Running the government becoming costlier and cuts into ADP

​​​​Running the government is becoming more expensive every year as operational spending in fiscal budgets has been ballooning for the past six fiscal years, leaving development a shrinking slice of the pie.

The upcoming fiscal budget faces severe constraints, with a significant portion of revenue earmarked for operational expenses, leaving limited funds for development.

Huge subsidies, rising interest payments, and inflated public sector salaries and perks have created a financial crunch, forcing the interim government to rely heavily on borrowing to finance development projects.

The finance ministry plans to allocate over two-thirds of the estimated Tk8.48 trillion budget to operational expenditures, a figure 114% higher than development spending—the widest gap in 14 years, according to finance officials. This stark imbalance highlights the financial legacy left by the previous administration, characterised by unchecked energy subsidies, excessive loans for infrastructure projects, and fiscal mismanagement.

In the current fiscal year (FY25) budget, salaries, allowances, and pensions accounted for 23% of operational expenses, while loan interest repayments consumed 22%, and subsidies and incentives another 20%. The proposed FY26 budget, 14% larger than the revised FY25 budget, will allocate Tk5.78 lakh crore (68%) to operational costs, finance division sources say.

Conversely, the Annual Development Programme (ADP) is slated to receive only Tk2.7 lakh crore, a mere Tk5,000 crore increase from the original FY25 budget. A decade-long analysis reveals a widening gap between operational and development spending. In FY12, operational costs were 124% higher than development expenditures. While this gap narrowed in subsequent years, it has consistently expanded since FY20, reaching 91% in the FY25 budget.

Experts say that over the past decade, the previous government had to spend its entire revenue just to cover operational expenses. As a result, the finance ministry is preparing the upcoming budget with a development programme entirely dependent on loans.

"If these expenses were controlled and spent on education and healthcare, it would contribute to the development of the economy and human resources," Dr Zahid Hussain, former chief economist of the World Bank in Dhaka, told TBS.

He further said while it is easy to talk about reducing subsidies, it is not easy to implement.

"Reducing agricultural subsidies will not be possible unless prices of fertilisers and agricultural inputs decrease in the international market, as this is directly tied to the country's food security. However, the government is working to reduce electricity costs."

The next year's budget will aim to keep inflation below 6.5% while targeting a 6% GDP growth.

The upcoming budget will be the first formulated by the interim government, which assumed power following the ouster of the Awami League government amid a mass uprising in August of last year.

The rise in operational spending

Finance division officials say since the fiscal year preceding the 2014 one-sided election, the Awami League government has been increasing various subsidies and incentives to appease businessmen.

Infograph: TBS

In 2015, alongside doubling salaries and allowances, various benefits were introduced for government employees, including those in law enforcement agencies.

During this period, new allowances, including risk allowances, were introduced for members of law enforcement and various other agencies.

Before the 7 January national polls in 2024, the Hasina government introduced an additional 5% increment along with a 5% incentive for government employees, a policy that still remains in place.

According to the sources, to cover the increased operational expenses and show off so-called rapid development, the former Awami League government borrowed large sums at high interest rates from banks and savings instruments, with Tk93,000 crore allocated in the current budget for interest payments. This amount is expected to rise to nearly Tk1 lakh crore in the upcoming fiscal year.

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), criticised the previous government's decision-making process, citing pressure from interest groups and a lack of consideration for economic realities. She also pointed out the inequity of providing an additional 5% incentive to government employees, beyond the mandated 5% increment for all workers.

To reduce expenses, the Public Administration Reform Commission has recommended introducing cost-effective e-services and reducing the number of ministries.

The commission noted that ministries have been expanded irrationally due to political considerations, leading to overlapping responsibilities. As a result, government expenditures have increased while administrative efficiency has declined.

The finance ministry, in its budget documents, projected that state-owned enterprises will incur a net loss of over Tk28,000 crore in the current fiscal year.

Highlighting that these enterprises remain a burden on the government, the Reform Commission stated that they continue to operate only through heavy subsidies.

Revenue target set at Tk5.85 lakh crore

According to finance division sources, in the proposed budget, a revenue target of Tk5.85 lakh crore has been set, which is 9.3% of GDP, to allocate a large operational expenses.

Of this, the target from the tax system under the NBR is set at Tk5.21 lakh crore or 8.2% of GDP.

"Setting a revenue target of more than Tk4.5 lakh crore in the upcoming budget will not be achievable because the government has not implemented any reforms in the revenue sector that would increase revenue by 20% or more," said Dr Zahid Hossain, suggesting that the interim government should clarify in the upcoming budget which reforms they aim to complete before leaving office.

However, finance division officials say in the new fiscal year, the government will focus on increasing revenue collection from income tax and VAT. To boost revenue generation, special emphasis will be placed on fully automating the income tax and VAT departments in the new budget.

The deficit for the current fiscal year is estimated at Tk2.56 lakh crore, which would go up to Tk2.63 lakh crore in the next fiscal. To cover the deficit, the government plans to borrow Tk1.53 lakh crore from domestic sources including Tk1.27 lakh crore from banks, and Tk1.10 lakh crore from foreign sources.

Hopes for lower inflation, higher growth

According to sources, the finance ministry is preparing the proposed budget for FY26 prioritising the restoration of macroeconomic stability, the establishment of good governance, and key reform initiatives.

Finance division officials say the upcoming budget will focus on keeping the inflation rate within 6.5% as they pin hopes on US President Donald Trump's intervention to end the Ukraine-Russia war, which will bring down global commodity prices and ease pressure on Bangladesh's exchange rate and foreign reserves.

The finance division is expecting a 6% growth in the upcoming fiscal year on a rebound in public and private investments.

The growth target for the current fiscal year's original budget was set at 6.75%, which has been revised down to 5.25% in the amended budget.

Additionally, officials from the finance division have stated that extra attention will be given to climate change and women's empowerment in the new budget.

In November of next year, Bangladesh will officially graduate from the Least Developed Country status to a developing country. The upcoming budget will outline various measures taken by the government to address the post-graduation challenges, along with policy support measures as alternatives to cash incentives for exports.