The government has almost finished preparing the budget for the fiscal year 2016-17. Being the first federal budget, the Nepali people expect a lot from it. The coming annual financial plan is projected to be worth around Rs900 billion compared to the current fiscal year’s budget of Rs819 billion. The government has Rs170 billion in unspent funds in its treasury. Moreover, it has been able to spend only 20 percent of the capital budget so far. Last year, the National Planning Commission (NPC) conducted a study to examine whether the budget allocation procedures are transparent, scientific, people-centred, need-based and free from political and positional influences. 

Financial Procedures Act 1999 controls how the budget is formulated and the money is spent. It says that the Ministry of Finance (MoF) is responsible for preparing the budget. Preparations start after the Resource Committee consisting of representatives from the MoF, NPC, Nepal Rastra Bank and Financial Comptroller General’s Office decide the resource envelope for the new fiscal year. The process starts in November when the Resource Committee reviews the estimates of revenue and financing and sets the budgetary ceilings. The NPC and the MoF then jointly prepare the budget ceilings for the line ministries indicating the sources of funds and types of anticipated expenditures, recurrent and capital. The budget is prepared by following the Budget Preparation Guideline and the Budget Operation Directives. The finance minister presents the final budget in Parliament through annual Budget Speech. The House discusses and passes the budget within three-four weeks.  

The government prioritises centrally driven programmes into three categories, namely first priority (P1), second (P2) and third (P3). For the purpose of prioritisation, the development programmes are grouped into five areas—social sector; infrastructure development; agriculture, land reform and forest; economic development; and miscellaneous. P1 projects get priority in budget release and are regularly monitored. P2 and P3 projects may not receive the requested budgets on time and are often considered for merger or closure. The MoF authorises the ministries to spend the budget which in turn delegate the spending authority to the departments and district line agencies.  

Low cap expenditure

Low capital spending occurs almost every year. During last year’s Mid-Term Review, the then finance minister Ram Sharan Mahat said that the government had fallen behind in spending on development projects. Expenditure in P1 projects in the first six months of the fiscal year reached 26.46 percent of the allocated amount, down from 30.89 percent in the same period last year. Similarly, spending on P3 projects was 3.69 percent of the target in 2015-16 compared to 9.1 percent in 2014-15. During the review period, capital expenditure amounted to only 12.60 percent. Based on this experience, the NPC study report has recommended that 10 percent of the total divisible pool for the ministries’ budgets be given based on a performance evaluation. The study has also suggested that expenditure be made a basis for performance evaluation. Similarly, in the education sector, an incentive budget should be given to districts with the lowest dropout rate. 

Formula-based allocation

Except for the distribution of grants to local bodies, the horizontal budget distribution procedure to all the ministries is arbitrary. The budget has been distributed haphazardly regardless of the size of the districts and their need-based variables such as population, geographical area, poverty rate, per capita income and regional imbalance. As a result, the system lacks objectivity, equity, transparency and predictability. Against this backdrop, the NPC has designed a formula-based budget allocation framework for sectoral ministries like Education, Health, Physical Infrastructure and Local and Urban Development. 

For example, in education, various need-based variables like the number of students, schools and teachers and incentives for reducing the dropout rate have been used. Similarly, in road construction, variable like the population, geographical area and strategic national and rural road network are applied. The study has analysed budget distribution patterns across districts and regions. Based on its results, the provincial level budget allocation scenario is presented in the table above. It shows that 16.09 percent of the total government budget should be given to the Ministry of Education. The table also shows how the budgets for the ministries are balanced across provincial levels. For example, 18.08 percent, 14.58 percent and 16.52 percent of the education budget should be distributed in provinces one, two and three respectively.

Conclusion

Irrigation Ministry officials said that last year the irrigation minister had distributed 191 projects to his district, and that the current minister had been pressuring them to double the figure. This is a simple example of how programmes and projects are distributing arbitrarily across districts. The role of the NPC is very vital in resource allocation. “The study report is very relevant and useful. However, the NPC is neither implementing the study report nor establishing the proper system,” said former NPC vice-chairman Shankar Sharma. 

The chief secretary has also instructed all the secretaries to distribute resources based on need and equity. However, there is a very small chance that the instruction will be followed. There is political intervention in budget allocation. Influential political leaders are often only concerned about their districts and constituencies, and this leads to disproportionate distribution. The government will be presenting the first federal budget soon. There has been much debate at the public level regarding budget misallocation. The parliamentary Development Committee headed by Rabindra Adhikari has also instructed the government to establish a system approach in budget allocation. In order to fulfil the constitutional mandate, the government needs to allocate resources transparently, responsively, efficiently and effectively. 

Devkota holds a PhD in fiscal decentralisation and is a former member of the Local Bodies Fiscal Commission