In March of 2018, The Kathmandu Post reported that austerity measures are to be introduced to prevent the widening of the government budget deficit. The government budget position is the difference between government spending and taxation revenue received in a given financial year. Within the last 10 months of 2017-2018 the government budget deficit inflated to 138.23 billion NPR from 0.51 billion NPR in the corresponding period of the previous calendar year. Which accounted for 6.4% of GDP in 2017. This indicates that government spending is exceeding taxation revenue greatly. A year-on-year deficit will increase the national debt; currently equivalent to 26.8% of GDP and this will enlarge further due to interest rate charges.
The reasoning behind such an enlargement in the deficit is reported to be due to higher recurrent expenditure, errors in the calculation of savings in the previous fiscal year and low mobilisation of foreign grants (52% drop in the utilisation of foreign grants).
It is unfortunate that such an economically important and policy influencing figure can be swathed so greatly by miscalculation. But in conjunction, this erroneous calculation can be connected to inordinate corruption that takes place within the offices of the government of Nepal. Corruption is the appropriation of public resources for personal gain and other private purposes via the abuse of official power and due to its illegality is extremely hard to measure. Tackling corruption will be imperative to lift the country to development, as corruption within institutions deters investment and creates inefficiency.
Austerity measures are being taken will focus on a cut in only unnecessary government spending, such as reducing the number of foreign trips. According to Finance Secretary Shankar Prasad Adhikari further cuts to spending include the “purchase of vehicles, fuel and office materials including computers”.
Although there is little said about any proposed increases in taxation to help narrow the deficit. With over 70% of the economically active population being involved in the informal economy, there is a large amount of revenue going untaxed. Steps to formalise some of these industries would source vast amounts of extra taxation revenue and would provide the added benefit of great official oversight.
Conversely, in the short-term such a deficit is required to stimulate growth both economically and in terms of development. Government spending on infrastructure projects and education will boost supply in Nepal in the long-run could benefit the country. Yet Nepal will need to refocus its spending in the supply-side areas in order to gain the long-term benefits, and in the meantime use austerity to handle the growing deficit.