Public Finance: Scope and Fiscal Institutions

Concept of Fiscal Policy

Fiscal policy is the deliberate use of government revenue and expenditure instruments — taxation, public spending, public borrowing and public debt management — to influence the level of aggregate demand, output, employment, prices and the distribution of income in an economy. It is the budgetary policy of the government, as distinct from monetary policy, which is conducted by the central bank through money supply and credit. The theoretical foundation of fiscal policy was laid by J. M. Keynes, who argued that an active fiscal policy is necessary to lift an economy out of depression and to maintain full employment. In modern practice, fiscal policy has three broad objectives: allocation (directing resources to socially desired goods), stabilisation (controlling inflation, unemployment and business cycles) and distribution (reducing inequality of income and wealth).

Fiscal policy operates through two main instruments:

1. Public expenditure — capital expenditure on infrastructure, irrigation, energy, education and health, plus current expenditure on administration, defence and subsidies.
2. Public revenue — direct taxes (income tax, profit tax, land revenue), indirect taxes (VAT, customs, excise) and non-tax revenue, supplemented by internal and external borrowing.

When expenditure exceeds revenue, a budget deficit arises, which may be financed by borrowing; when revenue exceeds expenditure, a budget surplus arises. A deliberate increase in spending or cut in taxes is expansionary fiscal policy; the opposite is contractionary fiscal policy.

---

Significance of Fiscal Policy in Promoting Economic Growth in Nepal

1. Financing capital formation. Nepal's gross domestic capital formation is low because of low domestic saving. Fiscal policy channels resources into capital expenditure — roads, bridges, hydropower, airports and industrial corridors — which raises the economy's productive capacity. The federal budget's capital expenditure allocation is the main instrument for this.

2. Mobilising and directing domestic savings. A progressive tax system and compulsory saving schemes (such as the Citizen Investment Trust) transfer resources from consumption to investment. Tax exemptions and concessions under the Industrial Enterprises Act encourage private investment in priority sectors.

3. Correcting regional imbalance. Nepal suffers from wide disparity between the Kathmandu valley and the hill and Tarai districts. Fiscal transfers — fiscal equalisation grants, conditional grants and special grants to provinces and local levels under the federal structure — direct public investment to backward regions and thereby raise their growth potential.

4. Controlling inflation and maintaining stability. During inflationary pressure caused by remittance-driven demand or supply shocks, contractionary fiscal measures (reduced spending, higher taxes) help cool down prices. Price stability is a precondition for sustained growth.

5. Creating employment and raising demand. Government spending on infrastructure and rural employment programmes (e.g., Prime Minister Employment Programme) generates income, which raises aggregate demand and induces further production — the multiplier effect.

6. Attracting private and foreign investment. Fiscal incentives such as tax holidays, duty-free imports of capital goods and double taxation avoidance agreements reduce the cost of investment and attract FDI, which supplements scarce domestic capital.

7. Human capital development. Spending on education, health, drinking water and social security raises the productivity of labour — the most abundant factor in Nepal — and thus long-run growth.

---

Significance of Fiscal Policy in Promoting Distributive Justice in Nepal

1. Progressive taxation. Direct taxes on higher income groups (income tax slabs, profit tax) take a larger proportion from the rich than the poor. This reduces disposable income inequality and provides revenue for redistribution.

2. Progressive public expenditure. Free basic education, free health care, subsidised food and social security allowances for senior citizens, single women and marginalised groups transfer real income to the poor. Such spending is more valuable to low-income households.

3. Targeted poverty alleviation programmes. Programmes such as the Poverty Alleviation Fund, Karnali Employment Programme and targeted subsidies for Dalit, Janajati and Dalit communities directly raise the income and capability of deprived groups.

4. Reducing regional and social disparity. Equalisation grants to Karnali, Sudurpaschim and other backward provinces, and reservation and affirmative action in education and public employment, correct historical exclusion.

5. Price subsidies on essentials. Subsidies on chemical fertiliser, cooking gas and public transport keep the real income of poor households from falling and protect them from inflation.

