Public Spending without Payoff: Provincial Evidence from Nepal

Abstract

This study examines the relationship between provincial government expenditure and economic growth in Nepal using panel data from seven provinces covering the fiscal years 2017/18 to 2024/25. The Pooled Ordinary Least Squares (POLS) method was employed to assess the effects of capital and current expenditures on provincial economic growth. The findings reveal that neither expenditure category has a statistically significant impact on economic growth, suggesting that increased fiscal allocations have not yet yielded measurable economic returns at the provincial level. The results indicate that fiscal decentralization alone is insufficient to achieve regional development objectives without effective institutional and governance mechanisms. Weak implementation capacity, dependence on intergovernmental transfers, and inefficient utilization of public resources appear to constrain the developmental role of provincial governments. The study highlights the need to improve expenditure quality, strengthen institutional capacity, and prioritize productive investments to enhance the contribution of provincial governments to Nepal’s economic development.