Budget through federalism lens

Nepal's federal budget for Fiscal Year 2026-27, presented on May 29, reflects the complex distribution of power and resources within its federal system. While the budget is an annual financial statement, its true significance in a federal structure lies in how it delineates the allocation of power, resources, and responsibilities across different government levels. The effectiveness of federalism is tested by whether a budget strengthens or weakens this structure, considering not just public expenditure but also resource recipients, spending authority, and adherence to the constitutional division of powers.

The budget calendar is strategically staggered, with federal governments presenting their budgets first, followed by provincial governments on June 15, and local governments on June 24. This sequence allows for a coordinated approach, enabling provincial and local governments to align their financial plans with federal priorities and allocations, reflecting the constitutional vision of cooperation among the three tiers of government. However, nearly a decade into federalism, a critical question persists: Does the budget genuinely embody the spirit of federalism?

Evidence suggests a partial reflection of federalism in the budget. The fiscal centralization in Nepal is evident in the disparity between government levels. The federal government announced a budget of Rs 2.124 trillion for FY 2026-27, while the combined budgets of all seven provincial governments total only Rs 300.11 billion. Strikingly, the budget for the Ministry of Infrastructure Development alone, at Rs 302.83 billion, surpasses the total allocated to all seven provinces. This highlights a significant vertical fiscal imbalance, where functional responsibilities have been decentralized, but revenue authority remains highly centralized, with the federal government controlling over 80 percent of revenue sources despite devolving nearly 60 percent of public service delivery responsibilities.

The Constitution acknowledges this imbalance and mandates intergovernmental fiscal transfers, including various types of grants and revenue sharing, as constitutional entitlements rather than discretionary allocations. These mechanisms are designed to ensure fiscal equity across provinces and local levels. However, the persistent gap between devolved responsibilities and retained revenue authority indicates that the budget's implementation and structure only partially uphold the principles of fiscal federalism.