Growth TRENDS and Fiscal Policy Of BANGLADESH

Nashid Reza

INTRODUCTION

The current Bangladesh Economic Update reveals that fall in growth in collection of revenue, rising per capita debt burden and shrinking public sector investment may contract expansion of gross domestic product (GDP). the Update probes into the matter of increased deficit in the budget of the government leading to slimming down of private investment on the one hand and retrenchment of development expenditure on the other hand, since the government borrows from abroad to finance deficit and has to repay the loan with large amount of interest payment that increases non-development expenditure and causes government to reduce its development expenditure.

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Salient Features of Bangladesh’s Current Salient Features of Bangladesh’s Current Fiscal ScenarioFiscal Scenario

Salient Features of Tax System Notwithstanding the various fiscal reforms of the recent past, Bangladesh

fiscal system continues to suffer from a number of major weaknesses: Low Level of Revenue Mobilisation Regressive Nature of Taxation High Tax Incidence Low Tax Base High Degree of Tax Evasion Limited Administrative Capacity Resource Constraints (Human and Logistics) Centralised Taxation System Cumbersome Legal Procedures

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Growth Trends and Revenue Structure of Growth Trends and Revenue Structure of BangladeshBangladesh Over the past years total revenue and tax receipts as % of Bangladesh GDP

have increased – from 6.5% and 5.5% respectively in FY1982 to 11.2% and 9.4% respectively in FY2010

Tax receipts roughly generate four-fifth of total revenue National Board of Revenue (NBR) is the apex tax authority of the government

which is entrusted to mobilise tax revenue Average annual growth of total tax revenue for FY1982-1991 period was

13.77%; it came down to 11.8% during FY1992-2001. However, average annual growth picked up between FY2002-2010 and was 14.21%

Revenue and Tax Revenue as % of GDP

However, tax-GDP ratio is still significantly low when compared to other countries (average tax revenue as % of GDP in South Asian countries is about 12%)

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Fiscal Year Revenue as % of GDP Tax Revenue as % of GDP Fiscal Year 1982 6.48 5.47 1982 1992 8.21 6.61 19922002 9.48 7.80 20022010 11.22 9.37 2010

What is Fiscal Policy?

Fiscal Policy is the decision of the government about:

How to earn revenue and gather resources from various sources

For what to spend those earnings and resources

How much to spend and When to spend

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There are two sides of fiscal policy

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Earnings: Revenue and Resources

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Why does the government need revenue?

To maintain its daily activities, i.e. to run the government

To ensure protection for the helpless To provide necessary services to people that otherwise

nobody would provide (Market failure) To ensure development of the country To build buffer against risk!

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Where does the revenue come from?

Tax revenueDirect: income tax, wealth tax etc.Indirect: VAT, tariff, excise duty etc.

Non-Tax revenueFees & charges: registration, sales

of forms, stamps etc.Fines: mobile court fines, police

fines etc.Printing of money

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Where does the government keep its revenue?

The government’s account is maintained by the Treasury which is located at Bangladesh Bank

The “account” in which all these revenues are deposited is called the “Consolidated Fund”

Consolidated Fund was created under Article 84 of our constitution

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Resources from other sources

GrantsLoans from

Domestic sourcesTreasury bills/bonds savings schemesborrowing from the banks

Foreign sourcesBilateral Multilateral

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Revenue trend in Bangladesh

Revenue as percent of GDP is increasing Around 80 percent of public revenue in

Bangladesh is derived from tax sources.

