Projected Revenue is well below the Nu 194 bn Current Expenditure outlay of the 12th plan
This may impact the overall size of the Nu 310 bn 12th plan
No salary cuts or new taxes but there will be cost cutting
The Ministry of Finance (MoF) while replying to an audit observation in the Annual Audit Report on the rising fiscal deficit over the last four financial years (FY) said that as per the Nu 310 billion (bn) 12th Five Year Plan (FYP) the domestic revenue was initially projected at Nu 217.728 bn.
The rest Nu 63 bn was grants and so the plan was short by Nu 29 bn with a fiscal deficit of 3 percent expected for the entire plan.
However, in a revised update as of August 2021 the MoF told the Royal Audit Authority that the projected domestic revenue has now dropped to Nu 179.577 bn.
This is a whopping drop of Nu 38.151 bn. This also means that the original Nu 29 bn fiscal deficit of the Nu 310 bn 12th plan has increased to Nu 67.151 bn.
The MoF said that the decline is mainly due to decrease in Tourism Royalty, Business Income Tax and Corporate Income Tax. The biggest impact on the domestic revenue projection is the COVID pandemic’s economic effects which started from March 2020 in Bhutan.
This sharp drop in domestic revenue has two main implications.
The first is that under the Constitution the current expenditure which is salaries, allowance, utilities, TA/DA, maintenance etc can only be funded from the domestic revenue.
As per the 12th FYP the current expenditure is Nu 194 bn which means the 12th FYP is short of Nu 14.423 bn in revenue for current expenditure.
The second implication is that with an original projected revenue of Nu 217.728 bn there was a surplus Nu 23.728 bn that could be diverted to capital expenditure which is for activities like road construction, hospital construction etc.
However, with the huge fall in projected domestic revenue the capital budget for the entire plan is short by a huge amount.
On the ground the government has been trying to make do with limited resources firstly by drastically slashing the current expenditure short of touching pay and allowances through the block grant system. It is a new system of giving a fixed but vastly reduced amount in the annual budgets to agencies for current expenditure instead of under various heads like in the past.
On the capital budget front, the government has been reprioritizing activities by leaving out certain activities which it feels are not as necessary.
PM says plan size may change
Lyonchhen Dasho (Dr) Lotay Tshering said, “There are three factors here which are what is projected, what we have and what we can do, and they need to be coordinated. If you want to keep the 12th plan budget at 310 bn or spend 310 bn, but know that the revenue is down due tourism, trading and tax being down -you have to source the money. Maybe five or ten percent can come as grant but 90% will be debt and we have to take loans.”
However, Lyonchhen said due to COVID while there are not much resources, but due to restrictions the spending capacity is also not there.
“My approach right is to spend wherever you have to spend and can spend and so don’t look back,” he said,
Lyonchhen said as of now the government is doing re-appropriation of activities and have not resorted to borrowing (external) as yet and now as they go towards the end of the tenure they will see and there are more things that need to be done then funds will be sourced via borrowing.
“Those activities should have good return on investment as every penny I borrow must be invested,” qualified Lyonchhen.
In response to a question the PM on if the entire plan size would change due to the shortage in revenue, Lyonchhen said, “The answer is yes, yes and yes (on changing the plan size).”
“The plan is made of activities, and so if I feel the activity can wait for 5, 10 or 20 years then it can wait,” said Lyonchhen.
He said the choice is to study the remaining activities, and see if they are required to be done or not now.
He said they are all required activities which is why they are there (in the 12th FYP) but now given the situation he asked if it is worth implementing by borrowing or not.
The PM said if he finds the activity is worth it, the government will borrow and invest there as it is already identified and agencies and people are waiting.
“If I find the activity not so worthy of borrowing, then I will drop it in which case I will shrink the plan size,” added the PM.
“Maybe by the mid of 2023 that would be the final assessment of how much the plan has shrunken or even how much it has expanded. You never know,” said the PM.
Lyonchhen said that every year Bhutan would get Nu 12 to 13 bn from tourism, but that is gone now and this the second year it is going.
FM says no salary cuts or new taxes but rationalization will be done
Finance Minister Namgay Tshering said that the government has made some innovative changes to manage the issue.
He said that many parts of the recurrent budget are also being capitalized. “Earlier what we did is that even if the grant came from outside the government was meeting the recurrent component almost like co-financing. All the project based activities are being capitalized. If there is dedicated project, there is no point if the government pays the salary. The project staff are on contract and that is the part of the overall project as the Operation and Maintenance cost,” said Lyonpo.
So he said under this many capital activities can help cover the current expenditure.
“With COVID while there is domestic revenue downfall it has taught us how we can rationalize and we spend where needed and not spend where it is not needed. I don’t like the word austerity,” said Lyonpo.
He said an example of spending not needed is the Hospitality and Entertainment budget of ministers capped at Nu 1.5 mn a year compared to an average of Nu 4 mn per minister that was being spent earlier.
He said the government is rationalizing everything. He said earlier every Nu 50 capital expenditure led to a current expenditure of Nu 100 being apportioned. Lyonpo said this is a mismatch and they can rationalize wasteful expenditure.
In the Nu 310 BN 12th FYP while the capital expenditure was Nu 116 bn the current expenditure was much higher at Nu 194 bn.
“While cutting the wasteful expenditure we are not touching the salary as if it impacts the salary then it is a question of morality on me as the buck should stop with me as the Finance Minister. Secondly, allowances will also not be impacted and thirdly TA/DA for mandatory travels in the District is not impacted,” said Lyonpo.
Giving an example of saving cost, Lyonpo said if a person has to meet another person then that person need not drive there, but can meet online.
He said domestic expenditure goes mainly into current expenditure which is being rationalized and it is important to ask why an expenditure is needed.
Lyonpo said that in the time of past governments austerity was only from the mouth, but the real practice of austerity was not there.
On the huge revenue shortfall in the 12th FYP he said it is a forecast and the forecast may change anytime and that every month they update the figure.
Lyonpo said there is no alternative to generate revenue as they cannot tax people more, but what they are going to do is rationalization and they expect that the revenue situation will improve.
“Taxing people for additional revenue and cutting down number of civil servants is not the solution,” said Lyonpo.