Government Expenditure Rises by 15%: Is It Productive Spending?

Nepal’s fiscal data for early FY 2082/83 (2025/26) shows that government expenditure grew by 15.2% year-on-year by mid-August, continuing the upward trend from FY 2024/25 when spending had expanded by 9.3%. On the surface, higher spending appears to support economic activity, especially at a time when private investment and domestic credit growth remain sluggish. However, the key question is whether this rise reflects productive expenditure that enhances long-term growth, or whether it is primarily recurrent spending that adds little to economic capacity.

The composition of spending reveals persistent structural weaknesses. Recurrent expenditure, which covers salaries, pensions, interest payments, and administrative costs, continues to dominate the budget, accounting for more than 16% of GDP in FY 2024/25. In contrast, capital expenditure—intended for infrastructure, energy, and development projects—remains very low, just 3.6% of GDP. This imbalance suggests that much of the recent spending growth is not creating new assets or directly stimulating productive sectors but is instead absorbed by routine government operations.

This raises concerns about fiscal efficiency. Nepal’s public investment has long been constrained by bureaucratic delays, project mismanagement, and underutilization of allocated funds. While the headline figure of rising expenditure may provide a short-term boost to aggregate demand, without a significant increase in capital investment, it risks reinforcing structural bottlenecks rather than removing them. In fact, the persistent gap between budget announcements and actual implementation of development projects means that higher spending often does not translate into tangible economic gains.

At the same time, rising expenditure adds pressure to fiscal sustainability. With domestic debt at 20.8% of GDP and external debt at 22.9%, an acceleration in spending without matching revenue growth (already negative at -10.8% in early FY 2082/83) risks widening the fiscal deficit. If financed through borrowing, this could crowd out private investment and add to future repayment burdens.

To make higher expenditure productive, Nepal must prioritize capital spending efficiency, channel funds into sectors with high multiplier effects—such as hydropower, transportation, digital infrastructure, and agriculture—and improve governance to ensure that resources generate long-term returns. Otherwise, rising expenditure will remain a fiscal burden rather than a driver of sustainable growth.