Fiscal equalization grants: Sub-national govts to receive lower budget for next fiscal year

Provincial and local governments will receive a lower budget in fiscal equalization grants from the federal government in the next fiscal year 2023/24. Given the central government’s reduced budget allocation and spending capacity in the wake of a drastic decline in revenue collection in this fiscal year, the National Natural Resources and Fiscal Commission has recommended the federal government to downsize fiscal equalization grants in the next fiscal year than the amounts transferred in the current fiscal year 2022/23. According to the commission’s recommendation, provincial and local governments should be provided as much as Rs 146bn under the fiscal equalization grant, a drop of Rs 15.64bn from Rs 161.66bn in FY 2022/23. Of the total amount recommended for fiscal transfer, Rs 58.66bn is for the provincial governments and Rs 37.35bn is for the 753 local governments. The federal government provides grants to the sub-national governments under four headings of fiscal equalization grant, conditional grant, supplementary grant, and special grant.

Of them, the fiscal equalization grant is provided to implement the provincial and local governments’ budgetary programs. Conditional grants are provided to pay the liabilities of the central government or to implement its programs.

“The commission reduced the fiscal equalization grant to be provided to the provincial and local government because of downsized resources forecast for the next fiscal year by the Resource Estimation Committee,” said a senior official of the commission. The committee is headed by the vice-chairperson of the National Planning Commission. “We recommended the amount to be transferred to the sub-national government under fiscal equalization grant after the Resource Estimation Committee estimated the potential resources and spending limit,” the official said. The National Resource Estimate Committee has estimated the resources availability of Rs 1,688bn for FY 2023/24 including from the government’s revenue, internal loans, external loans, and external grants. The projected resource availability is far less than the total budget size of the current fiscal year at Rs 1,793.83bn. The budget size was trimmed to Rs 1,549.83bn through the mid-term review of the current fiscal year. The committee has estimated the federal government’s revenue to grow by an average of 14 percent in the next three fiscal years. “With the resource estimation committee not making a bold resource prediction, we also had to recommend the allocation of a fiscal equalization grant to provincial and the local governments,” said the commission official. A conservative projection of resource availability was made as the country’s economy is in a downturn contributing to sluggish revenue collection. With the economy slowing down amid reduced market demands for goods and services, both import-based revenue and inland revenue have gone down this fiscal year. According to the Financial Comptroller General Office, the revenue collection as of March 19 of the current fiscal year stood at Rs 591bn, a sharp drop from Rs 691bn during the same period last fiscal year. According to the Department of Customs (DoC), the customs offices across the country collected Rs 250bn as of March 14 against the target of Rs 433bn which accounts for around 58 percent of the target. “The impact of the policy reversal on import control has not been reflected in the customs revenue,” said a senior DoC official.  The country receives nearly half of its revenue through taxing imported goods. Import taxes on vehicles fall among the largest sources of revenue. But even after the government lifted the import ban, the automobile dealers have not rushed to import the vehicles.  The automobile dealers have not yet cleared around 2800 four-wheelers parked at the customs yards, according to the customs officials. These vehicles were imported in recent months based on a letter of credit opened before the government imposed a ban on the import of vehicles along with foreign alcohol and expensive mobile sets among others in April last year. The inland revenue collection has also remained sluggish. According to the Inland Revenue Department (IRD),  the revenue collection as of March 14 this fiscal year stood at 79.68 percent of the target. The government collected Rs 281.99bn as of May 14 against the target of Rs 353.91bn. The collection is poorer than the total inland revenue collection during the same period last fiscal year 2021/22. According to IRD, it had collected as much as Rs 284.88bn during the same period last fiscal year. Meanwhile, the commission has also set the standards for providing conditional grants to provincial and local governments. “The federal government will itself decide on the conditional grant based on the standards we set,” the commission official said.