The budget is an annual ritual, performed near the end or before the beginning of the new fiscal year that starts on the first day of the month of Srawan, usually the middle of July. The budget presents expenditure and revenue estimates for the coming year in the background of current economic situation and how the government foresees next year’s developments will be and plans to put in place a mechanism to produce a more desired outcome.
The budget contains big numbers about planned incomes and expenses of the government, which the government would be tasked to manage over the year, to achieve social and economic objectives beneficial for the population.
This year’s budget envisages total spending of Rs 385 billion and income of Rs 247 billion, leaving a gap between expenditure and income of Rs 138 billion—a budget deficit—to be covered from foreign aid and domestic loans. The large revenue-expenditure gap means that of each rupee government would spend during the year, over a third of it will come from foreign aid and borrowings.
To help understand the underlying meaning of these numbers, let us start with a small number—a billion rupees. Many with some level of education will know that this is 1,000 million. A better way to comprehend this number is to think of what a billion rupees can buy if used wisely and productively, which is the expectation when you are handling public money.
Suppose you want to construct housing for the poor—for a family of four. Though the costs of land and materials have increased sharply, one unit can still be constructed for 500,000 rupees in small towns and villages and, with a billion rupees, we can get 2,000 units. Similarly, for school buildings costing 2 million each, 500 building units could be put in place, adequate to run a primary school. Similarly, other public sector infrastructure—roads, bridges, water supply, irrigation, power plants—can be built for a mere billion rupees.
Now you can imagine how much more can be done with 100 billion rupees? This much of spending will make a visible impact on access to public amenities in a single year. Continue this for 10 or 20 years, and you can have a modern, highly-developed Nepal, hurtling toward joining the club of emerging economies and advanced societies.
Now let us review the budget presented for the new fiscal year, 2011/12. As noted, the budget proposes total spending of close to 400 billion rupees, intended to accelerate the pace of country’s development, an on-going effort for the past 40-50 years.
The substance of the budget story is that there is no need to be elated seeing the rapid growth in revenue and spending envisaged in the new budget. As past records show, this budget game has been played time and again and nothing seems to have changed.
Of course, the only part of the budget that directly ties to economic growth is how much of it is used for capital accumulation—for investment in physical and social infrastructure. Budget sets aside Rs 150 billion for such spending—investment in the economy to help future growth. This is a lot of money by any measure—150 times more potent than what can be done with a mere 1 billion rupees.
WASTEFUL SPENDING
Unfortunately, the above scenario is no more than engaging in day-dreaming. We have been doing this sort of development spending now for almost half a century, backed up by our enormous effort at tax collection, domestic borrowing and, most importantly, attracting foreign aid. There is no reliable historical record of how much has been spent for development purposes until now but a rough estimate will place it at as much as 2,500 billion rupees, calculated in today’s prices and cumulated over 40 years starting in the early 1970s.
There is no evidence, however, that development spending has had a measurable impact on the pace of economic growth, which has hovered around 3 percent rate a year on average, or barely matching population growth. In other words, average incomes on a per capita basis has barely moved over this long period, implying stagnant incomes and unchanged living conditions for most in the population.
Assuming, however, a careful spending of money allocated for development purposes, economic growth could have moved up, on average, at least an extra 2 percent rate per year, from the 1970s onwards, which means a doubling of average income per capita in 35 years. This would have yielded a per capita income of $1,000 today—on par with India’s—which is twice larger than actual per capita income we have now at $500.
Let us not exaggerate the point—that we have not invested wisely to achieve desirable rate of growth. Development money has been wasted in a number of other countries of the world and Nepal may not be the worst case. Former World Bank economist William Easterly cites in his celebrated book Illusive Quest for Growth (2002) the case of Zambia, an African country, which received massive amounts of foreign aid starting in the 1960s. If this money would have been invested wisely, says Easterly, Zambia would be an industrialized country today with a per capita income of $20,000 but, instead, it remains one of the poorest, with per capita income of just $600.
The substance of the budget story, then, is that there is no need to be elated seeing the rapid growth in revenue and spending envisaged in the new budget which, supposedly, should make the country prosperous and people happy. As the past records show, this budget game has been played time and again and nothing seems to have changed, in terms of the income levels of people and quality of life generally. However, the fact of the matter is that the budget money has been spent and books closed, and the cycle starts again.
At the end, there is little looking back—an assessment of accountability—as to what had been promised and what was delivered. It then appears that bringing out the new budget happens to be the only task that absorbs the finance minister and his staff and, once this is approved, the budgeted amounts get distributed and spent, regardless of a quid pro quo.
It appears then that the accumulated level of debt—now at Rs 500 billion ($7 billion) and ticking up—will be the only legacy we will leave behind to pass on to future generations. Understandably, this $7 billion doesn’t include $10 billion in foreign grants so far provided to Nepal—courtesy of foreign generosity. Even though much of it has been wasted, the good thing is that this need not be paid back. However, the unfortunate thing is that foreign donors record those transactions as humanitarian assistance to the poor people of Nepal which, as we know it, is hyperbole as well as hypocrisy.
The writer is an economist and former IMF staff member
sshah1983@hotmail.com
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