In his 1918 essay The Crisis of the Tax State, economist Joseph Schumpeter observed that the true nature of a government is never found in its speeches, but in its budgets. He wrote: “The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare—all this and more is written in its fiscal history.” Measured by this standard, the Rastriya Swatantra Party (RSP) government has put its money where its mouth is. Before being elected, RSP promised a modernized, digitally integrated Nepal with a thriving middle class, and it is funding precisely that, with the record-breaking NPR 2.12 trillion budget for the Fiscal Year 2026/27 AD (2083/84 BS).
Through this budget, Finance Minister Swarnim Wagle has planned to confidently enter the ‘AI era,’ alongside providing much lauded tax relief for the middle-class. For many, the middle-class remains the key to a prosperous democracy. Hence, this reform-oriented budget represents a definitive leap forward for the formal economy, composed of civil servants, corporate employees, and formal taxpayers who form the bedrock of urban civic life. Yet, another defining characteristic of the budget is its austerity measures, giving rise to a striking paradox: the most expansive budget in Nepali history is simultaneously steeped in austerity.
Why Austerity, Why Now?
As Minister Wagle steps into his role, he is walking a precarious fiscal tightrope. He is forced to juggle his party’s expansionist, high-tech promises with the rigid financial discipline demanded by international fiscal monitors such as the International Monetary Fund (IMF), World Bank, and the Financial Action Task Force (FATF), etc. Most urgently, there is a critical international evaluation approaching in September 2026, which will determine if Nepal can exit the FATF grey list. The FATF is an intergovernmental organization with a mandate to tackle money laundering. A large portion of complying with the FATF guidelines requires proving fiscal discipline, which translates into measures aimed at reducing budget deficits. This can manifest as fiscal austerity, a policy approach that involves reducing government spending and/or increasing taxes.
For Minister Wagle, exiting the grey list is a top priority, and he has warned that Nepal’s position on the list has caused reputational damage internationally. However, he is simultaneously bound by an obligation to “strategically implement election promises,” which requires spending. Hence, he is in the unenviable position of reconciling these two opposing mandates. In this scenario, the government has balanced its books by turning the screws of austerity in some domains like agriculture, while expanding others like digitalization. The question that this leaves us with is: will this celebrated step forward for the formal economy translate to two crushing steps back for the marginalized?
A Question as Old as Modernization
Fiscal austerity is neither exclusive nor unique to Nepal. Sociologist Wolfgang Streeck argues that under pressure from international financial markets and global watchdogs (like the FATF), modern governments transform into “consolidation states”. Their primary goal becomes balancing the books to appear globally competitive, at the expense of tax systems “becoming less progressive.” While austerity is a global phenomenon, its application is rarely uniform. In her extensive work on the subject, economist Suzanne Konzelmann emphasizes the “class analytics of austerity,” arguing that the crucial question is always “who bears the burden.”
One way to conceptualize this burden division is posited by David Harvey, an economist and geographer, who coined the term “accumulation by dispossession,” a phenomenon wherein the prosperity of the “upper classes” or “richer countries” is subsidized by taking from those outside of it. When I look at Nepal’s budget, I question if we are bound by this exact dynamic today. To protect the formal, tax-paying middle class, who hold undeniable political power, one could argue that the state is balancing its ledger by squeezing the excluded margins.
Balancing Books, Squeezing Margins
The budget has made provisions for a 21% salary hike for civil servants. Simultaneously, the taxpayer class benefits from a doubled income tax exemption threshold of NPR 1 million and a reduced maximum liability of 29%, down from 39%. However, the arithmetic of these expansions comes with a trade-off. To offset these direct tax cuts, the government is forced to rely heavily on indirect taxes as mechanisms of revenue generation and cost recovery. For instance, the new utility surcharges on electricity consumption above 50 units will be levied at the same rate for both an individual charging their Electric Vehicle and rural farmers relying on electric pumps, notwithstanding that one is a question of luxury and one of subsistence.
This disproportionately hits low-income households as it extracts a bigger percentage of their wealth. In sum, because indirect tax models depend on flat rates rather than progressive slabs, they act as an inherently regressive tax. Furthermore, this expanded disposable income for the middle-class invites demand-driven inflation, which occurs when aggregate demand for goods and services outpaces production. Unsurprisingly, the government projects inflation is going to reach 6%, up from 2.5% now, further acting as a tax on the purchasing power of the poor. Additionally, the federal agricultural budget was slashed by over Rs 10 billion, despite agriculture engaging 66% of the population, speaking to whom the effects of this austerity will hit hardest.
The Equity Tax
The equity tax imposed on private healthcare and private education is intended to reduce disparity in society by funding initiatives like a nutrition allowance. However, this decision comes at a moment when the share of private schools is increasing. Although the policy assumes that predominantly the wealthy opt into private education and healthcare, the reality is that the public health and education systems in Nepal are chronically underwhelming. Many low-income and marginalized households make immense financial sacrifices to send their children to local private schools or seek private healthcare. The budget has also imposed taxes on public transport, a service aimed at the masses.
The budget has made breathing room for a select demographic (those earning more than 80,000 per month) by providing tax exemptions—appeasing international monitors and the taxpayers alike. However, the health of the formal economy is subsidized by the people at the absolute bottom, forced to swallow the bitter medicine of austerity.
A Different Story
Despite the gaps in the budget, there is an undeniable sense of optimism in this budget’s willingness to deliver on its promises, while breaking away from decades of fiscal inertia and charting a reform-oriented course toward the future. The fact that the state has shown the political will to execute a vision is, in itself, a historic step forward. The machinery of digital transformation and economic formalization being built today has the potential to become an equalizer. But technology is only as inclusive as the architecture we design for it. If this record-shattering budget represents the scaffolding for a modernizing Nepal, the next phase of governance must ensure that the floor is raised alongside the ceiling.
NEFtakes are short-form analytical articles that provide concise, fact-focused insights into contemporary economic issues relevant to Nepal. Designed for a diverse audience, from students to policymakers, NEFtakes offer comprehensive yet easy-to-understand analysis, using clear and accessible language with minimal jargon. The views expressed belong to the author(s); however, all articles undergo an editorial review by Nepal Economic Forum (NEF) to ensure coherence and readability.
Sangya is a Penn World Scholar studying Economics and International Relations at the University of Pennsylvania. She is interested in intersectional issues, focusing on how economic policy and institutional reform intersect to drive change. Outside her current work at NEF, she is a Research Fellow at the Ortner Center on Violence and Abuse, and has both coached and debated in the Nepali National Debate team.
