Finance Minister Dr Yuba Raj Khatiwada presented the first full federal budget and fiscal plan for 2018/19 (FY2019) to the parliament on May 29. It outlines a narrative that is consistent with policies and programs, and election manifesto of the communist party. Dr Khatiwada wants this budget to be seen as a solid base against which performance of the government should be evaluated in the coming years. However, considering a strong electoral mandate for this government and the opportunity to introduce transformative reforms and projects to change the course of the economy, public service delivery and budget-making, it is a disappointing fiscal plan.

Budget overview

Bound by the constitutionally mandated provision to share a portion of total revenue generated with subnational governments and the outsized fiscal budget of the previous year, the Finance Minister could not increase the size of budget as was expected by some of his party colleagues, especially in increasing direct cash-based social security allowances and local-level pet projects to cater to the core voter base. Hence, FY2019 expenditure outlay increased by just 2.8 percent compared to FY2018 budget estimate. However, the Rs1,315.2 billion expenditure plan is still 25.7 percent higher than the revised expenditure estimate for FY2018. Of this, 64.3 percent is allotted for recurrent spending (which includes fiscal transfer to subnational governments as well), 23.9 percent for capital spending and 11.8 percent for financial provision. The budget amounts to about 38.7 percent of the gross domestic product (GDP).

The government is planning to meet 63 percent of total expenditure by mobilising domestic revenue, 13 percent from domestic borrowing and the remaining 24 percent from foreign grants and loans. Overall, the total revenue target is Rs945.6 billion— including Rs114.2 billion revenue sharing with subnational governments—which is about 30 percent increase over the FY2018 revised estimate. The government has to share, based on monthly collections, 30 percent of VAT and internal excise duty, and 50 percent of royalties from natural resources with subnational governments.This amounts to an estimated 12 percent of projected total revenue in FY2019.

In addition to direct revenue sharing, almost three-fifth of the recurrent budget (or 47.7 percent of the total budget) is set aside for subnational governments in the form of fiscal equalisation, conditional and unconditional grants (no matching and special grants for now). The total fiscal equalisation and conditional grant for provincial and local governments is Rs113.4 billion and Rs195.1 billion, respectively.These are substantial revenue sharing and fiscal transfers, which the subnational governments will incorporate in their budgets before the start of FY2019 (ie, mid-July 2018).

Mixed picture

In terms of macroeconomics and policy direction, the budget gives a mixed picture. Overall, Dr Khatiwada has presented a manageable budget compared to its size and growth in the previous years. However, his budget has fallen short of notably departing from the past and setting a new trend in terms of budget-making, outlining priorities given the available resources and capacities for budget execution, and introducing transformative reform measures and projects.

First, the government has given continuity to most of the projects and programs of the past. It prioritises control of revenue leakages, agricultural development, tourism, and infrastructure development, especially pushing forward with preparatory work for large-scale projects, development of sports facilities, hospitals and industrial estates. It provides tax relief by doing away with educational and health services taxes and value added tax in the case of private hospitals (which should ideally lower health and educational costs); tax concession for project reinvestment in tourism and productive sectors; reduction of income tax by 50 percent on tea, clothing and dairy production; and seven year income tax holiday for woman-run businesses, among others.

Second, the finance minister has tried to observe fiscal discipline by resisting the temptation, or pressure, to introduce a bloated budget without ascertaining revenue sources. He has tried to rationalise spending by not increasing salary and allowances, which already constitutes about 15 percent of total recurrent spending, and direct cash-based social security spending. However, like previous finance ministers, he has given continuity to pet projects of populist nature: continuing the federal constituency development fund under a different name and governance structure but increasing its budget to Rs40 million (making lawmakers project managers as well), spreading subsidies and grants too thin across too many sectors and programs, and open-ended loan waiver for small farmers and loan provisions based on educational certificates, among others.The failure to notably depart from this nature of budget-making and setting of priorities (usually prone to spending inefficiencies) is an example of opportunities squandered by a finance minister from a party with such a strong electoral mandate.

Third, a major disappointment is the lack of a credible reform plan to reinvigorate the private sector so that industrial production rises above the peak reached around 1997. The business community is disappointed by the singular focus on raising revenue as opposed to robust economic planning and accelerating industrial activities by rolling out time-bound reform plans in key strategic sectors. The finance minister does not have a good rapport with the private sector—at times for good because he is against inefficient private operations but at times bad because of his communism-inclined ideology that sees private sector as revenue leakers and rent-seekers only. Furthermore, the budget lacks a viable implementation plan, which raises suspicion over its timely execution (note that the government expects just 70 percent of planned capital budget to be actually spent in FY2018).

Fourth, if the government fails to meet the revenue target in addition to securing projected foreign grants and loans, then there is a likelihood of deterioration of fiscal and overall macroeconomic balance. Revenue growth target of over 30 percent is too ambitious when considering business-as-usual revenue administration operations and marginal tinkering of import tariff on some non-essential items. The fact that GDP growth of 8 percent itself is overly ambitious and the private sector find themselves less enthused than they were before the budget was unveiled means that it will be very challenging to meet the revenue target. Additionally, fiscal deficit is estimated to be about 7 percent of the GDP in FY2018 and is projected to be around 10 percent of the GDP in FY2019, which means that the government will heavily borrow internally (net internal borrowing is about 4 percent of GDP already), exacerbating interest rate volatility, inflationary pressures, current account deficit, outstanding public debt and crowing out of the private sector. Net foreign borrowing is projected to jump over 6 percent of the GDP (up from about 1.5 percent of the GDP in FY2018), which again is difficult to achieve with current trend of budget execution. Note that out interest payment to service debt is already excessively high (1 percent of the GDP).

In a nutshell, the budget is a good expenditure and revenue plan under normal times. However, given the sizable electoral mandate and strong backing for the prime minster, this budget is more a case of squandered opportunities than setting a base year for evaluation in the coming years.

Sapkota is an economist