Read the following case carefully and answer the questions that follow: Government holds key responsibilities of assuring the availability of infrastructures, social amenities, peace, security, and…

Read the following case carefully and answer the questions that follow:

Government holds key responsibilities of assuring the availability of infrastructures, social amenities, peace, security, and stability without compromising macroeconomic balance and debt sustainability. Upholding the role of supporter, facilitator, and caretaker, it needs to invest in social overhead capital to support developmental goals and simultaneously finance the recurrent expenditure. The capacity of the government to spend on recurrent and capital expenditures depends upon the amount of revenue it generates. Government revenue is a matter of concern for policymakers. Government revenue is more crucial in developing countries as they need a plethora of funds for developmental activities. Developing countries will need to rely substantially on domestic revenue mobilization as excessive reliance on foreign financing may in the long run lead to problems of debt. Revenue mobilization in Nepal has remained satisfactory so far. Government revenue to GDP ratio also increased from 14.6 percent in 2009/10 to 24.2 percent in 2021/22. The major sources of revenues are expected to accrue from taxes on income, capital gains and profits which are a direct tax on entities (24%), VAT (26%), taxes on foreign trade of which import taxes (and duties) comprise the majority (23%) and excise duty (15%). These four tax categories consisting of direct and indirect taxes constitute more than 87% of the revenues received.

Projected expenditures are expected to be NPR 1647.6 billion in current fiscal year, while domestic revenues as described above from different taxes and other revenues amounts to NPR 1,024.9 billion – 62% of expenditures. Therefore, there remains a financing gap (deficit) of NPR 622.7 (38% of projected expenditures) that must be financially managed through internal (domestic) loans from banks and the private sector, as well as external loans and external grants from bilateral and multilateral partners. The proposed budget plans to finance this deficit primarily through loans: foreign loans from multilateral and bilateral partners (50%), domestic loans (40%) & foreign grants from multilateral and bilateral partners (10%). However, government revenue is not enough to cover government expenditures. The increasing budget deficit has raised serious concerns in Nepal. Historically, development activities are financed through foreign aid as government revenue is just sufficient to cover the recurrent expenditure. The inadequacy of government revenue even to cover recurrent expenditures pose a threat to macroeconomic stability. It is essential to tame the widening budget deficit by adopting measures to strengthen the revenue base. Different factors affect revenue collection in the economy, such as nominal GDP, imports, exchange rate, foreign aid etc.

Questions:

a. Describe the role of government in a developing economy. b. Explain the major sources of government revenue in Nepal. c. What are the causes for increase in financing gap in Nepal? d. What are the major difficulties for revenue mobilization in Nepal and which methods the government of Nepal can follow to fulfill the financing gap? Which methods of fiscal policy do you suggest to overcome for this problem? Explain.