Focusing solely on the middle class and high-income groups will inevitably lead to increased inequality

Nepal's government, led by the Rastriya Swatantra Party, has unveiled its fiscal blueprint for the upcoming year, sparking skepticism with its declared economic transformation. Observers and planning experts point to a structural realignment that explicitly shifts focus from traditional poverty alleviation toward an aggressive, tax-incentivized expansion of the middle class and the information technology sector. Critics contend this trajectory risks exacerbating the country’s socio-economic cleavages and hinges on unproven economic assumptions.

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In previous fiscal iterations, the government of Nepal primarily focused on eradicating poverty while placing significant emphasis on industrial development and the support of small-scale enterprises. There was also a consistent focus on the advancement of national infrastructure. However, this budget demonstrates a strategic shift toward the expansion of the middle-class demographic. The objective appears to be the empowerment of the middle class, which is a notable departure from previous strategies.

Economist Shivaraj Adhikari, former vice-chair of the National Planning Commission, dissects the budget's mechanics, highlighting volatile revenue projections that could lead to an internal debt crisis. He also assesses the economic logic behind high-tier tax concessions and the populist appeal of urban digital infrastructure, while confronting the moral hazard of using taxpayer funds to address the ongoing cooperative sector collapse. Adhikari notes a significant departure from previous fiscal strategies, which concentrated on poverty eradication, industrial development, and small-scale enterprises. The current budget's objective appears to be the empowerment and expansion of the middle-income demographic.

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There has been a striking adjustment to the upper tiers of the tax structure, where the highest rates have been lowered to encourage participation. This reflects the desire to encourage people to pay taxes by removing the psychological barrier of excessive taxation. By opening this avenue, the government hopes to inspire a sense of duty toward the nation among those who previously felt discouraged by tax burdens.

Adhikari explains the rationale behind targeting the middle class, emphasizing their role in economic progression through consumption, savings, and investment. He also addresses adjustments to the upper tax tiers, where the highest rates have been lowered to reduce the psychological barrier of excessive taxation, aiming to encourage greater tax compliance. However, the budget's focus on the middle and high-income groups raises concerns about potentially increasing inequality, as traditional poverty alleviation measures seem to take a backseat to strategies aimed at economic expansion driven by a more affluent segment of the population.

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Within any community, there exist various income groups, and it is essential to understand which group best facilitates economic progression. The private sector, which possesses investment capacity, is undoubtedly the primary driver of economic activity. Alongside this, we find the middle-income group, which provides vital support to the higher-income brackets and the broader economy. They achieve this by consuming goods and services and by contributing to national savings. Furthermore, they often take loans from financial institutions to invest in various ventures, which supports the banking system.