 2,000 billion currently to Rs 2,680 billion after six years, whereas total government spending growing at 32 percent real rate will increase to Rs 2,736 billion over the same period. There will then be no room for the private sector to exist, much less to grow and expand! [break]
We may assume that actual spending cannot be as high as projected, from the simple logic that many of the mega-expenditure items, especially in the capital category, aren’t “shovel ready.” Major hydro power projects (Rs 4.66 billion); transmission lines (Rs 13.5 billion); Melamchi (Rs 5.2 billion); postal highway (Rs 2.2 billion); new airports (Rs 1.8 billion); railway (Rs 1.4 billion); road bridges (Rs 3.5 billion); and large irrigation projects (Rs 4 billion) won’t be able to absorb such huge allocations in a single year.
Even the large-size current and development budget items (road maintenance, Rs 4 billion; fertilizer subsidy, Rs 6.1 billion; poverty alleviation, Rs 3.1 billion; rural drinking water, Rs 4 billion: and local development grants, Rs 12 billion) would be difficult to program in a way that the targeted amounts are usefully and productively spent.
However, the miracle of our budget-making has been that allocated amounts have actually been spent—whatever the circumstances. For example, despite the uncertainties and disruptions caused by dissolution of the CA in May 2012, the budgeted spending targets for fiscal 2012/13 remained on track, with an estimated 91.4 percent of allocations being spent.
There is little doubt then that actual spending will be close to Rs 517.2 billion, as projected in the budget. Historically, the government zeal to meet spending targets has been no less than heroic—”blacktopping roads in the middle of monsoon to spend the available budget at the eleventh hour,” as a Republica editorial put it the other day—which has also meant almost no correspondence between how much is spent and what gets accomplished.
As is the case in many of the badly governed and corrupt African countries—and also in India until two decades ago—roads and bridges get completed on paper without anything being done on the ground!
Tax burden
Assuming that targeted budget amounts are spent, the government will need to secure adequate funding to carry out the programs. Here also, the government’s success in mobilizing budgetary resources has been exemplary, compared to many of the developing countries. During the past fiscal year, total revenue increased by 21.3 percent, even while economic growth decelerated from 4.6 percent to 3.6 percent.
This meant that government’s share of national income increased from 15.7 percent in 2011/12 to nearly 17 percent in 2012/13. This is an instance of the government getting richer while rest of the population gets poorer!
It is difficult to see how a high-tax environment can be termed business-friendly and as helping private sector growth—a point repeatedly made in the budget speech. If the government is serious about boosting private sector growth, this can be done in no better way than by slashing the tax burden by half, or at least a third. One such vision of budget has been presented in the last column of the table alongside.
For the current fiscal year (2013/14), government plans to take an even larger bite out of the economy, which would see revenue mobilization increase to 18 percent of GDP, from16.9 percent last year. Although the growth rate is targeted to go up by a full 2 percentage points, we can be sure that much less will be accomplished in light of the loss of inputs—labor and capital—that are needed to carry out production, and also the evidence of stagnant or declining productivity.
Budget deficit
The bottom line in the budget profile is that deficits would increase to an unprecedented Rs 87.7 billion, more than three times the estimated level for 2012/13. Of course, the deficit would need to be financed, which means the need for a large-size borrowing. Financing targets call for Rs 30.3 billion to be borrowed from foreign sources and Rs 43.1 billion from domestic sources, of which Rs 22 billion is needed for principle repayments.
This means that if expenditure and revenue targets are met, domestic borrowing requirements will be much larger, in the range of Rs 50 billion to Rs 60 billion. This translates to lots of money and unsustainable debt.
It needs to be mentioned that the government zeal to develop the economy has sunk the country deeper and deeper into the debt-hole. Annual debt servicing—interest and principal repayments—on accumulated government debt has reached Rs 40 billion, a sizeable part in foreign debt, which represents a loss of national savings.
An even more disturbing aspect of the debt scenario is that there is scarcely any evidence that debt commitments—foreign and domestic—have helped improve growth and living conditions. Actually, the inflows of debt and grant money from overseas have nourished a corruption culture and driven the more productive parts of the economy underground.
Budget mystery
One mysterious spending item that appears in the budget account needs further accountability—in terms of supplying details. Under ‘financial management’, there has been an allocation of Rs 78.7 billion for 2013/14, an increase from Rs 54.4 billion in 2012/13. Of this amount, Rs 21.8 billion will go for principal repayments and the rest is earmarked for ‘other financial transactions’.
These other transactions—a whooping Rs 57 billion—aren’t well-explained but it looks like a large part of it comprises payments for government share purchases of high-deficit government entities—Nepal Oil Corporation and Nepal Airlines, for example. If true, this provides another instance of the misuse of hard-earned taxpayer money and future obligation such deficit financing.
For the short-term, spending money to cover enterprise losses and to implement programs of doubtful productivity will inevitably lead to demand pressures—domestic demand outrunning available supply, mostly of essential consumer items that we have nearly stopped producing, except for whatever comes out of subsistence agriculture.
All this means that most of the excess demand in the economy—engendered most noticeably by our profligate budget—will drive up imports which now outstrip exports by 6 to 1. Nonetheless, part of the excess demand will stay in the domestic economy, mainly in the service sector, which cannot be easily imported. This is the recipe for getting hit by high inflation, much higher than the projected 8 percent.
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