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Revenue trend in Bangladesh(crore Bangladeshi taka)

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FY 98-99

FY 99-00

FY 00-01

FY 01-02

FY 02-03

FY 03-04

FY 04-05

FY 05-06

FY 06-07

FY 07-08

FY 08-09

Total Revenue 19767 20074 24342 24893 31120 35400 39200 44868 49472 60539 69382

Tax Revenue 16167 16079 19778 21332 24950 28300 31950 36175 39247 48012 56789Non-Tax Revenue 3600 3995 4564 3561 6170 7100 7250 8693 10225 12527 12593

As percentage of GDP

Total Revenue 9.00 8.47 9.60 10.21 10.35 10.63 10.58 10.79 10.59 11.17 11.31

Tax Revenue 7.36 6.78 7.80 7.81 8.30 8.50 8.62 8.70 8.40 8.86 9.25Non-Tax Revenue 1.64 1.69 1.80 2.40 2.05 2.13 1.96 2.09 2.19 2.31 2.05

Spending

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How does spending help? Theoretical framework

How much spending will affect depends on two factors- The multiplier effect and The crowding-out effect

The multiplier effect denotes that a certain amount of spending will have bigger impact than the size of the spending.

The crowding-out effect arises out of a mechanism that offsets the increase in AD.

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How does spending help?If the government wants to increase GDP…

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How does spending help?If the government wants to check inflation…

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For what to spend?

Through spending the government tries to affect: Macroeconomic stabilization Equity: horizontal and vertical Efficiency in resource allocation:

Provision of public goods Check market failure

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Macroeconomic Stabilization

To stabilize price To raise growth rate To raise employment level To reduce deficit

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Equity

Inequality prevails in all societies. Government tries to reduce the gap between the

rich and the poor For this, the government collects taxes from the

rich and spends it for the poor

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Efficiency of resource allocation

Private entrepreneurs may not be interested in investments where return of investment is not good for him but good for the country

In this case, the government may step ahead and supply resources for such investments

Example: building roads and highways, Public-Private Partnership (PPP)

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Is government spending always good?

Government spending is necessary to keep the economy on track.

However, if the spending is not in line with the economic objective then it may be detrimental

Example: Suppose a country is facing high inflation. Price is increasing very rapidly. But as the national election is close the government decides to spend more on social safety net programs and development activities to win popularity. What will be its impact on the economy?

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Public Expenditure: Types

Government spending may be broadly classified into two categories-

Revenue expenditureDevelopment expenditure

Revenue expenditure mainly includes government employees salary, benefits and establishment costs.

Development expenditure mainly includes money spent on development activities.

Is revenue expenditure good or bad?

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In which way public expenditure of Bangladesh moving?

The government spends huge amounts of money on building socio-economic and physical infrastructure human resource development and poverty alleviation.

Besides, the government has to incur expenditure for: Administrative welfare and other service oriented activities.

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Recent trend of public expenditure in Bangladesh

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FY 98-99

FY 99-00

FY 00-01

FY 01-02

FY 02-03

FY 03-04

FY 04-05

FY 05-06

FY 06-07

FY 07-08

FY 08-09 (up to

February)

Public Exp (a+b) 29779 34464 37399 40757 42075 47184 53903 59030 66836 93608 99962

a) Rev Exp 17454 19243 21498 25707 26804 30367 35132 39557 48920 71108 74362

b) Dev Exp 12325 15221 15901 15050 15271 16817 18771 19473 17916 22500 25600

Percentage of GDP

Public Exp (a+b) 13.55 14.54 14.75 14.92 14 14.17 14.54 14.2 14.3 17.27 16.29

a) Rev Exp 7.94 8.12 8.48 9.41 8.92 9.12 9.48 9.52 10.47 13.12 12.12

b) Dev Exp 5.61 6.42 6.27 5.51 5.08 5.05 5.06 4.68 3.83 4.15 4.17

Recent trend of public expenditure

% of GDP

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Economic structure of revenue expenditure% share of major economic categories

27Particulars FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 (up to February)