6. Land and asset reform. Progressive land revenue, ceiling on land holding and tenancy rights transfer assets to the tiller and reduce concentration of wealth.

7. Social security and safety nets. Old-age allowance, disability allowance and maternity benefits provide a floor of income security to the vulnerable, which is a direct form of distributive justice.

---

Conclusion

Fiscal policy is thus a powerful instrument for both growth and equity in Nepal. However, its effectiveness is limited by weak tax administration, a narrow tax base, low capital expenditure absorption capacity, widespread informal economic activity and political instability. For fiscal policy to genuinely promote growth with distributive justice, Nepal needs to broaden its tax base, improve spending efficiency, strengthen federal fiscal transfers and link incentives to productive investment.

Features of Tax

A tax is a compulsory payment made by individuals and businesses to the government without any direct or proportionate return. Its main features are:

1. Compulsory payment — Tax is legally enforced. A person liable to pay cannot refuse it; non-payment attracts penalty or legal action.
2. Payment to the government — Tax is paid to the government (central, provincial or local) and not to any private body.
3. No direct quid pro quo — The taxpayer does not receive any direct or measurable benefit in return for the tax paid. The benefit comes indirectly through public services.
4. Legal and statutory basis — Every tax is levied under a specific law (e.g., Income Tax Act, Value Added Tax Act). No tax can be imposed without legal authority.
5. Contribution to public revenue — The primary purpose is to raise revenue to finance public expenditure such as defence, education, health and infrastructure.
6. Non-penal in nature — Tax is not a fine or punishment; it is a normal civic obligation.
7. Payable periodically or on an event — Some taxes are paid regularly (income tax, property tax) and some on the happening of an event (customs duty, excise duty).
8. Redistribution and regulatory role — Besides revenue, tax is used to reduce inequality and to regulate consumption and production of certain goods.

Types of Tax

A. On the basis of shifting of burden

1. Direct tax — The burden cannot be shifted to another person. The person who pays the tax bears it himself. Examples: income tax, profit tax, property tax, capital gains tax, land revenue.
2. Indirect tax — The burden can be shifted to another person. The taxpayer collects it from the consumer. Examples: Value Added Tax (VAT), excise duty, customs duty, sales tax.

B. On the basis of rate structure

1. Proportional tax — The rate remains the same whatever the size of the base. Example: a flat 5% tax on all incomes.
2. Progressive tax — The rate rises as the base rises. Example: income tax slabs where higher income is taxed at a higher rate.
3. Regressive tax — The rate falls (or the burden falls more heavily) as income rises. Example: a fixed tax on salt or a uniform sales tax on basic goods.

C. On the basis of base or object

1. Tax on income — income tax, profit tax.
2. Tax on consumption — VAT, sales tax, excise duty.
3. Tax on property and wealth — property tax, wealth tax, capital gains tax.
4. Tax on international trade — customs duty, export duty.

Principle of Tax that Justifies Equity in Taxation

In my opinion, the ability-to-pay principle best justifies the maintenance of equity in taxation.

According to this principle, tax should be levied according to the capacity of the taxpayer to bear it. Those with greater ability should pay more, and those with lesser ability should pay less. Ability is generally measured by income, wealth or consumption. This principle is given practical effect through progressive taxation, where the tax rate increases with the size of income, and through exemption of a minimum subsistence level so that the poorest are not taxed at all.

This principle maintains equity in two ways:

• Horizontal equity — persons with equal ability to pay bear an equal tax burden.
• Vertical equity — persons with unequal ability to pay bear an unequal burden, the richer paying proportionately more.

Thus the ability-to-pay principle, applied through progressive rates and basic exemptions, ensures that the tax system is fair and that the burden of government expenditure is distributed justly among citizens.

