More money, more problems

  • Failure to pursue reforms aimed at growth will have long-term detrimental effects on the entire economy
- Yoga Nath Poudel
More money, more problems

Jul 10, 2014-

As in previous years, different segments of society have made unreserved demands to incorporate their shopping lists in the new budget. The business community expects a reduced tax burden with increased spending on infrastructure development. All sectoral ministries have claimed bigger stakes without conducting detailed viability studies of individual projects. Public employees anticipate a raise in their salaries even amidst widespread questioning of their productivity within a ballooning structure.

These recommendations are beyond manageable and unrealistic. They are merely a collection of concessions and claims on the public purse at the cost of capital expenditure and social entitlement. Striking a balance between the two has remained a challenge for finance ministers for many years now.

Ministerial challenges

The huge burden of expectations cannot be met without trimming spending on infrastructure development at a time when the country desperately needs more capital spending to improve its creaking infrastructures. Ram Saran Mahat, the Finance Minister, has the credibility of a bold reformer. So his budget is expected to contain reform measures to increase growth and get the engine of the economy roaring again, as was achieved through the structural changes he made in previous budgets. His oversold second-generation economic reforms are nothing more than instruments to enable growth, not trigger it.

Minister Mahat has not failed to reiterate in all of his budget discussions that the faltering economy cannot be revived without making huge investments in upgrading infrastructure, especially in the power sector. While it would be difficult to present a future policy direction for every sector of the economy, the prioritised sectors should get sufficient budgets. People are keeping a keen eye on Mahat to see whether he can take a stance on some critical issues despite all-round opposition from powerful vested interests.

Pressure is on

There is no doubt that one of the essential components of the budget is to contain fiscal stability. But stability should not be maintained at the expense of development activity. The budget is heavily over programmed because of political pressures to accommodate new projects into the Red Book. The consequences of this approach have been that too many projects are chasing after too few resources. Even though insufficient resource allocation in the budget has hindered the completion of projects on time, the number of projects is on the rise with limited resources spread too thin among too many projects.

In this situation, Mahat has to confront an additional demand to increase the budgetary allocation for electoral constituencies. The majority has the same voice—they distrust development entities in their way of allocating resources for the cause of people, and wish to hold on to the strings of the purse. One of the duties of lawmakers in Parliament is to point out irregularities and misuses of resources to ensure the proper utilisation of scarce resources in a bid to enhance citizens’ well-being. If all of them are in positions to mobilise funds from public coffers, who will remain on the floor to oversee alleged misappropriations of funds through the Audit Committee?

The circumstances are quite challenging for someone who has taken over the reins of the economy. On the one hand, any opposition to extravagant demands may not go down well with those who want it. On the other, surrendering to their demands may put a dent in the credibility earned by Mahat through his long experience in budget allocation and his academic credentials. More decisiveness in government policy formation can be expected but pressures from all sides to deliver and match their expectation do not make for an easy task. So the time has come to muster enough courage to take tough decisions in the interest of the nation.

Private sector consumption has contributed to increased revenue, which is scarcely channeled into the investment sector. Very recently, it was proudly

publicised that the size of the budget has increased by a hundred-fold during the last quarter century. While the government has been praising the increased size of the budget, how and where it has been spent has hardly been a matter for inquisition, even for economic policymakers and those concerned.

The share of capital and recurrent expenditure in the total budget was 56 and 44 percent respectively in Mahat’s maiden budget in the Fiscal Year (FY) 1996/97. It gradually eroded to 19 and 81 percent in the FY 2013/14, loosening the purse strings for recurrent expenditure. Turning around the course of budget allocation will take time. Like the steering of a ship, if we wish to change the direction, the ground works to avert any accident have to be completed early.

Aim for growth

When the poor people have paid taxes on the purchase of clothes and a pinch of sugar, the government cannot escape its obligation of providing social entitlements whether in the name of populism or the persuasion of conservative politics led by powerful corporate interests. The needy should get a decent share of the treasury, though they are disorganised.

The country has to change its approach of relying too much on remittance. Though there is less room to maneuver, a failure to take advantage of increased budgetary resources to pursue reforms aimed at growth and committed to fiscal consolidations will have long-term detrimental effects on the entire economy. Shifting the policy focus from consumption to investment and broadening the government’s narrow tax base with increased allocation to the social sector to meet critical human needs can help social and physical capital formation to lead the country on a growth trajectory.

- Poudel is under secretary at the Ministry of Finance. Views expressed are personal

Published: 11-07-2014 09:09

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