A budget to implement

The finance minister (FM) seems to have been spooked by the recession to propose a very large increase in the budget of 2010-11. The economy has performed modestly with none of the major sectors showing much dynamism. The modest growth rate of 5.5 percent (BBS) in 2009-10 owes much to education and public administration sectors, both of which exhibited enhanced growth mainly because of the hefty increase in salaries and allowances paid by the government. Especially worrying is the slump in investment (including foreign direct investment) that is the main driver of economic growth. The FM has attempted to overcome these hurdles by massively increasing public expenditure. He has decided on an expansionary fiscal regime where public expenditure will be pump priming the economy.

Government expenditure is broadly divided under two heads: non-development expenditure and development expenditure. The former consists of mostly current expenses of the ministries and departments of the government which have minimal impact in accelerating growth. The growth impetus comes mainly from development expenditure, which builds up the social capital stock of the nation.

There is not much difficulty in achieving the non-development expenditure target; almost 100 percent of the proposed non-development expenditure in 2009-10 budget was actually spent. However, spending the money allocated for the Annual Development Programme (ADP) poses serious difficulties. The government has never been able to spend the target allocation in recent years. The proposed ADP of 2009-10 was Tk 30.5 billion. The government spent only 44.5 percent of this amount during the first nine months of the fiscal year. It expects to spend Tk 28.5 billion by the year-end.

Having been unsuccessful to achieve the budget target during the last two fiscal years, the FM has raised the bar by a whopping 26 percent for the next fiscal. The entire government machinery will have to be on overdrive throughout 2010-11 if this gargantuan budget is to be implemented.

Raising revenue for such a large budget will prove difficult. Indeed the budget anticipates that the entire revenue raised during 2010-11 will barely cover the non-development expenditure; the overall budget deficit will actually exceed the total ADP allocation.

The deficit rose to 4.5 percent of GDP in 2009-10 from 3.5 percent in 2008-09. It will rise further to 5 percent in 2010-11. The government will not be generating any savings to pay for the ADP, which will be essentially debt-financed.

The FM proposes to finance the deficit partly by foreign borrowing and grants, and partly by domestic borrowing. Foreign borrowing will rise by 10.2 percent to Tk 16 billion. The borrowing from the domestic banking system will rise by 81 percent to about Tk 16 billion, while non-bank borrowing will be about half of this amount. Any inflationary impetus will depend on how the bank borrowing is structured. To minimise the risk of inflation the FM will have to work in co-ordination with Bangladesh Bank to keep the monetary variables in check.

The budget allocations broadly reflect government objectives that were flagged in the pre-budget meetings and seminars. Education, electricity and agriculture sectors get priority. The performance of the economy hinges crucially on whether or not the allocation for electricity is utilised properly; the government should pay much attention to ensure that this happens.

The fundamental flaw of the budget is of course that it arbitrarily changes basic economic parameters such as taxes and tariffs. Such changes make business environment uncertain thereby pushing up the risk premium of doing business. Investment stagnates as a result, which reduces growth. In other words the budget works as a drag on the growth of the economy. To reduce business uncertainty NBR could fix the rates (and a reduction schedule if applicable) for a reasonably long period of time, and any change should be pre-announced so that the business people have ample time to adjust.

A good example of arbitrary imposition of taxes is the new tariffs on sugar. Currently there are no trade taxes on sugar. The FM proposes a tariff of Tk 2000 per tonne on raw sugar and Tk 4000 tonne on refined sugar on the ground that world price is now low. The gap between the tariffs on raw and refined sugar is a heaven (FM!)-sent manaa for the refiners as it permits them to raise their price up to the landed duty-paid cost of refined sugar. Market price of refined sugar will undoubtedly rise, but the government is unlikely to get any additional revenue due to the gap. There is no good reason for the differential taxation as it negates government efforts to reduce prices of essential goods. The additional profit made by refiners will not encourage investment in this industry as there are no guarantees that the difference will be maintained.

Since the global recession is long over, the new stimulus package of Tk 20 billion is unlikely to have the impact it might have had a year earlier. But it will make the business people happy since a cash gift is always welcome.

The FM has tried hard to devise a budget that would accelerate economic growth. He has set a challenging target that will require concerted effort of the entire government machinery as well as the private sector to attain. Much depends on how well the budget intentions are realised.