Since the FY02/03 Budget was announced on July 8, many have criticized it for a "sharp cut" in development expenditures. How could Nepal get out of the current economic slump by cutting public investment? Is this Government really committed to poverty reduction? I think these criticisms do not really inform the public, nor do they contribute to a constructive policy debate.

First of all, was the development budget cut sharply? It is far from clear. Yes, the proposed development expenditures of Rs. 39 billion is much lower than the original FY02/03 budget allocation of Rs. 51 billion. But, the actual development expenditures for FY01/02 turned out to be only around Rs. 33 billion. So, where is the cut?

Those who are familiar with the budget of His Majesty's Government (HMG) all know that the development budget figures have been always wishful figures. (See the comparison of the budget figure and the actual spending below.) I have been told that high development budgets served some political objectives. It has never been clear to me whom such inflated figures are meant to please. Surely the public is not so gullible to be fooled by perpetually unrealistic spending plans. At any rate, unless this year's figure is also inflated to similar degrees, it makes little sense to compare the new figure of Rs. 39 billion with the Rs. 51 billion that proved meaningless. There are indications that this year's development budget, which reduced the number of projects by 175, is more realistic. It has been reported that as the budget was being finalized many of Prime Minister Deuba's cabinet colleagues bitterly complained that with such an austere development budget, they could not win the elections. (To his credit, the Prime Minister is said to have retorted that there must be different ways to fight elections.)

The criticism of the "cut" in the development budget is hollow in more fundamental ways. First, is there any evidence that increasing development expenditures would accelerate the process of development? Empirical evidence on Nepal does not support such a link. Given the very weak administration of many development projects and rampant corruption and waste, this is not surprising. The problem in Nepal is not in the quantity of development spending, but rather its quality. Critics have not helped to focus the budget debate on this core issue.

Second, it is fine to criticize the Government for cutting the development budget, but unless the critics are willing to offer an alternative, they do not contribute to policy debate. We all know that the available resources are limited. So, increasing development expenditures will necessarily mean cutting something else. What would the critics of this budget propose to cut? Security expenditures? The number of teachers, health workers, or other civil servants? Easy cuts have been already made. Any further cuts will be painful. But unless they are willing to specify where such pains should fall, insisting on more development expenditures will not be helpful.

So, do I like this budget? I had wished for a more stringent budget, because I worry that the revenue projections are on the optimistic side, and that the regular expenditures may turn out to be higher. But I recognized that the budget formulators faced intense political pressures. As in the past, it is likely that there will not be enough money to fund all development expenditures adequately. In the past, the Ministry of Finance managed this by controlling the "release" of budget. In other words, what one saw in the budget was not really what was actually allocated to each program or project. This year again, the MOF will have to do the same thing. It is premature, though, to write off this budget as business as usual. There has been an important innovation in this "release" process.

The FY02/03 budget has classified a small number of development projects as priority (or "P1") projects. They are to get funding before lesser priority projects are funded. The 100 or so P1 projects will amount to only about Rs. 17 billion. This is much more consistent with a realistic budget ceiling. If this approach is implemented properly, the limited development budget will be focused much more effectively on high priority projects. I think this is a realistic way to deal with a difficult and uncertain budget situation, in the face of intense resistance to dropping low priority projects.

The FY02/03 Budget also includes some reform measures that address the quality issue. It reaffirms HMG's commitment to beginning the process of handing over public primary schools to community management, along with block grants equivalent to the existing school budgets. Of the target of 1,000 schools to be handed over in FY02/03, the first batch of at least 100 is to be handed over by end of August. It also reaffirms HMG's commitment to handing over at least 20 sub-health posts each in 10 Districts to communities by October. These measures should begin to improve the quality of two essential services.

So, I would give the FY02/03 Budget a grade of B. With effective implementation of what has been proposed, however, this budget can end the year with a higher grade of A.