Concept of Government Budgeting

A government budget is the annual financial statement that shows the estimated revenue and proposed expenditure of the government for a fiscal year. It is the government's principal instrument for allocating scarce public resources among competing needs, stabilising the economy, and achieving socio-economic objectives. In Nepal, the budget is presented in the federal parliament by the Finance Minister, generally on 15 Jestha, and covers the fiscal year from Shrawan 1 to Ashad end.

Budgeting, therefore, is the entire process of preparing, approving, executing, monitoring and evaluating that financial statement. It is not merely an accounting exercise; it is a political, economic and managerial process through which decisions on "who gets what, when and how" are made. It converts the government's policies, plans and promises into concrete programmes with money attached.

Process of Government Budgeting

The budgeting process passes through four broad stages:

1. Budget Formulation (Preparation)

• The Ministry of Finance (MoF) issues a budget calendar and circular to all ministries, provinces and spending agencies, fixing ceilings and formats.
• Spending agencies prepare and submit their budget estimates (recurrent and capital) through their line ministries.
• The National Planning Commission (NPC) screens the proposals for consistency with the periodic plan and the Medium-Term Expenditure Framework (MTEF).
• The MoF holds pre-budget discussions with stakeholders, including the private sector and civil society.
• The budget is finalised by the MoF in consultation with the NPC and the Prime Minister's Office, and approved by the Council of Ministers.

2. Budget Approval (Legislation)

• The Finance Minister presents the budget speech and the Finance Bill in the federal parliament.
• The estimates are discussed in the House of Representatives; the Finance Bill (revenue measures) and the Appropriation Bill (expenditure authorisation) are passed.
• Parliamentary committees (such as the Finance Committee) scrutinise the budget before approval.

3. Budget Execution (Implementation)

• Funds are released by the MoF to spending agencies through the Financial Comptroller General Office (FCGO) on a quarterly basis.
• Expenditure is made through the Treasury Single Account system, following the rules of the Financial Procedures and Fiscal Responsibility Act.
• Procurement, contract award and payment are carried out by the concerned agencies.

4. Budget Monitoring, Control and Evaluation

• Progress is monitored monthly and quarterly by the MoF, line ministries and the FCGO.
• The Office of the Auditor General conducts the final audit; the Public Accounts Committee of parliament examines audit reports.
• Mid-term and annual evaluations assess whether outputs and outcomes were achieved, and feed into the next budget cycle.

Relationship between Budgeting and Planning

Planning and budgeting are two sides of the same coin — planning sets the direction, budgeting provides the fuel. Their relationship can be explained as follows:

1. Planning provides the framework for budgeting. The periodic plan (currently the Sixteenth Plan) fixes national goals, sectoral priorities and targets. The budget must be prepared within this framework. In Nepal, the NPC's role in screening budget proposals is precisely to ensure this link.

2. Budgeting is the financial expression of the plan. A plan without a budget is only a wish list. The budget translates plan objectives into annual programmes, projects and resource allocations. The annual budget is thus the first-year slice of the periodic plan.

3. Budgeting allocates resources to plan priorities. Through the MTEF and the ceiling system, the MoF directs funds to priority sectors identified in the plan. Conversely, poor budgeting — for example, under-allocation to capital expenditure — weakens plan implementation.

4. Planning guides resource mobilisation. The plan estimates the investment required and the resources to be raised through revenue, foreign aid and borrowing. The budget then sets the actual tax rates, aid negotiations and borrowing limits.

5. Budgeting provides feedback to planning. Execution experience — cost overruns, delays, low absorption of capital budget — provides information for revising plans and improving future planning.

6. Both are mutually reinforcing. Without planning, budgeting becomes ad hoc and directionless; without budgeting, planning becomes unrealistic and unenforceable. The two must be integrated through institutions such as the NPC, the MoF and the MTEF.

In short, planning and budgeting are complementary and interdependent. Effective development management requires that the plan and the budget move together — the plan providing vision and the budget providing the means.

Public finance is not only concerned with governmental finance, but also with the economy as a whole.

