Local government in Nepal is autonomous in carrying out the expenditure responsibilities within the broad national or sector policy framework provided to it by central government. Yet, what are the links between Nepal’s local government and central government fiscal provision?
This paper from Georgia State University addresses the above question, looking at issues of decentralisation and policies towards harmonising the work between central and local government. Decentralisation is a fundamental rule in the governance system of Nepal. Despite the emphasis on decentralisation, however, continuous practice of project administration by donors has meant that there is less emphasis on the process and the institutionalisation of building confidence, revenue base, or maintenance, and the cost recovery mechanism. This has also meant that local governments have become weaker and have not been able to fully manage things themselves.
Revenue autonomy is meant to increase the ability of local government to raise the marginal revenue locally to pay for the fiscal gap. Understanding vertical and horizontal fiscal balance is important for policy reform in expenditure and tax assignments, and also for reforms in intergovernmental transfers and borrowing arrangements. Other findings of the paper include:
- One method of measuring vertical fiscal imbalance is to look at the surplus or deficit position of each consolidated level of government before borrowing, but after the revenue sharing and transfers have been implemented
- Another method of measuring vertical fiscal imbalance is to examine subnational government expenditures that are financed from revenue sources under the control of regional and local governments
- Two of the objectives in the overall framework of the intergovernmental fiscal relations are to attain a predictable and stable source of revenue for local governments, and to equalise the differences in fiscal capacities among local governments
- Other objectives are to pursue legitimate central level policy targets and to increase local revenue generation
- Two important dimensions of an equalisation transfer system are establishing a transfer (divisible) pool and designing a distribution system.
A transformation towards direct linkage of tax payment to service provision is required in order to increase the accountability of political executive to voters. Efficiency, effectiveness, transparency, and a regular publication of detailed revenue and expenditure data for analysis should be the key in the administration and management of revenues. Other suggestions of the paper are that:
- Central government should clarify the existing duplication of responsibilities between central and local government
- Central government should eliminate contradictory provisions in local government law in order to provide a sound legal basis for the implementation of local government provisions
- A regular institution in the form of a committee working as a conflict resolution forum between central and local government as well as between individual local governments should be established
- The gradual removal of normative barriers and budget restrictions will increase local government budgetary autonomy when it is combined with increasing transparency and accountability towards the voters
- The regular disclosure of detailed revenue and expenditure information to the public and the media will create conditions for institutional incentive for enhanced transparency and accountability at local government level
- The oversight and the audit of local government should be strengthened; central government should conduct an evaluation of local government on a systematic sampling basis every year.
