Local Governments Face Severe Budget Cuts Amidst Federal Government's Financial Austerity

Kathmandu. The local level is the strongest structure of the state envisioned by the constitution of Nepal and the government closest to the people. These governments, established with the slogan of bringing the power of Singha Durbar to the villages, are currently falling victim to the financial austerity of the federal government.

The trend of cutting financial equalization grants, initiated by previous governments, has continued under the current government. This has raised serious questions about the autonomy and constitutional rights of local governments.

It is considered unusual that this trend has been repeated even more harshly under the leadership of Prime Minister Balen Shah, who himself came from leading a local government and is said to have experienced the problems and challenges of local levels up close. Representatives of local governments had previously raised their voices against budget cuts multiple times, but the center's habits did not improve. Now, a circular from the Office of the Controller General of Accounts has dealt a major blow to all 753 local levels across the country.

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Local Government Protests Against Equalization Grant Cuts

• Heavy Cut in the Last Installment

On May 5, the Office of the Controller General of Accounts issued a circular to all Treasury and Controller Offices, directing a heavy cut in the last installment of the financial equalization grant for the current fiscal year. As soon as this decision of the federal government was made public, anger spread across municipalities and rural municipalities nationwide.

There was a legal and constitutional guarantee that 50 percent of the total grant of Rs 88.97 billion approved by the government for the current fiscal year, i.e., 25 percent each in the third and fourth installments, should be disbursed. However, the government has dramatically reduced this to 20.43 percent. The direct implication is that approximately 8.55 percent of the total budget intended for local governments, or about Rs 7.60 billion, will no longer reach the accounts of local levels. This is expected to affect small and large development projects, social security programs, and basic service delivery in local areas.

• Threat of Protest

Following such an unilateral and unexpected decision, the National Federation of Rural Municipalities Nepal and the Nepal Municipal Association have jointly expressed strong objection and threatened to protest. These two umbrella organizations have characterized the government's move as contrary to the spirit of fiscal federalism and a blatant interference in the constitutional rights of local levels. They argue that financial equalization grants are not a favor or charity from the federal government to local levels, but a right guaranteed by the constitution.

The financial equalization grant is the backbone for service delivery and project planning through the exercise of the exclusive rights of local levels as stipulated in Schedule 8 of the constitution. The question now arises: how can the beautiful structure of federalism stand if the backbone is broken by a blow from the center? Representatives of local governments accuse the government's move of trampling on the spirit of the constitution and showing insincerity in implementing federalism.

According to federalism experts and local level leaders, even the minimum democratic practice has not been followed in making such a sensitive decision. The Constitution of Nepal and the Intergovernmental Fiscal Management Act have provisions for mechanisms such as the National Coordination Council or the Intergovernmental Fiscal Council for coordination and consultation between federal, provincial, and local governments.

However, the federal government has made cuts to the budget unilaterally, without discussing it in any of these bodies and without prior notice to the representatives of local governments. The President of the National Federation of Rural Municipalities, Laxmi Devi Pandey, and the President of the Nepal Municipal Association, Bhim Prasad Dhungana, jointly drew the government's attention, stating that this decision is unjust.

According to them, most projects are in the final stages of implementation, and some have been completed and are due for payment. At such a time, the sudden budget cut has created a situation where contractors cannot be paid and development works will be stalled.

• Government Ignores Finance Commission

The government's move has clearly disregarded the recommendations and dignity of the National Natural Resources and Fiscal Commission. The Finance Commission had clearly advised the Ministry of Finance in a letter on February 13 not to cut the financial equalization grant to local governments.

The commission argued that the equalization grant is the basis for meeting the minimum needs of local levels and that cutting it would affect local autonomy. The Ministry of Finance's decision to cut the grant, discarding the recommendation of a constitutional commission, raises significant questions about the government's intentions in implementing federalism.

According to the principles of federalism, the federal government should reduce conditional grants (which can only be spent on tasks specified by the center) and increase equalization grants (which local levels can spend according to their needs). However, the opposite is happening in practice.

• Cuts Are Continuous

This problem of budget cuts is not new. However, the blow this time is even more fatal. In previous years too, the federal government has a history of withholding local government budgets under various pretexts. In the fiscal year 2079/80, 25 percent of the financial equalization grant for the last installment was cut. Furthermore, in the Appropriation Act for the fiscal year 2080/81, the government made an even more detrimental provision, allowing the federal government to cut the grants to be given to provincial and local governments at its discretion.

Under the cover of that provision, 26 percent of the budget was cut in Magh 2080. Now, during the implementation of the budget for 2081/82, the same old and bad practice has been repeated.

• Making Excuses to Cut

Although there is a mandatory provision to send grants in four installments on the 2nd of Bhadra, Kartik, Magh, and Baishakh each year as per the Appropriation Act, the government is snatching the share of local levels by making excuses that revenue collection targets are not being met.

According to federalism expert Khim Lal Devkota, it is completely wrong for the government to attack equalization grants by citing low revenue collection. While the government has many other options for expenditure cuts, slashing grants constitutionally mandated amounts to an insult to the spirit of federalism and the basic principles of grant distribution.

"The federal government does not hesitate to allocate budgets for its own wasteful expenditures, administrative costs, and projects for big leaders, but when it comes to financial crisis, it first cuts the budget of the lower levels, which is discriminatory in itself. If revenue is low, the federal government should cut the budgets of its own ministries and central projects," Devkota said.

• 'Those Who Understood Local Government Ignored It'

In the current political landscape, this incident raises a significant ethical question. Many are surprised that Prime Minister Balen, who emerged as a new force advocating against 'old parties and old leaders ruining the country' and who reached the highest position in the country based on his experience leading local government, is repeating the same cycle of budget cuts as before, despite local governments having high expectations from him.

The continuation of budget cuts, similar to the past, even with a Prime Minister who is aware of the financial difficulties faced by local levels and the center's hegemonic attitude, is viewed with surprise by many. One mayor says, "What difference remains between those called old yesterday and those called new today?"