Public finance studies the income, expenditure, debt and financial administration of the government. But its scope is much wider than the government's own budget, because the government's fiscal activities directly influence every sector of the national economy. The following points justify the statement:

1. Concern with governmental finance: Public finance deals with public revenue (tax and non-tax), public expenditure, public debt, and financial administration. This is its core, but only its starting point.

2. Effect on national income and output: Government spending on infrastructure, education and health raises aggregate demand and productive capacity. Taxation withdraws purchasing power from the public. Both together determine the level of national income, employment and growth.

3. Stabilisation of the economy: Fiscal policy is used to control inflation, recession and unemployment. During depression the government increases spending and cuts taxes; during inflation it does the opposite. Thus public finance is an instrument of macroeconomic stability.

4. Redistribution of income and wealth: Progressive taxation and welfare spending reduce inequality. This is a socio-economic objective that goes far beyond balancing the government budget.

5. Allocation of resources: Public finance corrects market failure by providing public goods (defence, roads, law and order) and merit goods (education, health), and by regulating externalities. This affects the allocation of resources in the whole economy.

6. Promotion of employment and price stability: Fiscal measures directly influence aggregate demand, and hence the level of employment and the general price level.

7. Balance of payments and external sector: Taxes on imports, subsidies on exports and public borrowing abroad affect trade balance and foreign exchange reserves.

8. Economic development of developing countries: In countries like Nepal, public finance is the main instrument for capital formation, infrastructure building and poverty reduction.

9. Interdependence with monetary and other policies: Fiscal policy works jointly with monetary, trade and industrial policies; hence it cannot be studied in isolation from the economy.

Conclusion: Public finance is therefore both the finance of the government and a tool for managing the entire economy. Its subject matter extends to the effects of government revenue and expenditure on production, distribution, consumption, employment, prices and growth — which is why it is studied as a branch of both public and macroeconomic policy.

The Principle

Propounded by Hugh Dalton, with foundations in A. C. Pigou's welfare economics, the Principle of Maximum Social Advantage states that the government should collect taxes and spend on public goods up to the point where the marginal social sacrifice (MSS) of taxation equals the marginal social benefit (MSB) of public expenditure. At this point, the net social advantage (MSB − MSS) is maximised, and social welfare is at its highest.

Conditions for Maximum Social Advantage

1. Diminishing MSS — as more tax is imposed, the sacrifice borne by society rises at a diminishing rate.
2. Diminishing MSB — as more is spent, the additional benefit from public expenditure falls.
3. MSB = MSS — the equilibrium condition: the marginal benefit from the last rupee of public spending must equal the marginal sacrifice of the last rupee of tax collected.

Diagrammatic Illustration

If MSS > MSB, taxes are too heavy relative to benefits — the government should reduce taxes or increase spending. If MSB > MSS, public spending is too low — the government should increase public expenditure financed by additional taxation. Equilibrium is reached where the two curves intersect.

Critical Examination

Merits:

• Provides a rational criterion for the optimum size of the public sector and the tax-expenditure mix.
• Establishes that neither zero nor unlimited government intervention is desirable — a balanced middle path is best.
• Useful as a normative benchmark for budgeting and welfare policy.

Demerits / Limitations:

1. Measurement problem — MSS and MSB are subjective and cannot be measured in cardinal units; interpersonal comparisons of utility are not possible.
2. Ignored distribution — the principle considers only aggregate welfare and is silent on equity; a rupee taken from the poor and given to the rich may still satisfy the condition.
3. Assumption of independence — taxes and expenditure are treated separately, but in practice their effects are interdependent (e.g., tax-financed public goods raise productivity).
4. Static framework — it ignores dynamic effects such as growth, investment, and incentive effects of taxation.
5. Political and administrative feasibility — governments are influenced by vote banks, pressure groups, and corruption, so the theoretical optimum is rarely attained.
6. Externalities and public goods — in the presence of externalities and public goods, the market outcome and the principle may not coincide with Pareto optimality.

Conclusion

The Principle of Maximum Social Advantage provides a valuable theoretical framework for judging fiscal policy, but due to measurement difficulties, neglect of equity, and unrealistic assumptions, it remains an ideal norm rather than a practical guide. It must be supplemented by considerations of distributive justice and growth.

