The FY23 budget: A few issues to ponder

Preparations are afoot for the FY23 budget with clouds around development and growth prospects not entirely faded yet. While inclusive growth must remain the focus for the government, macroeconomic stability has also emerged as an elevated consideration in transitioning from the pandemic induced economic slowdown.

Bangladesh's growth recovery has been above global average. The public debt-to-GDP ratio is low despite recent increases. All GDP forecasts for FY23 indicate that Bangladesh will be one of the faster growing nations in the near term. Macro-economic indicators are generally positive – growth in revenue receipts, merchandise imports, exports, private credit are rebounding; electricity generation is up; and foreign exchange reserve is still adequate although depleting.

Growth globally is fragile, given large dispersion in vaccination rates, the fear of new Covid variants and geopolitical tensions in the international polity. Just as the Omicron driven wave began to taper out in many countries, a new sub-variant has emerged, threatening to prolong the wave. The year 2022 is poised to mark a departure from many of the trends that have defined the global geopolitical landscape in recent decades.

The budgets in FY20 and FY21 endeavoured to address the health emergency while stemming the impact on the economy. Those efforts have borne some results with the nation dealing with the Omicron wave in a measured manner while stepping up efforts on vaccination. The Covid-19 growth recession was due not to a lack of demand, but a lack of supply. People wanted to buy and spend, but businesses and supply chains could not fully operate owing to fear of the virus. That fear is hopefully receding without losing sight of getting caught by letting our guards down.

The salient tradeoffs

The fiscal deficit is projected at 6.2% of GDP in the FY22 budget. Revenues will most likely fall short of budget estimates despite nearly 17% nominal growth in the first half of FY22. Covid resulted in the government exceeding the budgeted fiscal deficit for FY20, largely owing to an absolute decline in revenues. The deficit was well short of target in FY21 as business as usual returned with expenditure shortfall, exceeding the shortfall in revenues.

A fiscal deficit to the tune of 5.5%-5.8% of GDP in FY23 and expenditure growth of around 15% (relative to revised FY22 budget) could be a good target to chase without concerns about fiscal sustainability. Excessive expenditure may fuel already rising pressures on exchange rate and inflation, which calls for prioritising development results. Differential capacity constraints within the government often reorient priorities towards agencies and sectors capable of utilising budgetary allocations.

A gradual fiscal consolidation, as envisaged in the government's macro-fiscal framework for FY2023-24, is feasible. This does not conflict with pushing public investments, creating a conducive environment for private investment, better targeting welfare spending, and getting organic improvement in taxes.

It is important that the budget strikes a balance between stimulus and sustainability to keep a check on profligate use of public debt, which is now around 40% of GDP. The interest rate on debt paid by the government has been less than Bangladesh's growth rate by norm, not by exception. The comfort from this favourable debt dynamics cannot be blind to the implicit and explicit contingent liabilities that are increasingly looming large. Also, with the interest rate rising due to rising inflation, the growth rate must remain higher as the economy normalises.

Revenue mobilisation has consistently eluded budgetary aspirations. The authorities' dilemma is to enhance revenues without squeezing more from compliant taxpayers. There is a temptation to milk over and over available cows until buying another one. This risk existing cows fleeing the stable while diverting attention from leakage, inefficiency, and tax net expansion.

The finance minister cannot afford to go for across the board tax cuts to induce people to spend. Even if we put money in people's pockets, they may not spend more, especially if they happen to be surplus households. The budget could, at least in principle, tax the wealthiest by tweaking the surcharge on the super-rich while providing some relief to the middle class through an inflationary adjustment in the income tax exemption limit. However, the quantitative significance of outcomes from these measures are not much to write home about but they may have a signalling value.

The finance minister cannot take high risks on the revenue expenditure side in the backdrop of consumer inflation levels that have reached beyond comfort. The prevailing subsidy regime is stressed by the rise in oil, gas, and fertiliser prices, thus raising premiums on prioritisation of subsidies. Maintaining the right balance between supporting rural demand and investing in physical and social infrastructure will be the difference between budget as usual and budget appropriate for moving development forward in changing times.

