Measuring the country’s 10-year budget trend

A new budget is set to be released in under four weeks now. But behind these budget sheets of the last 10 years lies a deeper question: how has a federal Nepal chosen to spend its money—and what does that say about the kind of country it’s trying to become?

Drawing from ten years of budget data, this analysis dissects how public funds have been distributed across government functions, revealing the evolving shape of the state—what it protects, what it invests in, and what it quietly sidelines.

A decade of rising budget trends 
Over the decade, the usual practice has been to introduce an expanding budget, with occasional [undesired] contractions—one in 2020/21, another in 2023/24.

In the third quarter of 2019/20, Covid-19 showed up prompting a nationwide lockdown and halt of economic activities. On one hand, the government directed its resources to battle the unwarranted emergency while having to provide tax relief on the other. As a result, the budget contracted by 4%.

Another contraction happened in 2023/24. Speaking at a recent public event, then-Finance Minister Dr Prakash Sharan Mahat rationalised budget contraction during his tenure expressing concerns over the budget’s sustainability, stating that the budget has been driven by populist bandwagon rather than ‘pragmatic’ deliberations.

The biggest jump happened in 2015/16 when the budget surged by 33%, driven largely by the need to address the aftereffects of the then devastating earthquake. 11% of the budget was allocated to reconstruction and rehabilitation [See the graph below].

10-year budget allocation and growth rate

 

Despite these fluctuations, the broader trend has been toward larger budgets with consistent yearly deficits. While a larger budget does not necessarily mean progress, a deficit is often necessary due to essential expenditures exceeding revenue.

To finance the growing deficits, the country’s treasury has largely relied on public borrowing. As of 2023/24, the public debt has surged to NRs 2433.2 billion in 2023/24 from NRs 544.47 billion in 2014/15, a growth of 300%, while the total public debt-GDP ratio has increased from 25.4% to 42.7 %. Additionally, a large external debt and depreciation of the home currency will make the debt repayment expensive.

Ambitious allocation, mid-year realisation

The initial budget allocation is often set with an ambitious tone but also often decried as unrealistic; however, as the mid-year review kicks in, the size faces reduction. This has continued since 2014/15, happening at 8% to 30%. The revenue target revision has ranged between 1% and 26% over the decade.

This fiscal year too the budget was slashed from NRs 1.86 trillion to NRs 1.69 trillion as the government failed to meet expenditure and revenue targets. The expenditure and revenue targets were reduced by 9% and 6.9%, respectively.

A trend of slashing the budget every year casts doubts on the competency, intentions and credibility of the finance ministry, finance minister and the planning commission—more broadly, the entire political establishment leading the country in the period. It also points towards a lack of pragmatism during budget formulation whilst allocating an ambitious budget to programmes that raise concerns on the sustainability of the budget.

The drastic increase in budget allocation to the social security fund, thanks to continued populist policies despite stagnant revenues and yearly budget allocation to utterly uncertain projects, such as Nijgadh International Airport, are a few instances of a lack of fiscal discipline.

Moreover, this practice of ‘ambitious allocation and mid-year realisation’ has severely harmed the country’s economy by fostering a sense of despair among the public. Economy heavily relies on the confidence of its people and businesses, which an unrealistic, politically driven budget inflation has steadily eroded on a yearly basis.

Year	Total Budget (in billions)	Revised Budget (in billions)	Budget Cut (In %)
2013/14	517.2	449.9	13
2014/15	618.1	522.6	15
2015/16	819.46	701.2	14
2016/17	1,048.90	935.9	11
2017/18	1,278.99	1048.8	18
2018/19	1,315.16	1208.4	8
2019/20	1,532.97	1073.4	30
2020/21	1,474.64	1266.3	14
2021/22	1,647.57	1447.5	12
2022/23	1,793.83	1505.0	16
2023/24	1,751.31	1530.4	13

Higher administrative expenses across categories

Over the last 10-year period, general public services and economic affairs have dominated the budget, together accounting for 72%.

General public services include payments to government agencies and staff, representing a form of recurrent expenditure. The other functional categories also encompasses recurrent expenditure, which are necessary for sustaining respective operations. While the higher administrative expense makes sense in general public services, the same trend within remaining categories point to a larger problem.

Share of functions in all 10 annual budgets

Excessive absorption of the national budget by the government apparatuses means even well-intentioned budgetary reforms can only do little—without a fundamental overhaul of the government apparatus itself.

For instance, the agriculture, forestry, fishing and hunting sub-category under economic affairs has a recurrent expenditure of NRs 363.7 billion and a capital expenditure of NRs 249.4 billion—which accounts for 18% and 12% of the total expenditure under economic affairs in ten years. The agriculture sector is closely tied to the country’s growth potential, which needs investment in assets and infrastructure to uplift and modernise the sector and increase its productivity. Yet, despite commitment to modernise agriculture for self-sufficiency and export  growth, most of its allocation goes to operations. Same goes with education sector where a substantial chunk goes on to paying salaries, leaving little for improving classrooms.

Functions	Compounded Annual Growth Rate (2014/15 to 2023/24)
General Public Services	12%
Defence	6%
Public Order	8%
Economic Affairs	9%
Environment Protection	-2%
Housing	11%
Health	11%
Recreation and Culture	5%
Education	9%
Social Security	30%

Then comes the social security category, which has observed the highest allocation growth rate, 30% since 2014/15.

