Let us get fiscal

  • The budget does raise concern, not due to the size per se, but because of where the money will end up
- RAM C ACHARYA, Kathmandu
To lessen the monumental problem of massive unemployment, the focus of the budget must have been on infrastructure. Yet, only 16 paisas for each rupee of expenditure are allocated to this task—a continuation of past trends

Jul 25, 2016-If the gross domestic product (GDP) of Nepal—total income generated within Nepal’s political boundary—in 2015 is shared equally among the people in the country, each will receive about $735. As a reference, 200 years ago, in today’s price, a US citizen had an income five times higher. Looking closer, Chinese per capita income reached Nepal’s current level 20 years ago. The income distribution in those economies then was more equal than it is in Nepal today. So, not only does Nepal’s prosperity lag behind by decades and even centuries, our society is also a more unequal one at its level of development. 

A nation’s sole objective should be to achieve sustainable economic prosperity and share its fruits among all citizens with a reasonable degree of equality—two goals that can be achieved through inclusive growth. Nepal has failed in this agenda not because Nepali people made bad choices but because the country’s successive governments did. The task ahead for Nepali policymakers is to rectify past policies so that the nation can make use of its physical and human resources to gain rapid economic growth with shared prosperity.

Propelling prosperity

Economic prosperity of a country depends on the amount of goods and services it produces, which in turn depends on two things: the level of employment and the amount a worker produces in an hour or a year (labour productivity). Similarly, two factors mainly set the level of economic equality. First, the equality of opportunity—universal access to publicly funded school education and health facilities—is a powerful pre-market tool. Second, redistribution of income and wealth from the rich to the poor in the form of tax-transfer is important for correcting unequal outcomes. 

For inclusive growth, the government shares the responsibility with the private sector for the ‘growth’ part. But the government has the sole responsibility when it comes to the‘inclusive’ part. 

Fiscal policy, which is outlined annually in the budget speech, is the most important policy in the government’s arsenal for addressing inclusive growth. From this perspective, a good budget helps build up the following four pillars of inclusive growth: (1) job creation (2) labour productivity growth (3) equality of opportunity and (4) redistribution without killing individual incentives to work hard and play a productive role in the economy. Both tools of fiscal policy, taxes and expenditures, cut across all four pillars. 

While strengthening these pillars, the government needs to be fiscally disciplined, adhering to the following five criteria. First, the government sector (bureaucracy, military and police) should be kept at a minimum, just essential to deliver services to the public. Second, the costs of inclusive growth should be borne by the same generation that enjoys its benefits. The burden should not be shifted to future generation in the form of large debts. Third, foreign grants should not be taken as a substitute to domestic revenue generation. Fourth, inflation should be kept in check. And fifth, public funding should be allocated first to those sectors where markets either do not exist or lead to inferior outcomes. 

These five criteria—smart governance, prudent financing, strong tax system, stable price and private-public partnership—bear the hallmark of a good fiscal policy.

Missed opportunity

Against this background, how do the fiscal policy in general and the budget of the Nepal government for this year vis-à-vis budgets of previous years in particular fare? As a refresher, this year’s budget of Rs1.05 trillion, which is 50 percent larger than the revised estimate of the last year, is about 47 percent of GDP. 

Historically, Nepal’s fiscal policies have been designed neither by thinking in line of the four pillars of inclusive growth nor adhering to the five rules of fiscal prudence.This year’s budget is not an exception. From the budget speeches of the past few years, one can conclude that they tell the same old story for decades: commitments are made but not delivered; set budgets are unspent unless they are a defined entitlement; subsidies are tweaked without any reason; programmes are introduced without a clear direction, among others.

The evaluation of all expenditures and tax programmes of this year’s budget will require a separate column each, but let me briefly revisit them in terms of the pillars. 

To lessen the monumental problem of massive unemployment in Nepal, the focus of the budget must have been on infrastructure, mainly civil works. Yet, only 16 paisas for each rupee of expenditure are allocated to this task—a continuation of past trends. Another recipe could be to aim to make Nepal a competitive economy so that it can increase exports and create jobs. 

Labour productivity growth requires enhancing labour skills, adopting better technology and increasing capital to workers. Skill requires training; tech-transfer requires foreign capital and participation in trade and capital formation requires incentive to invest in sectors other than in real estate, whose ever rising price has dried up investment elsewhere. The budget is silent on these issues. 

Moving to the inclusive part, the share of the budget in education and health has declined from 17.2 percent in the last year to 15 percent this year. Furthermore, the much-needed shift in taxation from direct to indirect to reduce the repressiveness of the tax system remains untouched.

An even weaker aspect of this budget is its further departure from some of the five rules of fiscal discipline.

Way forward

Both the thinking that the budget for this year has triggered financial anarchy as alleged by the opposition and the claim that this budget is the beginning of prosperity by the government are exaggerations. The fiscal system of the country has several flaws. But neither have they started with this budget nor are they going to end with it. Yet, that the current budget is 50 percent larger than last year’s is a great cause for concern, not due to the size per se, but because of where the money will end up—in productive capacity building or in imported consumption.

To be fair, this budget has brought some positive concepts (at least in the commitment part) such as building roads and hydro projects by the government, life insurance programme, building of a few government houses for marginalised groups and so on. I do not think they all are well thought-out programmes, but the fact that discussions have started along these lines is a good thing. 

What Nepal needed was a productive budget, capable of expanding productive capacity by creating jobs at the grass-roots level, but what it got is a populist one. Nepal’s situation means that one budget cannot be both. 

Changing decades-long policies may not be easy as there are strong, organised vested interest groups. Also, we should not expect a single budget to do everything. And, we may not know fully what works. But none of them should be an excuse for lazy thinking. 

Mere slogans and pseudo nationalism will not end Nepal’s laggardness and inequality as mentioned in the beginning. It requires ideas, plans, means and actions combined in a fiscal policy that adheres to fiscal discipline, promotes regional balance and helps build infrastructure in a big way. 

Acharya is an economist 

Published: 25-07-2016 12:39

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