Sources of Public Debt

Public debt refers to the total borrowings of the government to meet its expenditure requirements when its revenue falls short. The main sources of public debt are:

1. Internal Sources

• Market loans: Long-term loans raised by issuing government bonds and securities to the public, banks, and financial institutions.
• Treasury bills: Short-term borrowing instruments issued to meet temporary revenue shortfalls.
• Small savings and provident funds: Funds collected through national savings schemes, provident funds, and postal savings.
• Loans from the central bank: The government borrows from the central bank (Nepal Rastra Bank) by selling securities, which may lead to deficit financing.
• Public sector undertakings and financial institutions: Loans raised from domestic banks, insurance companies, and other institutions.

2. External Sources

• Foreign governments: Bilateral loans and grants from friendly countries.
• International financial institutions: Loans from the World Bank, IMF, Asian Development Bank, etc.
• Foreign commercial banks and private lenders: Loans raised from international capital markets and commercial banks.
• Foreign currency bonds and suppliers' credit: Borrowing through bonds issued abroad and credit from foreign suppliers.

Need for Public Debt

Public debt is needed for the following reasons:

1. Financing budget deficit: When government expenditure exceeds revenue, borrowing fills the gap.
2. Financing development plans: Large capital projects like roads, bridges, hydropower, and irrigation require huge funds that cannot be met from current revenue alone.
3. Meeting emergencies: Wars, natural disasters, epidemics, and economic crises demand immediate and heavy expenditure.
4. Economic development of underdeveloped countries: Developing countries like Nepal need external and internal debt to accelerate growth and reduce poverty.
5. Controlling inflation and deflation: Public borrowing reduces money supply during inflation and injects funds during deflation.
6. Reducing dependence on foreign aid: Internal borrowing lessens reliance on foreign grants and loans.
7. Providing public goods and services: Education, health, defence, and infrastructure need sustained funding.
8. Stabilizing the economy: Debt helps maintain employment, income, and overall economic stability.

Conclusion: Public debt is an essential fiscal tool for financing development and managing economic imbalances. However, excessive and unproductive debt can create a burden of repayment and interest, so it must be used prudently for productive purposes.

Burden of Public Debt

The burden of public debt refers to the real cost or sacrifice imposed on the economy by the repayment of debt and interest on it. It is the transfer of resources from the present or future generation to the lenders (creditors) in the form of principal repayment and interest payment. In other words, when a government borrows, it creates an obligation to pay interest periodically and repay the principal amount in the future. The sacrifice made to meet these obligations is called the burden of public debt.

Types of Burden

1. Financial Burden: The government has to raise revenue through taxes or other sources to pay interest and repay the principal. This involves a transfer of purchasing power from taxpayers to bondholders.

2. Real Burden: The actual reduction in the consumption and investment capacity of the economy due to debt servicing. It arises when resources are diverted from productive uses to debt repayment.

3. Burden on Present Generation: When debt is repaid through taxes during the same period in which it was incurred, the present generation bears the burden.

4. Burden on Future Generation: When debt is incurred for current consumption and repaid by future generations through higher taxes, the burden shifts to the future.

Is Debt Always a Burden? — Justification

No, public debt is not always a burden. Whether it becomes a burden depends on how the borrowed funds are used and who bears the repayment obligation. This can be explained as follows:

Case 1: Debt is NOT a burden (when used productively)

If the government borrows to finance productive investment such as building roads, bridges, irrigation projects, schools, hospitals, or power plants, the debt is not a burden. Such investment increases the productive capacity of the economy, generates income, and creates employment. The returns from these projects can be used to repay the debt and interest. Moreover, the future generation inherits the benefits of these projects along with the debt obligation, so the burden is offset by the benefits received.

Example: Suppose the government borrows Rs 100 crore to build a hydroelectric project. The project generates electricity, attracts industries, and earns revenue of Rs 20 crore per year. The debt and interest can be repaid from this revenue, and the future generation enjoys electricity and employment. Here, debt is not a burden but an asset.

