Nepali Times
The fallacy of large numbers


The budget season is upon us and like every year, the collective national imagination is gripped with images of the finance minister cooking up a concoction that will please everybody.

The ingredients-scholarships for students, a raise for civil servants, tax relief for businessmen and traders, special rehabilitation packages for the families of martyrs, roads and bridges for remote districts and the mandatory increase in expenditure for education, health and agriculture-are the same but the expectations from the budget are palpably higher this year.

This is not only because the budget is being presented by the peoples' representatives after a three-year hiatus but the cessation of Maoist violence, many feel, offers an opportunity to accelerate investment in rural areas.

These expectations, as well as the national affinity with large numbers in the budget are captured amply in the 'model budgets' being forwarded from various quarters. The independent National Council for Economic and Development proposes a Rs142 billion budget while the CPN-UML's Planning and Policy Coordination Division, led by one of the shadow finance ministers Bharat Mohan Adhikary feels Rs150 billion to be the more appropriate figure for a 'people's budget'.

These numbers are at least 30 percent higher than what the government has been able to spend in the current fiscal year. But, the country has turned a major corner politically and a peace dividend through the budget is perhaps deserved. An expansionary budget loaded with populist programs, however, is a risky way to deliver this dividend.

Not only does such a budget jeopardise the already precarious fiscal situation but in its zeal to 'scale up', it is very likely that the government will let in a lot of projects with dubious quality and justification or projects that would normally not be undertaken during years of fiscal austerity.

Budget planning and analyses in Nepal typically start with an expenditure target, proceed with a rueful commentary on the weak revenue effort and the limit on domestic borrowing and end by pointing out the centrality of foreign aid in filling the gap between resources and the proposed expenditure.

No surprises then that the primary objective of the finance minister in the run up to the budget becomes the maximisation of aid commitments. Two important lessons of the past should not be forgotten. First, boosting public investment programs, particularly through borrowed money, might actually narrow the available space for private investment which is infinitely more efficient. Second, using aid commitments from donors to bolster the spending portfolio is pointless because we are constrained not by the scarcity of donor funds but by our inability to spend what's already available.

It is true, however, that the present government needs to play a more aggressive role in the provision of social services and the financing of resettlement and rehabilitation. But even from this perspective, an overly expansionary budget does not make sense.

If there is one enduring positive to come out of the most recent spate of reforms in Nepal, it is the development and deepening implementation of the medium term expenditure framework (MTEF), a tool to plan and prioritize spending in a multi-year framework. MTEF has been the cornerstone of fiscal stability since 2002. Not only did it help thwart pressures to make unreasonable increases in security expenditure but it also enabled the government to protect the most pro-poor expenditure headings.

This was made possible largely by the prioritisation framework embedded within the MTEF which ensured that even during episodes of severe revenue shortfalls, there was sufficient cash (saved from the pruning of lower priority activities) available for the highest priority projects.

The experience during Nepal's democratic nineties shows that short-lived governments are keen to start new projects rather than giving continuity to the ongoing ones. Given that the government's spending packages for the last few years already contain the highest priority projects with significant rural orientation, it is important to remember that any marginal project that is added to the portfolio is actually of a lower priority than those that are already in there.

Additionally, the expenditure shortfall, the difference between the budgeted expenditure and actual expenditure, in the last three years has averaged about 20 percent and has been driven largely by capital expenditure. Again, this shortfall represents underperformance of the highest priority projects and reflects implementation setbacks suffered due to conflict among other things. So essentially, if the budget implementation were to improve, a maximum of 20 percent increase in actual expenditure could be realized without even increasing the budget.

What the revolutionary budget needs, therefore, is not a double digit increase in the promised expenditure through new projects but revolutionary strategies on how to spend what is already being spent more efficiently and effectively.

Violating the prioritisation framework that exists presently under the MTEF to undertake an ambitious expansion would be tantamount to opening the floodgates and bringing back the era of the 1990s when successive governments competed to overload the budget with some promising to build bridges in places that had no rivers and others proposing to build roads that already existed.

(11 JAN 2013 - 17 JAN 2013)