Mind the Gap: Schooling, Informality, and Fiscal Externalities in Nepal.

The article examines the fiscal externalities associated with additional years of schooling in Nepal, using data from the UNESCO-funded National Education Accounts and the Nepal Living Standards Measurement Survey. It finds that at the primary and secondary education levels, the marginal fiscal benefits to the government—measured as future tax revenues—are roughly balanced with the fiscal costs, including subsidies and foregone taxes, resulting in a small or slightly negative fiscal gap. In contrast, for tertiary (higher) education, the fiscal benefits exceed costs by about 5 percent of per capita household consumption, largely because higher-educated individuals are more likely to work in the formal sector and pay income taxes. The study's results are robust across various sensitivity analyses and highlight that fiscal returns to education vary by level and demographic groups, with women and disadvantaged castes showing lower fiscal benefits at higher education levels. This research underscores the importance of detailed subsidy data for evaluating education policies and suggests that fiscal externalities alone may justify greater public investment in higher education in developing countries like Nepal.