Pay and allowances 27.87 26.29 27.64 29.39 26.88 26.68 Pay of officers 2.69 2.58 2.87 2.62 2.38 2.32 Pay of staff 11.33 10.91 13.52 12.57 11.48 10.41 Allowances 13.85 12.80 11.25 14.20 13.02 13.94Goods and services 17.19 17.39 16.93 14.35 14.84 9.69 Supply and services 11.66 10.64 10.46 9.84 9.71 7.92 Repair and maintenance 5.53 6.75 6.47 4.51 5.13 1.77Payment of interest 20.58 19.51 20.61 20.89 21.46 27.63 Domestic 17.05 15.91 17.06 17.92 18.83 24.89 Foreign 3.53 3.60 3.55 2.97 2.63 2.74Subsidies and current transfers 28.83 31.32 30.24 32.59 33.17 34.26 Subsidies 4.75 6.47 4.72 7.24 8.35 8.99 Grants-in-aid 17.25 18.45 19.40 18.59 18.59 18.51 Subscription to the international organizations

0.08 0.08 0.08 0.08 0.08 0.03

Write-off of loan advances 0.00 0.00 0.00 0.00 0.01 0.001 Pension and gratuity 6.75 6.32 6.04 6.68 6.14 6.72Block 1.55 1.90 1.70 1.39 2.83 0.54 Unexpected 0.70 0.51 0.14 0.57 1.59 0.03 Other 0.85 1.39 1.56 0.82 1.24 0.51Procurement of assets & public works 5.58 5.20 4.95 3.82 3.73 1.2

Procurement of assets 4.36 4.03 3.93 3.15 3.18 0.66 Purchase of land 0.03 0.14 0.07 0.12 0.08 0.25 Construction and works 1.19 1.03 0.95 0.55 0.47 0.25Gross total 101.60 101.61 102.07 102.43 102.91 100.00Deduction recovery 1.60 1.61 2.07 2.43 2.91 0.001

Total- Non-development revenue expenditure

100.00 100.00 100.00 100.00 100.00 100.00

Is the government fulfilling its welfare commitment?

Public Expenditure By Social Sectors:

The Social Sectors are getting increasing prominence day by day

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Annual Development Program expenditure for social sectors (crore taka)

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Sector FY 98-99

FY 99-00

FY 00-01

FY 01-02

FY 02-03

FY 03-04

FY 04-05

FY 05-06

FY 06-07

FY 07-08

FY 08-09

Education & Religion 1776 2014 2274 2171 2591 2342 2110 2865 2930 3030 3519Sports and Culture 52 85 113 79 91 117 110 167 96 97 132Health & Family Welfare

1256 1469 1616 1443 1542 1948 1468 2151 2403 2442 2585

Labor & Manpower 9 14 18 18 27 42 72 88 70 105 113Social Welfare, Women & Youth Dev

169 180 189 173 220 183 186 196 160 140 334

Sub-total (1+2+3+4+5) 3262 3762 4210 3884 4471 4632 3946 5467 5659 5814 6683

As % of Total ADP Exp (6/8*100)

23.30 22.80 23.13 24.28 26.15 24.38 19.25 25.43 26.20 25.84 26.11

Total ADP Allocation 14000 16500 18200 16000 17100 19000 20500 21500 21600 22500 25600

Revenue expenditure for social sector(crore taka)

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Sector FY 98-99 FY 99-00

FY 00-01

FY 01-02

FY 02-03

FY 03-04

FY 04-05

FY 05-06

FY 06-07

FY 07-08

FY 08-09

Education & Religion 2988 3279 3700 3842 4086 4628 5245 6508 8085 8717 9664Health & Family Planning

887 972 1099 1286 1334 1497 1803 2065 2682 2898 3441

Youth, Sports & Cultural Affairs

55 73 67 71 84 140 140 184 205 185 195

Labor & Manpower 28 31 35 36 42 41 45 46 58 70 70Social Welfare & Women Affairs

141 177 203 229 283 455 895 1067 1250 1778 2134

Sub-total (9+10+11+12+13)

4099 4532 5104 5464 5829 6761 8128 9870 12280 13648 15504

As % of Total Rev Exp (14/19*100)

