A case of budget fatigue

If and when Mr. A M A Muhith presents the next budget, he will be doing so for the eighth consecutive year, an unmatched record in the history of this country, and one that will most likely remain unmatched for many years. During this period he has overseen the size of the budget balloon from less than one trillion taka in 2008-09 to nearly three trillion taka in 2014-15. He is fond of mentioning these figures and reminding people of the paltry budget size of the country during its early years (Tk 5 billion in 1972-73 with actual spending of only Tk 2.2 billion).

There is of course always a gap between budgets ratified by parliament and their eventual implementation.  Even with this proviso there has doubtless been a substantial increase in government spending on revenue and development budgets. As Table 1 shows, the last budget Mr. Muhith presented to parliament was 195 per cent greater than the budget he inherited from the previous government, i.e. an average annual growth rate of 16.7 percent in the nominal budget size. This will be viewed by many as remarkable.

The actual amount spent and revenue earned by the government are not the same as that envisaged in the budgets presented to parliament, or the revised budgets. The actual amount spent during the fiscal year 2008-09 was much less than not only the original budget, but also less than the much reduced revised budget. This was true of the budgets of all subsequent fiscal years. In 2008-09, the actual implementation was 89 per cent of the original budget and remained the same in the next year, although the growth rate of the budget was reduced by about a percentage point. The next year the budget growth was raised by more than 2 percent and yet the implementation rate shot up to 97 per cent, a praiseworthy achievement!

Perhaps encouraged by this excellent implementation record, the Finance Minister raised the budget growth from 16.1 to 23.8 percent. Not surprisingly, the actual implementation rate fell (to 93 percent). The budget growth was further reduced, but implementation became even poorer. Indeed, when the budget growth rate was reduced to its lowest level of 12.6 percent (2014-15), the implementation record was surprisingly the worst (81 percent) during his entire tenure. One would normally expect the budget implementation rate to go up with a smaller budget, but paradoxically the reverse happened.

The implementation rate was worse in the case of the development budget (Table 2). It was only 73.4 percent in 2008-09. Mr. Muhith managed to raise it to a commendable 88.4 percent. But since then it fell off sharply and stood at only 72.8 percent in 2014-15, which is less than what he had started out with. One of the reasons for the poor implementation record could be the very ambitious targets of the development budgets that included several mega projects. The size of the development budget increased by an average annual rate of 19.6 percent during the period between 2008-09 and 2014-15.  This was perhaps beyond the capacity of the government machinery to implement even with the leakages.

The national budget comprises of two parts: revenue budget and development budget. The revenue budget consists of mostly salary and wage payments, routine maintenance expenditure, subsidies, interest payments on debt, etc. These are mostly regular payments that do not much tax the implementation capacity of the government administration.  But the implementation of the development budget requires knowledge, imagination and willingness to put in the necessary efforts as well as negotiations with contractors and lenders. The capacity of the government administration is limited in this regard, and consequently any ambitious development budget is likely to prove difficult to implement satisfactorily. The magnitude of wastage and leakages are consequently likely to be higher. Therefore, it is not surprising that the implementation rate of the development budget is lower than the revenue budget.

Nominal numbers usually do not mean much to economists (except for inflation), who look for real changes in the variables of interest. The nominal value of a variable such as budget spending may increase without any real change. Hence, to see if there has been any real change in the budget or its components it is necessary to express the figures in real terms. This could be done by deflating the budget values by the GDP deflator.  Table 1 and 2 also show the budgets in real terms. It is immediately obvious that a large part of the increases in the budgets are illusory, caused by increases in prices. While actual budget spending in nominal terms increased by 128 percent during the period 2008-09 to 2014-15, actual real spending increased by only 52 percent. This translates into an average annual growth rate of 7.3 percent – a much more modest figure than the nominal growth rate of 14.7 percent.

What emerges quite clearly from the tables is that the years 2009-10 to 2012-13, roughly coinciding with the first term of the (post-Fakhruddin) AL-led government, were very satisfactory for Mr. Muhith in terms of budget allocation and implementation. The implementation rates were quite high. Not only that, the allocation for the development budget in nominal terms increased markedly, the rate of increase in real development budget (actual spending) was also very high, reflecting in part the high costs of mega projects. Tax and other revenue collection also increased very considerably (Table 3). These years could be regarded as a golden period for Mr. Muhith as the principal architect of the government budget.

But, surprisingly, the next two years present a very different scenario. The budget implementation rate fell off very sharply. It stood at 83 percent of the announced budget in 2013-14 and fell further to 81 per cent in 2014-15. This is far below the rate inherited from the previous government (89 percent). The situation with the development budget was worse. The implementation rate fell to 75.7 percent in 2013-14 and then to 72.8 percent in the following year. The same picture also obtained in the case of actual revenue collection, which was as high as 100 percent of the budget forecast in 2010-11. The actual collection as a proportion of the budget forecast fell to 90 percent in 2013-14 and then fell sharply to only 80 percent in 2014-15. The outlook for the current fiscal year is also not very encouraging.

The growth rate of real budget spending, which was fairly robust during the earlier period, fell off very sharply in 2013-14. There was virtually no growth in actual budget spending in this fiscal year, and only a small growth in 2014-15. In real terms, the budget spending appears to have virtually stalled after 2012-13 despite the fact that the economy, according to BBS, was growing strongly. These figures seem to suggest a fatigue in budget implementation.  The government will probably blame the political turmoil of the time as the main reason for the low implementation rate. While this might be arguably a plausible hypothesis for 2013-14, it holds little water for the next year, which was free of any political disturbance.

Mr. Muhith has served the nation for a long time in some very important positions.  The nation cannot honestly ask for more from this venerable octogenarian. A series of multi-billion dollar financial scams perpetrated under his watch, of which the Bangladesh Bank reserve heist is the latest, have tainted his image and raised questions about his ability to guide the economy. An aging minister with a voracious administration does not inspire great confidence in the economy he oversees in an increasingly complex domestic, global and cyber environment.

The information presented above suggests that budget implementation has lost steam since the inauguration of the AL-led government after the 2014 flawed election. The mega scams must have also tarnished its image, reduced efficiency and tested its credibility. Despite the political calm, achieved largely through subduing the opposition, the budget performance of the government has visibly worsened. Perhaps the public's revealed wisdom in denying two consecutive terms to any political party in the past had sound empirical logic!