Nepal’s rising budgets fail to translate into revenue, spending and growth gains

Nepal's economy faces increasing strain due to a significant disconnect between ambitious budget sizes, inadequate revenue collection, and persistently low capital expenditure. Economists express concern that the government's struggle to spend effectively and mobilize resources is leading to deteriorating growth prospects.

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It is not only difficult to create new investment, even the existing fixed capital base is shrinking.

Successive governments have announced larger budgets annually, but the failure to collect sufficient revenue and implement spending plans necessitates frequent downward revisions through midterm reviews. This trend has weakened development spending, slowed investment, and increased reliance on public debt. The Finance Ministry reports that while the federal budget allocated over the past decade averaged 33.7 percent of GDP, actual spending averaged only 26.8 percent. The budget-to-GDP ratio, which peaked at 39.4 percent in fiscal year 2019-20, fell to 30.5 percent in 2024-25.

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The government contributes around 20 percent of total investment, but its spending guides the private sector. When public investment declines, the private sector does not expand investment confidently. That is exactly what is happening now.

Economist Dilli Raj Khanal highlights that Nepal's weak capital expenditure and declining spending quality are directly harming economic growth. He notes that the government's capital stock has declined, indicating a reduction in the economy's productive capacity. While the government contributes about 20 percent of total investment, its spending patterns guide the private sector. A decline in public investment discourages private sector expansion, a situation Khanal describes as currently prevalent.

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Even though capital expenditure appears to have increased in nominal terms, its effectiveness has actually weakened. Clear standards are needed for recurrent spending as well. A large amount of public money is being wasted because spending decisions are often made without proper justification.

Khanal also criticizes the rising recurrent expenditure, arguing that a significant portion of spending remains unproductive. He calls for clear standards for recurrent spending, as many spending decisions lack proper justification, leading to wasted public funds. Furthermore, he questions the efficiency of Nepal's public spending system, pointing out that citizens face poor access to essential public services like education and healthcare despite paying high taxes. Without reforms in public expenditure management from the budget allocation stage, future spending is likely to become even more counterproductive.

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Unless the public expenditure system is reformed from the budget allocation stage itself, future spending will become even more counterproductive.