24.45 24.57 24.70 24.08 23.03 23.81 23.45 25.93 27.04 23.56 24.31

Total (ADP+Rev) (6+14) 7361 8294 9314 9348 10300 11393 12074 15337 17939 19462 22187As % of total Pub Exp (16/(8+19)*100)

23.93 23.74 23.97 24.16 24.29 24.04 21.89 25.75 26.77 24.20 24.83

As % of GDP (16/20*100)

3.35 3.50 3.67 3.42 3.43 3.42 3.26 3.69 3.80 3.59 3.62

Total Revenue Allocation 16765 18444 20662 22692 25307 28390 34664 38070 45412 57922 63764

GDP at Market Prices 219697 237086 253546 273201 300580 332973 370707 415728 472477 541919 613640

What is the balance in the government’s pocket?

If revenue earning is higher than expenditure, the government has surplus

If revenue earning is lower than expenditure, the government faces deficit

In Bangladesh the government maintains a deficit budget

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How the deficit is met

Deficit means that spending is more than earning Therefore, additional money is needed for filling out the

gap between spending and earning This additional money is called “financing” Financing may be either from domestic or foreign sources From foreign sources financing may come as bilateral or

multilateral loans Financing from domestic sources comes from borrowing

from banks, issuance of savings schemes and bonds… and if needed from printing money.

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Trend of deficit financing in Bangladesh

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Implications of budget deficit

High budget deficit means government is spending more than its ability

And in doing so it is borrowing from various sources If the borrowing comes from domestic sources it means

less money is available for the private sector. This may hinder private sector development initiatives.

If the borrowing comes from foreign sources it means the country is exposed to foreign currency risk (for example- speculative attack, current account deficit)

Increased amount of borrowing increases interest rate and, therefore, debt liabilities. High interest rate may make debt unsustainable. In such cases, the country will be exposed to financial crisis. Recent example is Greece.

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To minimize the budget deficit Reforms of Tax Administration is mustReforms aimed at strengthening tax administration and improving taxpayer services will continue to focus on

the following measures: Improve monitoring of tax collection and the

impact of measures to expand the tax net De-link tax collection from tax officials by

allowing payment through banks and/or online rather than through tax offices

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Reforms of Tax Administration (Continue)

Improve procedures for ensuring timely deposit of tax revenues at the point of collection

Establish a special tribunal to prioritise resolution of long-standing tax payment cases Improve publicity and information to encourage individuals and firms to register and

pay tax Undertake action to fill vacant positions in NBR (currently 8,000), improve on-the-job

training and undertake other capacity building measures Develop one-stop service centres to provide information and advice to taxpayers and

create a more positive tax compliant environment Further simplify tax forms and improve tax payment procedures such as payment

through mobile phones Implement an integrated automation strategy covering taxpayer submissions,

assessment, permissions and approvals, and payments Make all rules, regulations, SROs, notices and other orders available on the NBR

website immediately after they had been issued Introduce e-governance and online tax payment systems

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CONCLUSIONS

The gap between revenue collection and expenditure is getting wide over the years and also projects that the gap will be wider in the upcoming fiscal year. Falling revenue has been resulting in rising per capita debt burden, increasing pressure on the ability of the government to carry out regular as well as developmental projects, and crowding out of private investment. The slow growth rate in revenue collection has also been exposing the country to external terms and conditions in implementing its domestic economic policy. Additionally, regressive nature of the tax system has diminished the capacity of the state to raise revenue while putting pressure on the marginalised.

The collection of tax is significantly lower for a number of reasons. The country has a narrow tax base. There exist wide opportunities of evading and avoiding tax. Finally, structural weaknesses of the economy, have added further difficulties to tax collection. For example, more than 69 percent of total tax comes from indirect sources in Bangladesh. Therefore, strengthening of regulatory policy along with structural reforms, and innovation in the tax system is the requirement of time.

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Thank you

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