The budget for FY 2021/22 is an allusion to an ideal welfare-state. The government has undertaken the responsibility to protect and promote the social and economic wellbeing of the Nepalese citizens by introducing new programs and expanding many previous ones. The benefits are spread across all sectors, and all age groups – from increment in social security, salaries, and old-age pension to concessions on business loans, student loans and accessories, and transport of agricultural products, to tax and fees waiver; there is something for everyone.
Consequently, the budget has increased by 11.72 percent. However, given the adverse impact of COVID-19 for more than a year now, the Nepalese economy is in no position to finance these new expenses. Despite the abysmal state, the consideration and generosity of the government in preference to austerity can be attributable to the upcoming elections in November 2021, and thus can be deemed as populist.
These new promises are bound to make the days ahead more challenging. How is the government going to fund the expenses?
Expenses aimed at combating the pandemic have increased, whereas the revenues have declined. According to the World Bank, the tax revenue declined by 2.1 percent in the current fiscal year as trade, consumption, and corporate income tax dropped. Additionally, the collection of non-tax revenues was not satisfactory with the poor state of different economic sectors, especially tourism. While the government has expected a 2.5 percent increase in revenue in the current fiscal year, with the outbreak of the second wave of COVID-19 and yet another lockdown, the revenue performance is not likely to improve anytime soon.
This implies that the government needs to borrow enormously to honor its promises. Nepal has already experienced a historic rise in debt in the past few years. In the first half of FY 2021/22 alone, the public debt increased by 8.2 percent and now stands at NPR. 1.50 trillion. By the year 2022, the World Bank has projected the debt levels to rise to around 46.7 percent of Nepal’s GDP. A few experts have opined that Nepal is fine as long as it remains below 60%. However, this is true only when debts are being invested in productive sectors which will assist Nepal in servicing them in future. However, the current use of debt in health emergencies, and distribution of welfare programs like pension, social security, salaries, and the likes implies that the burden of debt repayment is going to be shifted towards the taxpayers in its entirety. Thus, after the economy revives, it is apparent that the private sector will experience an increment in tax rates.
Despite the negatives, debt-financing is one of the most attractive alternatives for the current government as its expenses will be financed on a ‘pay-as-you-go’ basis. The government knows that the burden of debt servicing will fall on the next government that holds office. And the next government that holds office is going to think the same. The initiation of populist agendas today is going to create a vicious loop – robbing Peter to pay Paul.
Currently, the concentration of the youth population in Nepal is high. The earnings of the high number of youths can be taxed to repay debts or finance the welfare programs directly. However, in future, as these youths retire and the population of the new young generation becomes slimmer, there will be a big crisis on our hands. As Margaret Thatcher put it, “The problem with socialism is that you eventually run out of other people’s money.”
The populist agendas in the budget are thus a seed for disaster and no matter how appealing they sound, Nepal would be better off without them. Being a country with limited resources, Nepal should instead seek alternatives that will serve the purpose whilst not adding any financial distress to the future generation.
For instance, introducing social security funds or increasing the old-age pension was redundant in the existence of absolutely efficient institutions like the Citizen Investment Trust (CIT). Encouraging more people to join the CIT would not just have saved a significant amount of money for the government but also would have provided more choices to the citizens regarding how they wish to plan their retirement. Likewise, instead of the government providing student loans, incentivizing banks and financial institutions to introduce schemes for students or listing education on Priority Sector Lending Program (PSLP) could have been an alternative. Similarly, policy support to businesses in the form of tax waivers and reduction of compliance and cost of filing taxes, registering an enterprise, and cross-border trade over concessional loans would provide huge respite to the enterprises who haven’t been able to conduct economic activities to repay the loans.
If the government truly acts as a facilitator and allows the private sector and civil society to perform what they are best at, the government can do away with many of the plans and programs. This would indeed be a more sustainable and efficient way to address the problems of the general people.