Fiscal federalism can be defined as an efficient governmental location of taxation and expenditure decisions. Local governments can offer certain efficiencies in the provisions of goods and services and in tax collection. However, it is believed that there also exist offsetting equity considerations.
The essence of fiscal federalism can be understood only when we differentiate between the functions and instruments under the centralized and the decentralized form of government. Alternatively, the widely-used meaning of fiscal federalism is designing expenditure and revenue allocation by assuring welfare gains at each level of governance.
Challenges
The challenges are to develop compatible fiscal policy with regards to the proposed federal structure and to reconcile between the existing policy, standard international practices and structure and modality proposed by the Committee on Restructuring of State and Devolution of State Powers. As fiscal policies are country-specific and Nepal’s constraints, priority, and opportunities are uniquely different, the replication of federalism adopted from other countries may not be the solution to address the question of welfare and inclusive growth.
The diversity in the needs and policy execution is painfully different, therefore, devising diversified and balanced fiscal policy interventions within the given deadline is a challenge because not much public debate has been organized with regards to the understanding of how the present system is working and what the inherent problems in the present system are.
Constraint to policy interventions
Newly-emerged federal states have put much effort in enhancing skills among national, state and local governments on fundamental policy problems. Nepal’s need to design policies in creating gainful employment, health, education, social security and guaranteeing basic needs to the people through the reforms in public distribution system and revisiting the newly-proposed public-private participation modality by the private sector organizations is not very easy.
The ultimate goal of the government should be to make economic growth compatible to workers’ advantages. In this regard, investment is the key element, which helps in increasing demand by creating jobs. This is what is not happening at all since no employment opportunities are being created. As stated above, given the failure in formulating policies for absorbing additional workforce, the problem of social inclusion will magnify.
Expenditure assignment in Nepal
A slow move of the process and rising demand for more participation in the governance led to promulgation of Local Self-Governance Act (LSGA) 1999 and Regulation 2000. The provision for the local bodies in the Act include, expenditure assignment, revenue assignment, revenue sharing and the authority of local-level borrowing, the four fundamental pillars of fiscal decentralization. Political party bases also expanded significantly during the 1990’s leading to a fast move towards political decentralization. LSGA and regulations also represented a move towards administrative decentralization as the local governments were provided more authorities on expenditure assignment, revenue assignment and the authority to borrow.
Expenditure assignment to District Development Committees, Village Development Committees (VDCs) and Municipalities by LSGA has wide coverage, which include, agriculture, drinking water, sanitation habitat development, hydropower, work and transport, land reform and land management (except VDC), development of women and helpless people, forest and environment, education and sports, wages for labor (except municipality), irrigation and soil erosion and river control, information and communication, language and culture, cottage industry, health service, tourism, physical development (except districts), finance, legal and public safety. However, only a few get implemented either because of the lack of importance or because of the lack of resources.
The Ministry of Finance (MoF) presents the summary of central and district-level allocation (revised and actual expenditure) annually in the Red Book. The following table presents the current scenario in this regard.
In the current fiscal year (2009/10), the percentage of allocation for central level, according to table 1 above, is 75.52 of the total budget, which divides between recurrent (48.45 percent) and capital (27.07 percent). The allocation for district level, on the other hand, is only 17.83 percent and this is also divided into recurrent (7.73 percent) and capital (10.10 percent). One can observe almost the same pattern in the preceding years. The revised estimate of the total expenditure incurred in 2008/09 showed that the share of central-level expenditure was 75.57 percent of the total expenditure whereas the district-level expenditure was 15.91. This data indicates that central-level spending is around five times higher than district-level spending.
From table 2 below, it is clear that 24 districts are able to generate revenue that is less than 5 percent of their total expenditure and all 75 districts generate revenue less than 10 percent of their total expenditure. This shows the highly-centralized financial system of Nepal. Centralized financial system has created increasing dependency of the local bodies to the central government.
The success of the new constitution with regards to fiscal federalism rests on acknowledging the division of competence in decision-making about public expenditures and revenue between center and local governments. This should also include the degree of freedom of decision-making enjoyed by the center and local governments in assessing taxes and determining expenditures. The competency of different levels of government may be possible only when there is political as well as administrative decentralization.
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