Concerns of fiscal responsibility and debt sustainability, which assume significance in the medium term, will be justified if the gains from the trade-off between macroeconomic stability outweigh the losses in terms of growth emanating from direct demand from the poor and the vulnerable.

Beyond recovery

Mere recovery is not enough. Bangladesh aspires for a quantum leap. To support that leap, the budget itself must leap towards putting in place a policy plumbers' articulation of the HIC ambition by 2041. This formidable ambition will hinge on the model of the future built on the strengths of our traditional backbone.

Such a model must address infrastructure and logistics, focus on water and agriculture, accelerate manufacturing, support MSMEs, identify sunrise sectors, incentivise clean energy, reimagine urban spaces, and harness the demographic and digital dividends. Increased capital expenditure is needed to address the slow-paced structural transformation and the palpable risk of a middle-income trap, with a boost to infrastructure spending crowding in private investment.

While the capital expenditure generates the multiplier effect with a lag, the revenue expenditure induces direct demand in the economy by influencing consumption. Appreciable increases in expenditure on transfers to the poor are expected to fuel inclusive growth. However, the devil haunts the implementation details.

The government must step up service delivery to enhance ease of doing development. One taka of programme expenditures could produce more than a taka worth of inputs by catalysing real and financial contributions from internal and external partners in development. Development cooperation carried out by government agencies and non-governmental organisations has been a trademark of Bangladesh's economic transformation.

The disruptions in formal education caused by the pandemic, which disproportionately affected children belonging to the vulnerable sections of society, could be responsible for permanent school dropouts, further accentuating inequality of opportunity, especially gender inequality. The solutions to compensate for such losses cannot just be technology-centric when the access to and quality of power and internet connectivity is often problematic, especially in the context of those disproportionately affected.

Fiscal innovations for the development of the agricultural sector must embrace cost-effective natural solutions and the principles of circular economy. These do not demand too much reliance on technology. Sustainable agricultural systems and practices are known to improve resilience of agriculture to disruptions such as climate change. Reliance on mechanisation alone rather than on sustainable agricultural systems and practices for transforming agriculture makes sense only within certain limits.

Urban local bodies responsible for urban development and management need financial and administrative empowerment. There must be an attempt to enhance the functional and fiscal autonomy and accountability of urban local bodies, which is critical for good urban governance. The budget must also address the issue of regional backwardness, especially coastal areas.

Beware of crony populism

Political economy and capacity constraints limit the menu of policy options the government can play with. The government must be wary of the crony populists' playbook. Populism is a strategy many use either out of a sense of conviction or out of necessity. Corruption, an overall lack of transparency, and the machinations used by various interest groups have caused public institutions to lose credibility and legitimacy. Typically associated with an anti-establishment and anti-elite narrative, populism often coincides with favoured relations between the state and some big business.

Cronyism is a form of deviant economic behaviour that leads to a poor business environment by sucking fairness and competition out of the economic game. Policies and expenditures that favour special interest groups and those with strong political connections is the very definition of cronyism. When the government spends more, private companies do more business with it. Extreme care and vigilance are needed to ensure the even-handedness and fairness of taxation and expenditures.

As a pragmatic rule, given Bangladesh's low tax effort, populist demand for decreases in tax rates can be accommodated only when the base expands enough to make the changes revenue neutral. There is indeed room for revenue neutral rate rationalisations towards a uniform structure in both indirect and direct tax categories if combined with reductions in holidays, rebates, exemptions and so on.

Lags in completing most development projects in time and within budget has become the norm rather than exception. Known irregularities and mismanagement cannot be addressed because the officials do not even respond properly to the concerns raised by the higher authorities. The game changer here is to enforce accountability like never before.

Aiming long amidst headwinds

The proof of the pudding lies in the effective implementation of the budget and the kind of outcomes such implementation will bring about. Chronic underperformance in health remains a serious concern. Even the pandemic brought no change in the quantity and quality of budget execution in the health sector. Stakeholders-based accountability systems could help get better value for public spending.

Budget management must aim long into the future. It should lay the foundation to integrate the planning and finance functions for greater budgetary efficiency and effectiveness. This will enable fighting many evils, including leaks in government spending and corruption that damages the nation's economic security and progress, besides impairing national political morality.