The revenue growth of the central government, which has stood at an average of 22 percent per year for the last one decade, is likely to decelerate to 3.7 percent in the next fiscal year under the business-as-usual scenario, due to constitutional provision on income sharing with subnational governments and cut down in revenue sources.

This is expected to trigger funding crunch at the centre, hitting construction of big-ticket infrastructure projects, higher education sector and other service delivery.

The central government is expected to generate revenue of Rs730.1 billion in the current fiscal year.

If, under the business-as-usual scenario, the central government’s income expands by 22 percent in the next fiscal year, the federal treasury would see collection of Rs891 billion in 2018-19.

But even if the central government is able to collect this money, it may not be able to use all of it because the new Intergovernmental Fiscal Management Act has made

it mandatory for the central government to distribute 15 percent of the revenue generated from value added tax (VAT) among local bodies and another 15 percent among states. Also, 15 percent of excise duties generated from sales of domestic products must be distributed among local bodies and another 15 percent among states.

Although the central government is authorised to collect these taxes, share of VAT and excise duties allotted to subnational governments will not enter the federal treasury and will go to a separate fund, former finance secretary Shanta Raj Subedi told an interaction organised jointly by the Society of Economic Journalists-Nepal and the Asian Development Bank on Tuesday.

Also, the central government has been barred from collecting land registration and vehicle taxes under the federal setup.

This reduction in revenue source, coupled with sharing of income generated from VAT and excise duties, will limit the central government’s income to Rs756.8 billion in the next fiscal year, according to Subedi.

This is expected to affect the central government’s spending plans.

The central government currently spends around 60 percent of annual budget on national defence, national pride projects, foreign affairs, management of judiciary and federal administration, domestic and foreign debt servicing, equity and loan investment in public enterprises, social security, retirement benefits and pension of civil servants, higher education, reconstruction, natural disaster and emergency management, and elections.

These costs, Subedi said, will have to be borne by the central government even in the federal setup and cannot be reduced much.

“While it is imperative to make these spending, subnational governments are not likely to generate adequate income on their own because local bodies have limited revenue sources and states have been assigned even fewer income sources,” said Subedi. “This means most of the states and local bodies will rely on federal government’s grants, which will add to the centre’s costs.”

Nepal’s transition from unitary to federal system of government, which has empowered states and local bodies through devolution of authorities and responsibilities, will definitely increase financial burden on the centre for now. Many agree to this. As per estimates of Finance Secretary Shankar Prasad Adhikari, such cost will go up by around Rs100 billion per year for around three years because of the need to build office buildings at states and local bodies and train human resources.

“But this is manageable,” Adhikari told the interaction. “And there are areas where the central government no longer needs to spend as those responsibilities have been transferred to subnational governments.”

For example, the central government’s recurrent spending on rent and service fee; operation and maintenance of capital goods; purchase of office items; consultancy and other fees; orientation and other similar programmes; and project monitoring and other field trips currently stands at around Rs120 billion.

“This cost will drastically go down in the next fiscal year because much of these spending will be made by states and local bodies,” Adhikari said. “This is the same for some of the capital spending like construction of office buildings, furniture and vehicles.”

Also, the central government’s costs are likely to go down due to reduction in number of federal ministries and ministers, Adhikari added. “This will reduce expenditure of the central government....So, the situation is not as bleak as portrayed by some.”

Yet what is anticipated is dependency of subnational governments on the centre for grants, as many will not be able to diversify their revenue sources or enhance tax compliance in the short term.

“Elected representatives of local bodies and states should not be short-sighted and turn a blind to the issue of improving tax compliance and introducing new revenue sources due to fear of losing popularity,” said Shankar Sharma, former vice chairman of the National Planning Commission (NPC). NPC Vice Chairman Swarnim Wagle and former NPC vice chairman Yubaraj Khatiwada were also present during the interaction.