While Finance Minister Barsha Man Pun is giving final touches to his new budget scheduled for presentation mid-July, it may be instructive to look back at recent history of Nepal’s budget-making and lessons that can be drawn from its evolution overtime.
The late historian Dilli Raman Regmi writes in his treatise on the Rana regime—A Century of Family Autocracy in Nepal (1951)—that government then collected very little in tax and nontax revenues—most of it comprising of land and customs taxes. He also notes that a miniscule amount of it was spent on general government operation, while most of it went to provide for the ruling families and nobilities.
There is no firm figure on how much the Rana government collected in revenue but Regmi quotes a sum of 4 crore (Rs 40 million) during Chandra Shumsher’s Prime Ministership. Government revenue receipt (and associated spending) didn’t change much for another 30 years—until the late 1950s. For instance, government spending averaged Rs. 50 million and revenue Rs.40 million annually during the country’s First Five-Year Plan (1956-60).
For a perspective on government revenue and spending data, however, we need to adjust them for inflation. No such long-term data are available but looking at the levels of commodity prices and salary levels, it can be shown that retail prices increased by about 100 times from 1960 to 2010. This means that the budget amounts of Rs. 40-50 million during Chandra Shumsher’s time and at the start of Panchayat regime in 1960, were 100 times larger in today’s’ prices—of the magnitude of Rs.4 billion to Rs. 5 billion. With a population of about nine million in 1960, government spending per person would then be just Rs.500 in today’s prices.
Fast forward the clock a little over half a century—to 2012—to make an assessment of growth in government operations. As per the budget presented for current fiscal year (2011/2012), total revenue was estimated at Rs.247 billion and total expenditure at Rs.385 billion. Taking into account the growth in expenditure as a measure of government’s presence in the economy, per capita spending in real terms—that is, government spending adjusted for inflation and population growth—comes a little over Rs.10,000. Compared to Rs. 500 in 1960, this level represents a 20-time increase in the size of government. Ordinarily, such enhanced level of spending would mean that provision of public services to the population—infrastructure, public safety, social services, poverty relief—is now 20 times improved than what it looked 50 years ago.
GROWTH OF GOVERNMENT
Size of government measured in terms of size of the economy, or on the basis of income per capita, has increased all over the world. For example, in the case of US, government spending was about US $100 billion in 1960 (US $700 billion in today’s prices) which rose to US $3,700 billion in 2012. This amounts to just over five times increase in total amount and three times increase on a per capita basis. Much of this growth—and similar growth in government spending in most industrial countries—has ensued from government assumption of social welfare functions. For example, more than half of government spending in US now comprises social safety-net payments, most of it put in place after mid-1960s.
How such an outsized growth of government spending in Nepal (almost times larger than in a typical country, developed or developing) can be rationalized? Admittedly, government has taken up new spending in development areas—roads, airports, bridges, irrigation, power, telecommunications, health and education infrastructure—which were largely absent 40 or 50 years ago but are more visible now. Nonetheless, annual levels of spending in all these areas are disproportionately in excess of the size of benefits that have accrued to the population.
For example, the level of annual spending on these infrastructure items together may have reached Rs 100 billion during recent years, which is 100 times the amount spent just 30 years ago. Even discounting for inflation, the speed of increase in government spending—regular and infrastructure—has been phenomenal, whereas the average quality of administration and of infrastructures has deteriorated, offsetting the benefits from their larger physical size.
GOVERNMENT DOWNSIZING
I have always been surprised by the zeal Finance Ministers have shown in collecting the maximum amount of revenue possible and have received public accolade for breaking the previous record. During recent times, Baburam Bhattarai is remembered most for his charm offensive for tax collection when he headed the Finance Ministry in 2008-09. In the current fiscal year, despite setbacks to the economy on several fronts including a lower economic growth, government revenue is projected to increase by 20 percent to an unprecedented level of Rs 240 billion, close to the budget target of Rs.247 billion. Total spending is projected at Rs 375 billion, about a similar percentage increase.
Both represent large amounts in absolute terms as well as in terms of GDP. With revenue at about 20 percent and spending upward of 30 percent of GDP, government presence in the economy is one of the highest in the world!
There are a number of things we need to look into to get a proper perspective on the pros and cons of government expansion. The first point we should note is that government has not been an efficient user of the country’s economic resources and of its revenue resources in particular. For example, if the government would have been a non-profit or philanthropic enterprise, then ideally no more than 20 percent of revenue receipts would be spent for administrative purposes. With government’s current spending, excluding debt payments, approaching Rs 200 billion or 80 percent of total revenues, this reflects a rare case of government inefficiency. The country gets very little return for government’s administrative expenses, compared to, for example, if this much money could have been left in private hands.
Second, growth in revenues has justified (even encouraged) larger spending by government—from its own resources and from the enlarged access that higher revenue gives to acquire domestic and foreign loans. Government’s debt burden has thus ballooned, far exceeding its debt-servicing capacity. Third, growth in government spending justifies the need for further revenue generation and tax hikes, which creates disincentive for private enterprise and pushes much of the economy underground. Fourth, and finally, a larger tax-burden on domestic production discourages investment and weakens competitiveness that tends to undermine the economy’s growth potential.
Inefficiencies of government spending and high tax make strong case for rolling back government operations and giving private players a bigger role.
Such well-recognized inefficiencies of government spending and disincentive ensuing from associated high tax burden makes a strong case for the rolling back of government operations to allow private enterprise to play a greater role, than when government size is expanding more rapidly than the economy as a whole. A lesser tax burden and related cuts in government spending would help promote economic growth and improve living standards in a much surer manner than if government is trusted for economic leadership, which it has done for decades.
Look, then, at what kind of budget Minister Pun puts forward for the next year. If he takes pride in enlarging the role of government in the economy—promising a double-digit growth in revenue and spending—ask him to go back to the drawing board and force him to re-do his budget. Advisedly, he should slim it down to the bare bones—about half the size of what it is now and what, most likely, he is going to propose.
The author is an economist
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