Increasing financial dependence of provinces and municipalities

Just a few days ago, the federal government has brought the annual budget for the financial year 2081/82 . Likewise, all the seven state governments have also released their annual budgets.

753 local governments (municipalities) have brought the budget on June 10. There is a constitutional and legal provision that the union must bring the annual budget of their respective governments on June 15, the state on June 1 and all local levels on June 10 of every financial year.

In the context of federal Nepal, the major revenue sources (customs, excise, VAT, income tax) among the three levels (Union, Province and Palik) are under the authority of the Union (about 85 percent of the total national revenue), and the provinces and Paliks mainly receive various funds from the upper level. They have been depending on financial transfers.

Provinces receive equalization, conditional, supplementary, and special grants from the federal government and receive revenue sharing from various taxes and natural resources, while municipalities also receive similar grants and revenue sharing from the federal and provincial governments.

In this way, since their tax authority is limited, the state's annual income, revenue collection, budget allocation and overall economic planning depend to a large extent on the budget of the higher governments.

Because of this, it becomes important to study the trend of financial federalism in the budgets of the Union and the states that were announced a few days ago.

The trend of financial federalism

Let's talk about subsidies first. Among the grants that the provinces and municipalities receive from the union, the most important grants are financial equalization and conditional grants. The equalization grant has the purpose of reducing the horizontal disparity of resources among the provincial municipalities .

Such equalization grant received from the association was about 1 trillion 61 billion in the financial year 2079/80, and in 080/81 it decreased by 10 percent to 1 trillion 46 billion . Even in the current financial year 081/82, 1 trillion 48 billion remained at the same level as last year .

For the second conditional grant, the association gives such grants through provinces and municipalities to achieve their national goals, programs, objectives and commitments. However, its ratio remains unbalanced and may affect the financial autonomy of the lower level units.

The 2 trillion 40 billion rupees allocated by the association for provinces and municipalities in 079/80 decreased by only 6 percent, remaining 2 trillion 27 billion rupees in 080/81, while it is 2 trillion 34 billion rupees for the current financial year.

In this way, the reduction of the equalization budget compared to the conditional grants in different financial years shows that the financial autonomy of the lower level is shrinking.

Third, complementary grants given by the Union for regional and local infrastructure projects. It remains stable at about 13 billion in the same financial year mentioned. In the same way, special grants for various social development and public participation programs have remained at 12-13 billion in the same financial year. To break the story, supplementary and special grant is a kind of conditional grant. Looking at these grants with small amounts in practice, it seems that the governments with a conscious and active leadership who can confirm the justification of their plans/projects are receiving this grant from the Union. However, provinces-municipalities that have less skills including planning, have not been able to benefit from this subsidy.

Fourthly, the financial transfers obtained from the mutual distribution of common taxes (VAT, excise duty and royalty of natural resources) between the Union-Province and the municipality, which directly affect their internal revenue of the provinces and municipalities. Its objective is to reduce the vertical economic imbalance between the three tiers, which leads to major revenue sources and the handling of taxes being with the Union Government.

In the year 2079/80, it increased by 6 percent from 1 trillion 63 billion and remained at 1 trillion 73 billion in 80/81, while in the current fiscal year, compared to last year, it decreased by 8 percent to a total of 1 trillion 59 billion .

The laxity seen in the national economy, the low revenue receipt compared to the estimate, all of these reasons seem to have an impact on the revenue receipt of the lower units, as it will reduce the annual income of the provinces and municipalities, the size of their budget will be reduced .

The recent public provincial governments' budgets also confirm this . In the current year, the budget size of all provinces except Bagmati and Sudurpaschim has decreased . It is certain that the budget of the municipalities will decrease further in the coming financial year.

its impact

In this way, the equalization subsidy which is decreasing is sure to bring two side effects. First, the equalization subsidy is the constitutional right of the province-municipalities, thus the reduction of the portion of this subsidy means the reduction of the constitutional rights of the lower level .

In addition, it will also hurt the objective (for equity) of minimizing disparities in natural and other resources between different regional, local units. At the same time, the reduction of the equalization subsidy received by the provinces and municipalities from the federal government is not in accordance with the constitutional objective of a socialist-oriented economy as a whole .

The second effect is the uncertainty of resources it brings. In the last fiscal year alone, provinces and municipalities received 25 percent less of the fourth installment of the equalization grant . On the one hand, we have tried to make public finance management predictable, permanent and disciplined through the medium-term expenditure structure, on the other hand, there have been activities that affect the policy order of the lower units.

Similarly, the gradual increase in the share of conditional grants received from the federal government for provinces and municipalities will have a serious impact on their autonomy related to the construction of overall economic and social plans. It cannot be denied from the conflict it can bring. Another aspect related to this is that in developed countries, the share of conditional grants is low, the sub-national units of those countries are able to tailor plans according to their needs and objectives in policy and institutional terms, while underdeveloped countries like us, lacking institutional development, where financial governance The risk is high, conditional grants seem fruitful for such countries . Therefore, a balance between these two is necessary .

If we fail to properly link conditional grants with performance, it may increase the financial dependency of the grassroots and also increase unresponsiveness towards public spending.

Another, related to the distribution of various revenues received by the province and municipality. Union collects revenue but shares a certain share with provinces and municipalities. However, the overall economic and monetary policy adopted by the federal level will have an impact on those revenues and will eventually affect the internal dimensions of the lower level, so it seems to be more sensitive.

It seems that it can increase the budget deficit of the lower level governments, create public debt and liability . In addition, since current expenditures are mostly fixed, there is a risk that reduced revenue sharing could reduce the capital expenditures of provinces and municipalities, which has an impact on economic productivity and job creation.

opinion-suggestions To break the story, financial federalism has to face similar problems in a developing federal system like ours, which receives public revenue based on imports, has a risk of financial governance, and has sponsored rights from top to bottom . However, as far as possible, the Union should not reduce the equalization grant compared to the conditional grant .

It is not only the autonomy of the lower level planning, but the plan is not created according to the regional and local needs, those units are limited to the implementation unit of the central plans, there can be no innovation related to the local planning .

Another, lower-level source should be ensured, the tendency to ad-hoc cuts, not making payments on time will have a negative impact on their public spending . Since the public net expenditure of the provinces and municipalities is better than that of the Union, it does not seem appropriate to disrupt at the lower level where there is no political instability.

In the same way, it seems that the provinces and municipalities should increase their revenue mobilization appropriately. Measures such as identification of new tax-non-tax subjects, increasing the share of internal revenue by expanding the scope, and reducing financial dependence as much as possible are appropriate. Similarly, the available resources should be increased investment in the economic sector to increase productivity . It helps to increase the internal revenue . In addition, good governance and financial discipline help to mobilize private investment and also increase the size of regional and local economies.

(Mishra teaches at Kathmandu University.)