Big budget, big promises
Finance Minister Bishnu Prasad Poudel presented the 2021-2022 budget on May 29 by ordinance, due to the dissolution of the federal parliament and the announcement of new elections scheduled for November. The inflated budget includes big promises on spending, revenue mobilization and deficit financing that are difficult to implement if elections are held, also without fully immunizing a significant portion of the population.
Nevertheless, the Minister of Finance has rightly prioritized the most urgent challenge at the moment, namely testing, tracing, treatment, vaccination and modernization of health infrastructure. The strategy appears to be the stabilization and resumption of economic activities by addressing health challenges, pursuing existing projects and relief measures for individuals and businesses, and supporting aggregate demand as well as the electoral base by increasing the allocations.
Large expenditure, large deficit
The total expenditure for 2021-2022 stands at Rs 1.650 billion, 30.1% higher than the revised estimate for 2020-2021. Operating and capital expenditure allocations represent 61 percent and 26 percent of the budget. Notably, the government has started reporting recurrent and capital grants to subnational governments (NGSs) separately from the next fiscal year. This gives a better picture of actual investment spending, as previously the government argued that reported investment spending underestimates the actual figure, as some budget transfers recorded under recurrent spending are used to finance investment projects. investment by NSEs.
Total federal revenue (share of federal government revenue plus foreign grants) is estimated at Rs 1.09 billion. The growth target for revenue mobilization is set at 20%. Taking into account federal government spending and its share of revenue in total revenue mobilization, the budget deficit stands at Rs 559.3 billion, which is to be financed by foreign loans and domestic borrowing. The government expects foreign aid (grants and loans) to cover about a quarter of its spending needs. Overall, the budget deficit is expected to increase to around 7% of GDP in 2021-2022, from around 5% in 2020-2021.
About 45.1 percent of the planned recurrent budget is allocated to NSEs in the form of recurring fiscal transfers and unconditional recurring grants. The other important item is social security, which absorbs about a quarter of the recurrent budget. Social security includes allowances, social assistance (scholarship; rescue, relief and rehabilitation, medical assistance); and employee social benefits (retirement and invalidity allowances, bonuses linked to retirees and medical assistance). The 33 per cent increase in allowances, including for those aged 70 and over, significantly increased the allowance under this heading by 50 per cent. Meanwhile, about 58 percent of the planned investment budget goes to civil works and 14 percent in the form of investment grants to NSEs.
The budget was rolled out as the country finds itself at a critical juncture. In fact, economic activities are estimated to have contracted by 2.1% in 2019-2020 and will likely increase by around 2% in 2020-21, most of which is due to a base effect anyway. Increasing social security allowances, free immunization allowance, maintaining the refinancing facility and business continuity funding, and income tax relief for individuals and businesses are some of the notable features of the budget.
Without determining the resources, it is also redistributive in nature, aiming in particular to influence the electoral base ahead of the planned federal legislative elections. A larger increase in federal spending (30.1%) than an increase in federal revenue (14.5%) indicates a difficult fiscal management task in the future. In this context, there are six specific macroeconomic lessons.
First, given that the budget deficit widens and the stock of public debt and interest payments increase, it would have been good to anchor expenditure and revenue on medium-term expenditure and revenue frameworks. . The stock of public debt is also growing rapidly, particularly after 2014-15, reaching around 37% of GDP in 2019-20, up from 22% just five years ago. It is also necessary to determine to what extent this budget falls within the framework of the 15th five-year plan and to what extent it includes the projects listed in the National Project Bank.
Second, the target of 20% revenue mobilization growth from the revised estimate for 2020-2021 is a bit ambitious at the moment. In fact, income growth has consistently been below 20% since 2016. Raising excise duties on “sin” products and reshuffling administrative reforms may not bring many benefits without an increase in the base. of taxpayers and better compliance. Large-scale one-off tax exemptions are not helpful.
Third, most of the planned foreign loans might not be realized if the project implementation is not radically changed. Compared to the revised estimate for 2020-2021, foreign lending is expected to increase by 87%, which is unrealistic given the low budget execution capacity and the fact that if elections are held in November , this will disrupt development activities. Meanwhile, domestic borrowing is expected to exceed 5% of GDP. Large domestic borrowing may seem acceptable, given the abundant liquidity of the banking system and the lack of investment opportunities for pension funds and institutional investors. However, as the situation normalizes and corporate capacity utilization improves along with demand for personal and corporate credit, there may be pressure on liquidity, causing the interbank rate to rise and then increase. retail interest rates.
Fourth, the projection of foreign subsidies looks ambitious as the sources of subsidies dry up. For example, the Asian Development Bank and the World Bank now only provide loans, although TA is primarily a grant. And that most bilateral donors might not increase aid allocations given their priority to boosting national economies ravaged by the pandemic. The government expects to receive a 134% growth in foreign subsidies from the revised 2020-2021 estimate, which is unrealistic.
Fifth, the non-contributory old-age allowance, a sort of guaranteed universal basic income, hopes to support individual or household consumption demand. However, it also directly increases the government’s accountability, as it must be maintained for years to come. Normally, such programs are reasonable when the economic pie grows and there are sufficient resources to fund populist programs. Increasing the responsibility of social protection by borrowing or reducing capital expenditure is not a good policy.
Finally, the real GDP growth target of 6.5% of GDP may be a bit optimistic, given that the pandemic will continue to affect lives, livelihoods and economic activities over the next year. . There is no likelihood of a sudden V-shaped recovery. Agricultural production growth could be higher than in 2020-2021 with a forecast of a normal monsoon and the availability of inputs such as chemical fertilizers. . Industrial production may not fully recover as capacity utilization will not increase significantly in a context of sluggish demand and investment. Travel and tourism activities are unlikely to recover anytime soon without adequate health measures and mass vaccination. Election-related spending, if it occurs, will increase consumer demand. Overall, GDP growth could hover around 4 to 5% in 2021-2022.