In the first five years, total allocation in the category was only NRs 162.7 billion—1% of the total budget—which increased to NRs 781.9 billion in the latter half of the decade—accounting for 6%.    

Notably, the share of allocation for social security funds in the budget jumped from 7% in 2020/21 to 12% in 2021/22. In the two fiscal years, the social security allowance for elderly citizens, who make up 10% of the total population, was raised to NRs 3,000 and then to NRs 4,000. Most see it as vote-bank policy. 

Experts call for restructuring the scheme, which is currently universal, along with consolidating different schemes under one umbrella to cater to only those who need such economic support. Otherwise, an increasing ageing population could prove social security unsustainable. Certain measures are expected in the upcoming budget.

Share of environment protection in the total budget

One of the most pressing issues in recent time, the environment protection category has experienced a decline in budget allocation and its share over the decade. In the initial five years, its share was just 2%, which further decreased to less than 1% in the latter half.

The total budget allocated to this category is negligible amid the urgency to have better systems and preparedness for disaster reduction, pollution control, and biodiversity conservation. Wildfire has become a recurring calamity quickly turning into disasters in the absence of prevention and control, devastating vital economic resources like forests, resulting in loss of human lives and biodiversity, risking carbon stock and causing air pollution in urban conglomerates. 

For instance, 1,558 wildfires were recorded between March 1 and April 9, which claimed seven lives before rain could bring mercy. Simultaneously, Kathmandu’s air was unbreathable as pollution levels reached 353 AQI levels in the first ten days of April this year, posing respiratory hazards to all age groups and risking the lives of those with prior complications.

Similarly, health and education, the two most essential services, have seen compounded growth of 11% and 9% respectively between 2014/15 and 2023/24. Health share in the budget saw a notable surge from 5% in 2019/20 to 9% in 2021/22 as a response to the unfamiliar fatal viral disease.

While the quality of education, its accessibility and dropout rate are concerning, the pandemic exposed flaws in the country’s public health system—hospitals were overwhelmed and lacked essential medical supplies, including medicines and protective gear, to navigate through the emergency.

For optimal development outcomes, the World Bank recommends an ideal health and education budget allocation of 6 to 10 percent and 15 to 20 percent, respectively. While the health budget remains within the ideal range, the education budget has decreased to 11% of the total budget in recent years.

This is concerning as currently the economy needs a skilled and educated labour force. Nepal Labour Force Survey 2017/18 shows that 80% of the country’s workforce have attained up to secondary-level education only. A low level of formal educational attainment has many major economic implications, such as low productivity and limited skills and limited access to better-paying jobs.

Higher investment is, thus, critical in education—particularly in addressing challenges such as exorbitant fees in urban areas, and persistent urban-rural education divide.

A government struggling to spend

The actual expenditure has grown underwhelmingly—less than 1%—in the last decade. The expenditure growth rate, which was 29% on average from 2014/15 to 2017/18, has steeply declined to 4% on average from 2018/19 to 2022/23. Total recurrent expenditure increased by 15% on average over the 10 years. 

The general public services function has the highest 10-year total expenditure (excluding financial management), followed by economic activities—NRs 3,415.6 and NRs 2,054, respectively.

Trend in growth of actual expenditure

Social security expenditure has the highest growth rate of 19% over the decade. This is followed by general public services growing by 10%, defence by 1% and public order by 3%. All other functions have observed a decline in public expenditure, including economic activity by 1% and environmental protection by a staggering 14%.

The general public services category has the highest share, as it accounts for payments to government agencies and staff. This also means that the recurrent expenditure is the highest in this function. 

However, recurrent expenditure is also high in other functions, while capital expenditure is comparatively inadequate and is spent irregularly. The ten-year total recurrent expenditure is 57% of the total budget, whereas the capital expenditure is only 23%. Driven by the fear of the budget freezing, capital expenditure usually spikes in the last quarter of the fiscal year.

Trend of gaps between revenue forecasts and actual revenue

On the revenue side too, the government has increasingly overestimated its initial collection throughout the decade, focusing more on adjusting tax rates than on broadening the revenue base through structural reforms. The difference between the estimated and actual revenue has increased by 41%, indicating a widening gap—with average revenue projection estimated at NRs 864.3 billion against actual collection of NRs 750 billion.

Despite that, the revenue receipts have increased by 9% over the decade, partly thanks to the country's high tax rates which is higher than other South Asian countries. Nepal has the highest average tax rate, which is 35% for individuals earning between two million to four million. 

The same income is taxed at 25% in Bhutan, 11.6% in Maldives, 30% in Pakistan, 20% in Bangladesh and 21.7% in India. Another example is the country’s VAT, which has remained standard for all products and services over its 25 years of implementation. In contrast, South Asian economies have adopted a multi-tiered tax system with varying rates for different goods and services to better meet consumer needs.

Similarly, although the country’s tax-to-GDP ratio is a quarter (25.5%) of the total GDP—considered relatively higher by global and regional standards, the country’s treasury has frequently fallen short on meeting revenue targets throughout the decade. One critical factor is the significantly large size of the informal economy—around 85% of the total employed labour force is engaged in the informal sector, shows the Nepal Labor Force Survey 2017/18, while the size of the informal economy is as big as aaround 40% of the GDP, estimates a study. 

A 10-year review of the budget shows that the country’s budget is in dire need of a structural overhaul and a complete departure from the current trend of populism towards fiscal discipline and formalisation.