Case 2: Debt IS a burden (when used for unproductive purposes)

If the government borrows to meet current consumption expenditure, finance wars, or cover budget deficits without creating productive assets, the debt becomes a burden. In this case, the borrowed funds are consumed and do not generate any income. The future generation has to pay taxes to repay the debt without receiving any corresponding benefit. This is called the "deadweight burden" of debt.

Example: Suppose the government borrows Rs 50 crore to finance a war or to pay salaries and subsidies. The money is spent and gone. The future generation must pay higher taxes to repay this debt, but they receive no productive asset in return. Here, debt is a clear burden on the future generation.

Case 3: Internal Debt vs External Debt

• Internal debt (borrowed from domestic citizens) involves only a transfer of resources within the country. The interest and principal are paid to domestic bondholders. The burden is not on the nation as a whole but on taxpayers, while bondholders receive the payment. So, it is a distributional burden, not a real burden on the economy.
• External debt (borrowed from foreign countries or institutions) involves a transfer of resources abroad. The nation as a whole loses resources, so it is a real burden on the economy.

Conclusion

Public debt is not always a burden. It becomes a burden only when:

• The borrowed funds are used for unproductive purposes (consumption, war, etc.).
• The debt is external and resources are transferred abroad.
• The debt is incurred for current consumption and repaid by future generations without corresponding benefits.

On the other hand, if the debt is used for productive investment that generates income and benefits future generations, it is not a burden but an asset. Therefore, the burden of public debt depends on the purpose for which it is incurred and the source from which it is borrowed.

Theories of Budgeting

Budgeting theory explains how governments decide the size, composition, and purpose of public expenditure and revenue. The main theories are:

1. Classical Theory (Balanced Budget Theory) This theory, associated with classical economists like Adam Smith, holds that a government budget should always be balanced — public expenditure must equal public revenue, with no deficit or surplus. It believes in a "sound finance" policy: government should spend only what it collects, keep expenditure low, and leave economic activity to the market. A deficit is seen as wasteful and inflationary, while a surplus means over-taxation. The role of government is limited to defence, justice, and public works.

2. Keynesian Theory (Functional Finance / Deficit Budget Theory) Propounded by J. M. Keynes during the Great Depression, this theory rejects the balanced budget rule. It argues that the budget is an instrument of economic policy, not merely an account. During recession, the government should run a deficit budget (spend more, tax less) to raise aggregate demand, create employment, and fight depression. During inflation, it should run a surplus budget (spend less, tax more) to reduce demand. Thus the budget should be used to achieve full employment and price stability, not to balance every year. This is also called the theory of functional finance (Abba Lerner).

3. Modern Theory (Compensatory Budget Theory) This is a refinement of Keynesian thought. It states that the budget should compensate for fluctuations in private spending so as to maintain stability. The government should run deficits in recession and surpluses in boom periods, so that the budget is balanced over the business cycle rather than each year (cyclically balanced budget). It also accepts deficit financing for growth in developing countries, where public investment is needed to build infrastructure and break the vicious circle of poverty.

4. Other Supporting Theories

• Zero-base budgeting (ZBB): every expenditure is justified afresh from zero each year, not on the basis of last year's figure.
• Performance/Programme budgeting: budget is linked to objectives, programmes, and results rather than to inputs.
• PPBS (Planning-Programming-Budgeting System): combines planning, programme formulation, and budgeting to choose the best alternative.

Conclusion Classical theory stresses balance and economy; Keynesian and modern theories stress the budget's role in stabilising and developing the economy. In practice, developing countries like Nepal follow a mixed approach — allowing deficits for development while trying to keep them within safe limits.

