Public Expenditure Review Commission: FinMin proposes formation of review body under Mallik

November 22, 2017

The Kathmandu Post, 22 Nov 2017 

The Ministry of Finance has proposed to set up the Public Expenditure Review Commission, which will recommend ways to raise income generating capacity and reduce expenditure of the three tiers of the government, under former minister and former finance secretary Vidyadhar Mallik. A formal proposal in this regard has been forwarded to the Cabinet, a high-ranking official of the ministry said on condition of anonymity. A Cabinet meeting scheduled to be held on Wednesday is expected to take a decision in this regard, the official added.

The Finance Ministry has proposed setting up a six-member Public Expenditure Review Commission to suggest innovative ways to generate resources for central and newly-formed subnational governments. The commission will also chart out ways to reduce expenditure in central, provincial and local governments, demarcate economic and fiscal responsibilities among three tiers of government, and assign programmes for central and subnational governments to avoid the problem of duplication.

Since Nepal moved from unitary to federal government system following promulgation of the new constitution in September 2015, enormous decision-making power has been transferred from central to provincial and local bodies. For example, subnational governments, from now onwards, should frame their own annual expenditure plans, cater basic public services, like health and education, and build basic infrastructure.

To cover these expenses, subnational governments should have the capability to generate their own income. Otherwise, they will end up becoming completely dependent on grants provided by the central government, which may hit public service delivery.  

Major revenue sources in the country are value added tax, income tax, and customs and excise duties. All these taxes and duties will be collected by the central government. Subnational governments, on the other hand, can collect taxes such as property, house rent, real-estate registration, vehicle, land, entertainment, advertisement, business and hoarding board, which make very little contribution to the total government revenue.

This revenue generation arrangement indicates approximately 80 to 85 percent of the total revenue will remain with the central government in the coming days, while sub-national governments will be left with very little resources to execute various works.

Of course, the central government needs to provide billions of rupees each year in the form of fiscal equalisation, conditional, matching and special grants to subnational governments. But will these cash transfers be enough to meet aspirations of people, which are already high and are expected to further go up after completion of provincial and federal elections in December?

This, however, does not mean central government’s funding sources should be curtailed. 

An initial study conducted by the Finance Ministry shows that the central government needs a whopping Rs820 billion to build various physical infrastructure, mainly offices, and enhance capacity of human resources at provincial and local levels. 

This cost also includes funds required to launch voluntary retirement scheme for government officials.

All these mean huge resources will be required to ensure smooth functioning of three tiers of government. The Finance Ministry hopes the proposed commission will recommend measures to help the government strike a balance between revenue generation capacity and expenditure needs of central and subnational governments, so that the process of institutionalising fiscal federalism does not become too costly. 

This is the third time such a commission is being formed since the restoration of democracy in the early 1990s.

The first commission formed around 17 years ago under Binay Dhoj Chand had reduced the number of projects from around 700 to 450 mainly through mergers and introduced the concept of service contract in government bodies. 

These measures had helped the government to make efficient use of resources and cut costs.