Bracing for the budget

  • The budget, instead of directing investments in the right direction, might contain a lot of unproductive populist plans
- Yoga Nath Poudel, Kathmandu

May 27, 2016-

The government is going to present the budget for the fiscal year 2016-17 amidst economic anomalies ranging from budget surpluses in the treasury to excess liquidity in the banking sector and low consumer and investment confidence across the country. Although this may be seen as being a cushion for the government and the private sector, it is really an indication of the imbalance in both the fiscal and monetary trajectories.

A budget surplus is not necessarily a blessing for a country where the capacity to absorb capital expenditure is low. This makes room for an expansion of the recurrent expenditure on the strength of increased fiscal space that eventually creates a perpetual burden on the economy. Similarly, excess liquidity is an outcome of monetary impotence which shows more serious impediments in the economy. No matter how well meaning government intentions may be, the situation cannot be overcome without building investor confidence and directing public investment into the productive sector. Failure to do so may ultimately fuel consumption of foreign goods and services at the cost of national industry and investments. 

Irrational use of money

After petroleum was discovered in Nigeria, government revenue increased tremendously; but the people could not benefit from it because the money earned was not used rationally for socio-economic and infrastructural development. The real beneficiaries of the oil boom in Nigeria were the government machinery and investors. The income earned from oil was not spent on building roads, but the number of automobiles exploded beyond the capacity of its narrow roads resulting in accidents and pedestrian deaths. 

Considering the unbridled expansion of the state machinery in Nepal, it looks like the country is going down the same path. Caution is required to prevent an unsustainable spell of recurrent expenditure in the future. Recurrent expenditure has been swelling every year leaving capital expenditure far behind. When the capital budget is spent, most of the money goes not into mega infrastructure projects but into local projects and trivial programmes that cannot add substantial value to the national output. 

The excess liquidity in the banking system also reflects the inability of the economy’s inadequate infrastructure to absorb spending, and the only remedy is heavy investment in public sector projects. Although one of the main aims of any of budget is to attract private investment, there is little in the government’s financial plan to help achieve this goal. The time has come to take a bold decision to contain regular expenditure and boost capital expenditure to create business confidence. However hard we try to attract multinational investment into the country, it will be a futile effort until the world business community is convinced that the government is serious about providing basic infrastructure in the country.

People are very concerned that the budget, instead of directing investments in the right direction, will contain a lot of populist measures to gain electoral support. This type of spending of scarce resources to please a noisy collection of interest groups in the name of local development may bring immediate popularity, but it will not convince the public that the government is committed to growth. The government’s pitch for the Constituency Development Fund got a cool response from all independent observers as it is alleged that the money was being spent on local club activities or building party office buildings instead of the development of the constituency. The system on which the government depends is mired in issues. If the practice cannot be stopped, the funding should not be increased which will inspire hope among the people that the government is doing something about it. Citizens’ hard work and savings should not be squandered on dubious projects.

Art of budget-making

It must be understood that in order to expand the revenue base, the tax rate should be rational. A downward revision of valued added tax (VAT) can be used as a reliable vehicle not only to cut the cost of living but also to contain inflation and discourage bribery and corruption. When the poor are making a contribution to the national treasury by way of VAT on their morning cup of tea, they need to be protected by the state through social safety nets. If we are in a position to assure them of support in their old age with adequate resources, we can show how responsible the government is towards the people. 

In order to increase productivity, growth and long-term benefits to the country, the government should concentrate on two areas of the economy—protecting the needy and building infrastructure. The art of budget making involves a credible and consistent macroeconomic policy and removal of structural impediments to achieve higher public investment in infrastructure and enhance private investment. Whether the budget contains measures to push the country towards that direction or is a continuation of the usual verbal pledges without a realistic action plan remains to be seen.

Poudel is Under Secretary at the Ministry of Finance; views expressed here are personal

Published: 27-05-2016 08:43

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