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A sweet budget turns sour

Discussion in 'Bangladesh Defence Forum' started by Banglar Bir, Jun 18, 2017.

  1. Banglar Bir

    Banglar Bir SENIOR MEMBER

    Mar 19, 2006
    +1 / 3,847 / -4
    2:00 AM, June 18, 2017 / LAST MODIFIED: 12:14 AM, June 18, 2017
    A sweet budget turns sour
    Source: cropmind.blogspot
    Biru Paksha Paul

    This year's budget eventually turned sour though its components are fine. The major aspects of the budget can be fit into a pentagon model that has five components. In sequential order, we can determine: i) the current spending and the next; and (ii) development spending. By adding the first and second components, we can then take a look at the third component, (iii) revenue collection, which always falls short of the total budget with components (i) and (ii) for any developing nation, necessitating the presence of the most critical fourth component, (iv) deficit financing. The fifth or the top component of the pentagon is (v) economic growth that the government targets to achieve its goal of welfare through tackling unemployment and poverty.

    If we assume this budget of Tk 4 trillion to be equivalent to Tk 400, the reader can estimate the actual figures in the real budget by adding ten zeroes after each number. Tk 400 has two major components: Tk 241 for the current (which budget-makers still erroneously term as 'non-development') and Tk 159 for development allocations. The ratio of current to development budget then turns out to be approximately 60:40 – a good selling point for the government because the ratio was 65:35 a few years ago. It implies that the government is heading in the right direction of increasing the relative share of the development budget gradually. The government can collect Tk 248 through the National Board of Revenue (NBR) and Tk 40 from non-NBR sources, creating a revenue support of Tk 288 (248 + 40), thus generating a deficit of Tk 112 (400 - 288).

    The government has to now devise ways on how to finance this gap and we often forget that this is the most arduous task of the ministry of finance. The manner of financing matters a lot to the nation and here we see that the government succumbs to the monster that is Sanchaypatra – the most expensive way of financing for which the people have to pay the price. This is the weakest side of the budget that portends a bitter future for the country. The excise duty on savings turned out to be the sourest innovation of the budget and has since dominated discussions of the budget. Unfortunately, the excise-on-deposit discussion hid the main weakness of the budget – a non-market way of handling Sanchaypatra, thus ballooning the interest liability.

    The government plans to borrow Tk 60 from domestic sources and Tk 46 from foreign sources. There is still a shortfall of Tk 6 (112 - 60 - 46) which the authorities will make up from an expected amount of foreign grant of Tk 6, completing the total math of the budget.

    In a household, we first look at our earnings and then our expenses. This works in reverse for the state. If we view the budget from the point of view of a household, the government would earn Tk 288, borrow Tk 106 (60 + 46), and receive grants worth Tk 6 making the total collection equivalent to Tk 400 (288 + 106 + 6). It essentially splits the fund into a 60:40 ratio (as discussed above) so we can keep Tk 241 for current spending and Tk 159 for development projects – the numbers that would help achieve the targeted 7.4 percent growth for FY2018.

    The budget math becomes even simpler if we think of it in terms of Tk 100 comprising of Tk 60 for current spending and Tk 40 for development projects. The government can earn Tk 72, facing a deficit of Tk 28 which is equivalent to five percent of GDP – a shortfall seen as safe and usual for Bangladesh. These percentage numbers are not at all off track given the budgets of the past five years. This regime started with Tk 1 trillion and now has a budget of Tk 4 trillion in eight years, registering an annual growth rate of 19 percent. This growth is desirable and needed to support four things: annual GDP growth, inflation rate, a natural progression of the budget to gradually cover a larger share of GDP over time, and finally, the political ambition premium.

    Last year's budget was targeted to be 17 percent of GDP and it finally came out to be 16 percent. This year's target is 18 percent and we hope that it will be 17 percent after realisation – a natural progression rate to become 25 percent of GDP in seven years or so.

    A considerable rise that the budget saw this year was actually jacked up by a steep growth in VAT estimates which will jumpstart a new era of revenue collection. The government failed to sell these good points to the public because it lacks economic 'attorneys' who can speak independently to analytically interpret the budget numbers and justify the aspirations of the leadership.

    Although the budget was otherwise rightly designed based on the past track record, three things have made this budget sour: (i) excise on bank deposits; (ii) allocation for failing state banks; and (iii) non-market way of financing along with improper numbers in domestic financing.

    First, the interest rate on deposit fell from close to 10 percent to below five percent. As a result, even existing excise duties are now unfair. Second, recapitalisation is considered an unethical default-culture fee paid off with taxpayers' money. Third, financing figures are essentially ridiculous. How can we assume that the government will collect only Tk 30 thousand crore from Sanchaypatra at the end of FY2018 whereas its sale has already touched Tk 50 thousand crore? This seems to be a cosmetic dressing to conceal the plague of expensive non-market financing through Sanchaypatra. And that damages credibility too. One can only hope that these aspects are removed before the budget gets approved in Parliament.

    The writer is visiting fellow at Bangladesh Institute of Development Studies (BIDS) and guest faculty at the Institute of Business Administration (IBA), Dhaka University.

    E-mail: birupakshapaul@gmail.com