While the country’s banking system data indicates that the sector is coming out of the quagmire it was in due to the lack of loanable funds, the government statistics on finance are ringing alarm bells. This calls for an immediate review and revision by the government in its budget followed by suitable interventions.
With the fiscal year now in the sixth month, the figures so far (as of December 21, 2022) show that the government has mobilized Rs 338.21 billion as tax and non-tax revenue compared to the recurrent expenditure of Rs 367.72 billion already incurred in the same period.
There are hopes that the tax collection will increase by the end of the second quarter (that is by January 14, 2023) when the businesses are scheduled to make advance payment of 50% of the taxes for their projected profits of the current fiscal year. Since the businesses have already paid 25% of such taxes at the end of the first quarter, they will now pay only remaining 25%. And the collections are not likely to be as planned.
Many indicators show that the businesses are not operating as well as they did last year. So, their expected profits are lower compared to the last year. Thus, the tax collection is going to fall short of the government’s projections.
Meanwhile, the government’s operating expenses aren’t going down unless a direct intervention is made which is unlikely to happen unless an intervention is made. This excess of current expenditure over revenue collection is a serious macroeconomic deficit that requires immediate attention. If addressed promptly, it could lead to the government defaulting on payments to its suppliers, social security payments, and even the salaries of government employees.
Under normal circumstances, the government reviews the budget after the first half of the year is over, typically in the 8th month. This is due to the time needed for the collection and processing of information. However, the current situation is not normal, and therefore the review must begin immediately and finalized by the end of the first half of the fiscal year. This will allow to take corrective actions at the beginning of the seventh month.
While reviewing the budget, the government should refrain from hiking taxes to increase revenue in order to meet expenses. Instead, the focus should be on cutting expenses. To do this, there are already two bases available. One is reducing the size of the federal government by closing down offices whose functions have already been transferred to the province and local governments.
The report of the Public Administration Review Commission led by Dr Dilli Raj Khanal serves as the second basis for trimming the expenses. According to the report, a number of boards, committees, and commissions that are ineffective in their functions should be closed down immediately. Other measures to consider include reducing expenses on travel for government employees and ministers within the country and abroad, and cancelling meetings and conferences that incur significant expenses.
These types of expenses are often difficult to control. So active intervention from the highest level of the government is necessary. While such interventions may not achieve 100% success, some examples from the past show that they have been effective to a great extent.
Another area the government must focus on is to obtain the foreign grants it has budgeted for. So far, collections from grants have only been 6% of what the government has planned to receive.