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All eyes on revenue
APR 03 -
Incredible growth has been registered in revenue collection over the years. Former Finance Minister Dr. Mahat had boasted that his tenure was successful as revenue collection had overshot the target and the level of foreign exchange reserves confirmed the upward trend. In his language, it was a classic period of robustness of the economy required for investment and long-term growth. He advised the incoming government to at least maintain the momentum if it was unable to perk up the growth rate.
The next Finance Minister Dr. Bhattarai set the target surprisingly higher than envisaged by any of his predecessors in line with his pledge to leap like a frog and not slither like a snake. Initially, all were sceptical about his revenue target and criticised it as being an unreasonable and unattainable task. But he absolutely invalidated his vocal critics and staunch opponents all through his tenure by consistently achieving his revenue collection target projected in the budget. The upward trend has not been missed but kept up by the present government. And it has not been slow to crow about it.
But the question is what factors made the revenue growth possible, and whether the increased resources are being allocated to boost the productive capacity to produce benefits for the people or whether it will drag on the economy in the future are the important issues to be considered before taking it as an unalloyed blessing. Revenue yields are affected by the composition of the revenue bases, tax rates and tax efforts. But in the case of Nepal, nothing has improved substantially over the years except the revenue base due to the inflow of remittance that has stimulated consumerism.
The increase in the import volume has been attributed not to the growth in aggregate trade but to the shutting down of domestic industries and rising imports of food grain, consumer items and construction materials. Double-digit inflation has also boosted nominal revenue collection when taxes are levied on an ad valorem basis. Moreover, national savings have shrunk to a record low of 8 percent of the GDP which has only fuelled the high level of public and private consumption.
Now the time has come to reflect if the free lunch will be available to allow unbridled expansion in government consumption in the context of poor social and economic infrastructure. If controlling expenditure and raising revenue had been simultaneous priorities of the government, it would have steered the economy and restored sound public finance — an indication of leading the economy in the right direction. But the situation is totally different when development policy could not focus on promoting savings and capital accumulation.
If the present trend of revenue collection cannot be maintained in the ensuing years, what will be the long-term well-being of the economy when, on the strength of the increased revenue collection, recurrent expenditure has gone up tremendously at the expense of capital expenditure? If revenue growth fails to continue at the present level, what will happen to the massive size of non-investment expenditures when there is little room for cuts? Will the government be able to revert to the earlier shape in the face of reduced income? If not so, what will be the fate to which no authorities have paid any attention?
The days ahead are not going to be rosy. The total revenue collection projected for the current fiscal year is Rs. 142 billion, whereas the recurrent expenditure including principal payment is Rs. 145 billion. It has hampered the government’s ability to make public investment in sectors such as physical infrastructure, human capital and research and development to promote long-term economic growth.
Entrenched current consumption per se will not be taken as a big predicament in a developed country where existing infrastructure will facilitate absorption of the enlarged consumption through greater employment and production. But in a country like Nepal, increased consumption does not facilitate revenue collection as much as it exerts pressure on the persistent current account deficit when most of the consumer goods are imported. The recent disappointing export performance has dimmed hopes that the country can trade its way out of the quagmire.
Though the size of the government budget has been swelling every year, the city is enveloped in darkness at night and its streets are marked by gridlock for hours in the day. These issues may prompt anyone to question the worth of their contributions to the government coffers. There is no miraculous way out of the mess. If more motor vehicles are not added every day and if houses are not built in massive numbers to generate revenue, the government will not be able to meet its bloated payroll.
The most telling indicator is that Nepal is not apparently constrained by lack of resources when the rising remittance has been poured into consumption instead of productive investments. The low investment in Nepal has been attributed to insufficient rewards for individual risk taking that can have many causes — high taxes, macroeconomic imbalances, weak contract enforcement and property right which have been pronouncedly stifled by shortcomings in the infrastructure.
If the government continues to disregard these trends, the country will be eventually choked by the inadequate business environment, low supply of infrastructure, high taxes and high prices for public services, weak contract enforcement, property right and inadequate education. In the present condition, public savings have been negative and distortionary taxes have cast a dark shadow over the precarious economy. High taxes and low savings reflect high spending and reduced disposable income of the formal private sector. High taxes and negative savings also reflect high entitlements, waste and large inherited debts. This setup forces the country to choose the policy rounded in increase national savings by reducing government entitlements and wastes rather than wishful forecast for growth.
The scenario suggests that the underlying problem is the conflict between the large demands for investment and paucity of domestic savings. Lowering taxes, reducing public sector prices and improving infrastructure and education could lower public revenue in the short run; but it is the only avenue to save the country from being doomed to sink to the bottom of development failures. Rigorously stringent measures may not be politically feasible at this time, but the government can contain expenditure at a sustainable level so that the incoming government may not have to bear the unsound scale of expenditure. The times demand that we hammer out a plan of action that will not further burden the governments to come after the new constitution is written.
(The author is Under Secretary at Ministry of Finance; the views are his personal)
yog_nath@yahoo.com
Posted on: 2010-04-04 08:29
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