Govt plans a big budget despite pressure on finances

Published On: May 24, 2020 06:50 AM NPT By: Sagar Ghimire  | @sagarghi

Budget to propose 15% higher expenditure compared to last year

KATHMANDU, May 23: Despite pressure on finances, the government is preparing a bigger budget for the next fiscal year 2020/21 compared to that of the last year. 

According to a high-level official at the Ministry of Finance (MoF), Minister for Finance Yuba Raj Khatiwada is in the final stage of drafting the budget statement that will have plans to spend more money in the next fiscal year than in the current fiscal year. 

Finance Minister Khatiwada is scheduled to present the federal budget of the country on June 28 (coming Thursday). This will be the third budget presented by Finance Minister Khatiwada who was tapped by Prime Minister KP Oli to manage the treasury.    

While the source at the MoF declined to divulge details and the size of the budget, the high-level official, requesting anonymity, said that the total expenditure allocation for the next fiscal year is expected to be 15 percent bigger than the current year’s estimated total expenditure.  

For the current fiscal year, the government has allocated Rs 1,532.97 billion as the total government expenditure which was later revised downward by 9.6 percent to Rs 1,385.96 billion through the mid-term review of the budget. 

Even the revised spending estimate now looks unattainable as the expenditure plans and project executions have been hit by a two-month lockdown imposed to contain the spread of coronavirus in the country.  

The government was advised to lower the size of the expenditure in the next fiscal year and reprioritize spending for economic recovery from COVID-19.  Economists have called for not only slashing the recurrent expenditure, but also for not allocating funds for the projects which are not of immediate priority. 

Instead, the focus of the resource allocation should be on a stimulus package to provide targeted support to businesses, create employment opportunities for those who have lost their jobs in the pandemic and extend social protection measures to the most vulnerable.

Brushing aside suggestions from economists and the private sector that the government should resist its temptation to lay out money on projects other than those of immediate priority during the ongoing crisis, Finance Minister Khatiwada is reportedly tabling a bloated budget next week.  

The government’s policies and programs for the next fiscal year that were approved by the federal parliament last week also indicate a bloated budget in the offing. 

Rather than disciplining the budget, focused and relevant to the times, the policies and programs were comprehensive in a tone-deaf manner. This scattered nature now adds further challenge to budget formulation, according to Swarnim Waglé, a former vice chair of the National Planning Commission. “The policies and programs have burdened the finance minister with mandates that he will likely not be able to do justice to,” said Waglé, addressing a webinar organized by Ganesh Man Singh Academy last week. “This is mainly due to two reasons: immense pressure on revenue and grants and our weak implementation capacity even in the best of times,” added Waglé, who is also the executive chair of the Institute for Integrated Development Studies.

These concerns about the bloated budget are not new. 

For example, the International Monetary Fund (IMF) has always been recommending to the government not to be ‘overly ambitious’ in its budget. 

“At all levels of government, a top-down budget process and medium term fiscal framework (MTFF) based on revenue and expenditure assumptions that are not overly optimistic would instill greater prioritization of expenditure plans, prevent dilution of implementation capacity, and avoid creating an unrealistic resource expectations among sub-national governments,” reads 2020 Article IV Report of the IMF. 

The current crisis has reinforced the IMF’s recommendation.  

“The government is likely to see its finances savaged by the pandemic as reflected in the revenue collection in recent months. It is high time that the government reprioritize its projects and programs to reduce capital expenditure in the budget amid pressure that it is facing toward its revenue side,” Shanta Raj Subedi, a former finance secretary, told Republica Online. “The government should also slash the recurrent expenditure and focus its budget to cope with the adverse impact of the pandemic,” he added. Some cuts on spending that he suggests include building government offices, operating expenses, consultancy services, monitoring, investment in public enterprises except projects and phasing out constituency development funds to free up resources to fund rescue and revival packages.  

But, the government does not seem to be caring about the voices for caution on spending. The pattern of outlays could be no different from those of the previous years as indicated by the policies and programs. 

Why does a bloated budget worry us? 

If the recurrent expenditure continues to balloon, it puts immense pressure on inflation. With the bigger size of the budget, the government will first try to raise its revenue to finance its spending, putting a financial burden on the taxpayers. Many projects or programs that are of priority may not be able to receive funds if the government makes unrealistic estimates of revenue collection to finance them.  

If there is a deficit, meaning that the revenue alone could not finance its expenditure, the government will have to raise debt for deficit financing. While Nepal is considered to be at low risk of debt distress with 30.1 percent of public debt (in percent of GDP), there are worries that elevated financing needs could increase such risk. If the government decides to mobilize debt to finance its spending, there will also be more pressure on the budget for the coming years when the country has to repay the loans.

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