How is national budget formulated?

A budget represents a country’s annual fiscal policy or planning, outlining how the government plans to carry out development activities in the upcoming year through its two main tools — government spending (expenditure) and the management of resources to sustain them (revenue, such as taxes and debts).

The budget also reflects the government’s priorities for the year, for instance, focusing on health and education over defence, and sets the direction for the country’s long-term development goals, such as capital-intensive infrastructures, poverty reduction programmes, nutrition programs for children and development of human capital through education, among others.

Naturally, political parties prioritise taking charge of the budget preparation process because it allows them to shape national priorities, fulfil their election promises, and demonstrate their vision and leadership in fiscal planning.

This leads to the question: How is the national budget formulated?

Nepal follows a structured budgeting process, with the national budget presented annually on Jestha 15 as mandated by Article 119 (3) of the Constitution. The budget system incorporates both top-down and bottom-up approaches.

Top-down approach

The budget process starts with forecasting the revenue sources and areas of expenses. 

To facilitate this, the government forms a national resource estimation committee, composed of the vice chairperson of the National Planning Commission (NPC) and representatives from relevant bodies such as the Ministry of Finance (MoF), the Nepal Rastra Bank (NRB), and the Financial Comptroller General Office (FCGO).

The committee conducts economic analysis by examining factors such as tax, foreign aid, grants, etc, while also identifying the priority sectors for spending their resources.

Once the revenue is estimated, the resource committee reviews the economic situation and sets a budget ceiling. For the upcoming budget, the NPC has set the expenditure ceiling at NRs 1.9 trillion, which is 12.4% more than the current revised budget.

A budget ceiling is a limit set on budget expenditure based on the priority sector and available resources. Some sectors may receive higher allocation, others comparatively low, depending on the priority.

However, the budget ceiling set is not always an absolute limit. For example, for FY 2024/25, the ceiling was NRs 1.8 trillion, but the actual budget exceeded the ceiling by around NRs 60 billion.

After the ceiling is set, the committee also creates budget guidelines for line ministries. Following the guidelines and sectoral limits set, line ministries are required to submit their budget proposal.

The ministries then transfer guidelines, proposals, and ceilings to various departments and agencies under them. The agencies subsequently formulate their business proposal based on guidelines and sectoral priorities. Once they formulate their budget, the proposals are submitted to their respective ministries.

These proposals can be renegotiated before the ministries compile and forward them to the MoF and the NPC for approval.

Bottom-up approach

District Coordination Committee (DCC), composed of nine local government elected representatives within each district, plays an intermediary role in national budget formulation [as well as implementation].

The NPC issues budget guidelines to DCC, which are then passed down to local governments, which organise a meeting composed of key stakeholders such as consumer groups, political leaders, activists and civil society, among others, to discuss plans and programmes.

Proposed plans are compiled and forwarded to the district council. These compiled proposals are examined and reviewed before forwarding them to the DCC.

The district-level body also holds workshops, meetings and consultations with elected representatives to identify district-wide concerns like regional hospitals, roads, and disaster preparedness. This encourages collaborative district-level planning by avoiding duplication or harmonising conflict in proposals from local governments, and increases chances of the district’s concerns getting attention in the national budget.

The final draft is reviewed and forwarded to the NPC and respective line ministries for approval and integration with the national plan.

After compilation of budgets from all line ministries, the MoF conducts meetings among the ministries to review, revise, and finalise the national budget. The NPC then reviews all proposed programs and checks for any discrepancies.

The draft is then shared with parliamentarians to review and raise concerns if any. Once the majority agrees and supports the budget, it is finalised for presentation. The finance minister is responsible for presenting the approved budget to the parliament.

The budget is further divided into three expenditure categories —

Recurrent expenditure is the budget allocated for the functioning of the government and the production of its services. For instance, payment for government operations, such as salaries and office expenses.

Capital expenditure is the budget allocated for building and renovating long-term assets. For instance, infrastructure construction, asset improvement, research and development.

Financial expenditure is the budget allocated for managing the government’s financial obligations. For instance, domestic and foreign loans, repayment of loans, etc.

The budget also outlines two main sources of government revenue—

Tax revenue is the money collected by the government from people and businesses as a legal obligation to pay. These revenues include direct taxes like income tax, corporate tax, etc, which are directly paid by individuals and businesses, and indirect taxes like VAT, customs duties, etc, which are levied on goods and services and passed on to the customers.

Another source of government revenue is non-tax revenue, which refers to money earned from sources other than taxes. These sources include charges, penalties, profit from a state-owned enterprise, rent from government-owned property, sales of assets, and foreign grants.

Though, government generates revenue from tax and non-tax sources, it may still face a budget deficit, which usually occurs when government spending exceeds revenue generated.

In the modern economy, a fiscal deficit isn’t necessarily bad but can be a strategic tool. The government can borrow loans or debts from domestic or external sources to stimulate the economy, invest in development, and support public welfare. However, if the deficit continues to rise, it can lead to accumulated debt, financial instability, and eventually to a debt trap.

Documents related to the budget—

To ensure transparency and accountability in fiscal planning, the government publishes several key documents alongside the annual budget. Each serves a specific purpose in detailing government plans, expenditures, revenues, and foreign assistance.

Budget Speech is delivered by the Finance Minister on Jestha 15 at the Parliament, outlining the government’s policy priorities, fiscal goals, and proposed estimates of revenue and expenditure for the year. It also includes progress reports from ministries, public enterprises, foreign assistance summaries, and the Economic Survey.

Red Book presents detailed estimates of government expenditures, both charged and appropriated, across all ministries. It also includes budget summaries, head-wise allocations, and annexes on gender-responsive and strategic sectoral allocations.

Charged expenditures are constitutionally mandated expenses that ensure the independence of high-level constitutional offices. They include salaries, benefits, and administrative costs for positions such as the Chief Justice and the Supreme Court judges, Speaker and Deputy Speaker, Auditor General, members of bodies like the Election Commission, National Human Rights Commission and Public Service Commission.

Appropriated expenditure is the amount approved by the Parliament to be withdrawn from the Federal Consolidated Fund for a fiscal year to cover operations of government institutions, including constitutional bodies and ministries, commissions and authorities, provincial and local governments, security bodies and development and infrastructure agencies as per an annual appropriation act. (For reference, Appropriation Bill, 2024). It includes recurrent, capital and financial arrangement expenditures, and grants to provincial and local governments.

Yellow Book offers a performance review of public enterprises, providing sector-wise analysis across industries such as services, finance, utilities and manufacturing, among others.

White Book compiles data on foreign-funded projects, including donor contributions, ministry-wise breakdowns, and summaries of bilateral and multilateral technical assistance. It serves as a key reference for tracking external development funding in the country.