Justification of MTEF as a Budgeting Reform

The Medium Term Expenditure Framework (MTEF) is a three-to-five year rolling expenditure plan that links a country's fiscal policy, sectoral strategies and annual budgets within a consistent macro-fiscal framework. It is justified as a budgeting reform on the following grounds:

1. Link between planning and budgeting. In the traditional annual budget system, plans and budgets are prepared separately, so policies are rarely costed. MTEF translates policy objectives and sector strategies into costed multi-year expenditure estimates, thereby bridging the gap between planning and budgeting.

2. Fiscal discipline and macro-fiscal consistency. MTEF begins with a realistic estimate of total resources available (revenue, foreign aid and borrowing) and sets a hard aggregate expenditure ceiling consistent with the deficit and debt targets. This prevents over-commitment of resources and keeps the budget within a sustainable fiscal framework.

3. Expenditure prioritisation and allocative efficiency. Under a binding ceiling, competing demands are screened against sector strategies and cost-effectiveness. Resources are thus shifted from low-priority to high-priority and productive sectors, improving allocative efficiency.

4. Predictability and certainty of funding. By indicating sectoral ceilings for the next three years, MTEF gives line ministries reliable forward estimates. This allows them to plan and execute multi-year programmes and reduces the disruption caused by abrupt year-to-year budget cuts.

5. Improved operational efficiency and accountability. Forward estimates encourage ministries to prepare realistic budgets, reduce the December spending rush, curb fiscal indiscipline and make managers accountable for results within agreed ceilings.

6. Strengthened donor coordination. MTEF provides a single framework into which both government and donor-funded programmes are fitted, reducing fragmentation of aid and duplication of projects.

7. Rolling revision and flexibility. Being a rolling framework, it is revised each year in the light of actual revenue, expenditure and macro-economic developments, so budgeting becomes adaptive rather than rigid.

Conclusion. By combining fiscal discipline, strategic prioritisation, funding predictability and better planning–budget linkage, MTEF overcomes the weaknesses of the traditional line-item annual budget and is therefore rightly regarded as a major budgeting reform.

Note on the data: the table has a misprint ("51,39" for 2011/12 capital expenditure, taken as 5,139) and repeated rows. The two "Principle repayment" rows are taken as domestic debt repayment and foreign debt repayment. Figures are in Rs million and the results are rounded.

(a) Ratio of Total Expenditure to GDP

$\text{Ratio} = \frac{\text{Total Expenditure}}{\text{GDP}} \times 100$

(b) Annual growth rate of Total Expenditure

$g = \frac{E_t - E_{t-1}}{E_{t-1}} \times 100$

(c) Share of Total Principal Repayment in Total Expenditure

Total principal repayment = domestic + foreign debt repayment.

(d) Ratio of Tax Revenue to GDP

(e) Conclusion on the public financial situation

1. Rising government size. Expenditure stays at about 21 to 22% of GDP, but it grows fast in absolute terms (Rs 29.5 billion to Rs 43.6 billion), with a jump of 21.6% in 2013/14.
2. Improving revenue effort. Tax revenue rose from 13.0% to 16.1% of GDP, and total revenue covered about 67% of expenditure in 2010/11 and about 82% in 2013/14. This shows better tax administration and a growing economy.
3. Recurrent expenditure dominates. Recurrent spending is about 70% of the total (30,353 of 43,595 in 2013/14), while capital expenditure is only about 15%. This leaves little for development.
4. Falling grants, rising debt service. Foreign grants fell from Rs 4,592 million to Rs 3,396 million, and the share of debt repayment rose from about 6% to nearly 10%.
5. Fiscal deficit under control. The deficit narrowed from Rs 4,965 million to Rs 3,817 million, and is financed by both domestic borrowing and foreign debt. Foreign debt financing rose in 2013/14 (Rs 2,113 million).
6. Irregularities. Recovery of irregularities is small but increasing (Rs 261 million to Rs 573 million), which signals continuing financial indiscipline.

Overall, Nepal's public finance is improving through stronger revenue and a smaller deficit. The weaknesses are the heavy recurrent expenditure, low capital spending, falling grants and the growing burden of debt repayment. Capital spending needs to be raised and spending discipline improved.