Public Finance and the Budget of Nepal

What public finance covers

Public finance studies how governments raise revenue, spend, borrow and manage debt. The budget is the annual estimate of revenue and expenditure. Nepal's fiscal year runs from Shrawan 1 to the end of Ashadh (mid-July to mid-July).

Revenue

• Tax revenue: compulsory payments without a direct return.
• Non-tax revenue: fees, fines, dividends, royalties, interest and similar receipts.
• Grants: foreign and inter-governmental grants are shown separately from revenue.

Expenditure

Nepal's budget classifies spending under three heads:

1. Recurrent expenditure (chalu kharcha): salaries, operating costs, grants, interest.
2. Capital expenditure (punjigat kharcha): creation of assets such as roads and buildings.
3. Financing (bittiya byabastha): repayment of loan principal and investment in shares and loans.

Deficit concepts

• Budget (fiscal) deficit = total expenditure - (revenue + grants). It is the gap that must be met by borrowing.
• Revenue deficit = recurrent expenditure - revenue.
• Primary deficit = fiscal deficit - interest payments.

Example: revenue 1,000, grants 50, recurrent expenditure 900 and capital expenditure 300 give a fiscal deficit of 1,200 - 1,050 = 150. If the fiscal deficit is 500 and interest payments are 120, the primary deficit is 380.

Public debt is the stock of government borrowing. Internal debt is raised inside the country through treasury bills, development bonds and savings bonds; external debt is borrowed from foreign governments and institutions.

Constitutional rules for the federal budget

Part 10 of the Constitution of Nepal sets the federal financial procedure:

• Article 115: no tax may be levied and no loan raised except in accordance with law.
• Article 116: government revenues, loans and loan repayments are credited to the Federal Consolidated Fund (sanghiya sanchit kosh).
• Article 118: certain expenditure, such as the remuneration of the President and judges of the Supreme Court and debt charges, is charged on the Consolidated Fund and does not need the approval of the Federal Parliament.
• Article 119: the Finance Minister presents the annual estimate of revenue and expenditure before a joint sitting of both Houses of the Federal Parliament on Jestha 15 every year.
• Article 122: a vote on account (advance expenditure) may not exceed one-third of the estimated expenditure for the year.
• Article 124: a Federal Contingency Fund may be created for unforeseen expenditure.

Budget cycle

1. Formulation: resource estimate, ceilings and ministry proposals, led by the Ministry of Finance and the National Planning Commission.
2. Legislation: presentation in Parliament, debate and passing of the Appropriation Bill.
3. Implementation: authorisation, release and spending.
4. Audit and evaluation: final audit by the Auditor General (Article 241) and parliamentary scrutiny.

Fiscal federalism

Nepal has three levels of government: federal, provincial and local.

• Article 59: each level makes its own budget, but only the Government of Nepal may obtain foreign assistance and loans.
• Article 60: fiscal transfers are made on the recommendation of the National Natural Resources and Fiscal Commission (NNRFC), a constitutional body under Article 250.
• Under the Intergovernmental Fiscal Arrangement Act, 2074, VAT and internal excise duty are shared 70 percent federal, 15 percent provinces and 15 percent local levels. Natural-resource royalties are shared 50, 25 and 25 percent.
• Four grants flow downward: fiscal equalization, conditional, complementary and special grants.

Budget size, tax rates and debt totals change every year, so learn them from the latest budget speech with the fiscal year attached.

Exam pointers

• Federal budget date: Jestha 15, before a joint sitting of both Houses (Article 119).
• Vote on account limit: one-third of estimated expenditure (Article 122).
• Charged expenditure needs no vote of Parliament (Article 118).
• VAT and internal excise sharing: 70:15:15; royalties: 50:25:25.
• Foreign loans and aid: Government of Nepal only (Article 59).
• Direct taxes cannot be shifted; indirect taxes can.