How does a budget deficit affect the national economy? Before we answer this question, we need to know what exactly is budget deficit, which surprisingly is a contentious and controversial issue. There are multiple ways of defining it.
The simplest and also a reasonable measure of deficit should be excess government spending over income—exactly the way we would look at the budget of a household or a company. However, the measurement of government spending and income is more complicated.
This is reflected in the fact that while the 2013/14 Budget Speech mentions a deficit of Rs 87.7 billion, Budget Documents prepared by the Ministry of Finance put the deficit at just Rs 14.5 billion. Why such huge discrepancy? Which number more truly reflects the underlying budget profile? [break]
The difference in the estimates shows different approaches to budget-making. In the Budget Speech definition of the deficit, all payments from and receipts by government are matched against each other—whatever the nature or purpose of transaction. This means that the government treats all receipts from revenue sources and loan recoveries as incomes to meet spending needs.
In the current year’s budget, such receipts comprise tax and nontax revenues, foreign grants, and loan recoveries. Total receipt defined in this way comes to Rs 429.5 billion, which is the same number reported in the Finance Ministry documents, except that it excludes loan recoveries of Rs 5.5 billion.
The big difference, however, emerges on the expenditure side which, in the Budget Speech, includes current and capital expenditure items as well as a number of non-spending items—labeled as financing items by fiscal experts. Such labeling, however, is wrong and can be used to hide inconvenient facts about the true budget profile.
The size of non-expenditure items is actually huge—Rs 73.2 billion, compared to Rs 438.5 billion for current and capital spending items, which is a 6 to 1 ratio, meaning that for every Rs 6 billion spent on expenditure budget items, Rs 1 billon gets spent on “non-expenditure” items. What actually are these non-expenditure items that remain hidden from public view?
The Ministry of Finance, in its accounting of the 2013/14 Budget, provides the following estimates of non-expenditure budget items: repayment of foreign loans (Rs 16.3 billion); repayment of domestic loans (Rs 25.2 billion): domestic lending less repayments (Rs 24.5 billion); and purchase of shares (Rs 7.2 billion). Altogether, these add up to Rs 73.2 billion. To this amount we need to include Rs 14.5 billion in what we may call “unfunded” spending pledges. Together, they take the total deficit as defined in the Budget Speech to Rs 87.7 billion. By comparison, spending on government’s key spending item—government employees’ salary and pensions—is slated at Rs 90.1billion.
In the budget debate, fiscal experts and media have focused on taxes and spending items, while there has been little discussion of non-spending items like the ones elaborated above. It would have been more meaningful if the focus could have reversed—accepting spending items on their face value while paying more attention to non-spending “expenditure” items.
By definition, deficit is something that is not backed by available resources, which means that it must be financed out of borrowing, sales of government properties, depletion of cash reserves, or some combination. As it stands, the estimated deficit will be covered entirely by loans—Rs 43.7 billion in foreign loans and Rs 44 billons in domestic loans.
This represents a significant accumulation of national debt which currently stands at a third of GDP, about US $7 billion.
Now it is true that government plans to repay foreign and domestic loan principals amounting Rs 41.5 billion, which still leaves a net debt of Rs 46.2 billion representing new borrowings.
Besides the high level of debt accumulation, there is a further concern as to how proceeds from Rs 46.2 billion in net loans are going to be used. As the listing above of allocations for non-spending items excluding debt repayments indicate, most of them are of dubious nature and needs to be elaborated to demonstrate their usefulness and legitimacy.
For example, the government plans to lend Rs 24.2 billion and purchase Rs 7.2 billion in shares, a total of what we may term financial asset accumulation. However, it hardly makes sense to engage in such financial investments while, at the same time, the government plans to borrow Rs 44 billion from domestic sources to meet budget needs.
We can guess that a large part of such on-lending operations is being used to prop up failing government enterprises like Nepal Oil Corporation and Nepal Airlines. Also, part of it comprises compensation to government enterprises that have to sell their products at government-controlled prices, like the huge amount of transfers to
Nepal Electricity Authority (NEA) to pay for losses on subsidized sale of electricity purchased from India to make up for shortfall in domestic supply. There may be several other items included in the Rs 46.2 billion deficit, most of which may be adding little in net worth for government while burdening the national economy with future debt load.
Beside the dubious use of a large part of budget financing, we must look at its adverse effects on the larger economy. Such a high level of deficit—Rs 87.7 billion, almost 5 percent of GDP—will create excess demand in the economy, raise imports and trade deficits, and ignite high inflation. Also, the perception of large-size deficit will adversely affect confidence and discourage productive enterprise, contributing to weaken growth and spread poverty.
There is an urgent need for budget reform that should focus primarily on the transparent accounting of budget operations that until now has been confined to selected bureaucrats at the Ministry of Finance. In the large part, our budget-making practice has been immune to political change and out of the range of public discussion.
Much of this alludes to the basic problem of lack of transparency. This particular view of our budget-making practices is confirmed in the Open Budget Survey 2012 report released by International Budget Partnership which concludes that “Nepal maintained zero transparency in PBS (Pre-Budget Statement)—the details of government policies in budget—and CB (Citizen Budget)—non-technical presentation of government plans to raise public revenue—in 2012.”
We can get a glimpse of the massive neglect of transparency issue by looking at the timing of budget presentation that takes place just a week prior to the start of new fiscal year. This gives little time for review and evaluation of the draft budget by experts and general public. Also, details of the budget rarely get discussed as a decision-making item in the parliament. The government’s presentation of the budget contains final figures and this becomes law the next day.
Not to overemphasize the point but this arcane practice of financial management carries no accountability and leaves no room for a second opinion—reflecting legitimate public concerns about budget programs and priorities. The government in power will drive the budget through the legislature and any opposition to it is ignored or construed as obstructionist.
The first step towards improving budget transparency would then be to bring out the budget several months before the start of the new fiscal year. In the US, for example, national budget is presented about a year in advance that allows ample time for experts and legislature to review and voice opinions. At times, budget discussions take up a whole year (or more), with the new fiscal year starting without an approved budget. It is not suggested that Nepal adopt such a lengthy practice of budget approval but presentation of the budget right at the end of the fiscal year erodes credibility and, certainty, it carries questionable legitimacy.
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