Proposed FY26 budget in line with estimates, but below expectations: CPD
Legalising undeclared income through special tax provisions undermines efforts to enforce tax compliance and sends the wrong message to the public, says the think-tank.
The proposed budget for the upcoming fiscal 2025-26 fails to meet expectations despite aligning with macroeconomic estimates, according to the Centre for Policy Dialogue (CPD).
At a post-budget analysis on Tuesday (3 June), the think tank argued that the budget does not clearly explain how it will achieve its stated targets, many of which seem optimistic but unattainable.
CPD researchers said the budget lacks fairness in its tax structure, contains measures enabling money laundering, and offers limited protection for domestic industries.
The event, held at a hotel in Dhaka, featured a presentation by CPD Executive Director Fahmida Khatun and remarks from CPD Distinguished Fellow Mustafizur Rahman, joined by Research Director Khandaker Golam Moazzem and other researchers.
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Mustafizur Rahman said the budget's revenue collection targets are unrealistic, particularly given that the government has yet to implement reforms in the National Board of Revenue (NBR) and other areas.
"The budget's targets seem consistent with official projections, but they do not meet broader expectations. There's a disconnect between these projections and the practical challenges of implementation," said the economist.
He pointed out that while the budget's assumptions match official estimates, they do not align with the expectations of businesses or the broader economy.
The CPD also criticised the budget's provisions that enable individuals to legalise untaxed money by investing in houses, flats, or apartments.
While tax-free income thresholds have been raised, these changes will only take effect from FY27. In the meantime, the restructuring of tax slabs increases the burden on middle-income earners
At a time when the interim government is trying to crack down on illegal income, transactions, and money laundering, this sends the wrong message to the public," said Fahmida.
"It contradicts the spirit of the July uprising," she said, adding that similar provisions previously did not generate significant revenue. "If any government wants to legitimise untaxed money, it should be a one-off measure and strictly enforced.
Finance Adviser Salehuddin Ahmed on Monday unveiled the proposed budget for FY26, totalling Tk7,90,000 crore – a 0.87% decline from the current fiscal's budget.
Tax measures to fuel inequality
The CPD observed that the budget's direct and indirect tax measures could worsen inequality.
The budget's targets seem consistent with official projections, but they do not meet broader expectations. There's a disconnect between these projections and the practical challenges of implementation
"While tax-free income thresholds have been raised, these changes will only take effect from FY27. In the meantime, the restructuring of tax slabs increases the burden on middle-income earners," said Fahmida.
She noted that over the past two years, the prices of goods have risen by 20%. Given this inflation, the budget's failure to immediately adjust tax-free thresholds will hurt middle-income taxpayers.
Mustafiz added that the budget's approach to indirect taxation could further deepen inequality as it includes VAT increases in areas that will directly raise living costs for consumers.
However, the CPD welcomed the move to raise the tax-free income threshold to Tk5.25 lakh for July uprising fighters and to exempt up to Tk5 lakh in agricultural income from taxes.
Ambitious revenue targets
The budget aims to raise revenue collection by 8.9% over the revised target for the current fiscal year. However, CPD's calculations, based on actual revenue figures up to March, suggest the growth target is actually 29.4% higher than this year's likely outcome.
"Achieving such an increase would require the government to collect an additional Tk1.28 lakh crore compared to this year," said Fahmida. "This is simply not possible given the structural issues in revenue collection."
She also expressed concern that weak revenue growth will undermine development goals. "Without substantial revenue collection, development targets cannot be achieved."
Macroeconomic challenges
Fahmida Khatun said, while remittance flows and export earnings have shown signs of stabilisation, the overall economy faces serious challenges.
High inflation, sluggish revenue collection, slow investment, high borrowing by the government, rising loan defaults, and high interest rates all threaten growth.
The government projects GDP growth of 5% in FY25 and 5.5% in FY26. However, Bangladesh Bureau of Statistics data suggests the current year's growth will be only 4%.
Fahmida questioned how the government plans to meet its targets in the face of continued investment barriers and political uncertainty.
The budget assumes private sector credit growth will reach 11% next fiscal year, up from an estimated 9.8% this year.
However, Fahmida said this appears unrealistic, given the government's heavy reliance on bank borrowing and the ongoing political uncertainty that discourages private sector activity.
The proposed budget expects the private investment-GDP ratio to improve to 24.3% in FY26 from 24% in FY25, which will require an additional Tk1.62 lakh crore in private investment in the next fiscal. Whether it is possible in the current political climate remains a question, said CPD in its analysis.
Ambitious inflation target
The budget projects inflation will fall to 6.5% in FY26, down from the 9% forecast for FY25. But as of May 2025, average inflation on a 12-month moving average basis stood at 10.1%, with point-to-point inflation at 9.05%.
"The inflation target for next year is overly ambitious, given current trends," said Fahmida.
Development expenditure pressure
Prevalence of carryover projects, listing of projects without allocation, and inclusion of even unapproved projects in the hope of foreign funds continued to feature in the Annual Development Programme, the CPD points out.
The share of projects with symbolic allocation has increased substantially, a trend that CPD finds "an objectionable development and a move in the wrong direction."
Inclusion of projects with an allocation of Tk1 lakh has been a perpetual practice, with 45 such projects making way to the ADP for FY26 – up from 24 in the current fiscal year.
The CPD cites how time overrun continues in development projects as it finds the average age of 969 projects is 5.5 years, with 338 running for 6-10 years and 43 more than 10 years.
It points out how repeated extensions of projects cause cost overruns, with 47.8% of ADP projects chosen for FY26 have already been revised 1-4 times.
Fahmida said the Annual Development Programme (ADP) implementation remains a concern. In the first 10 months of the current year, only 32.8% of the ADP has been executed, with the year-end figure likely to be around 70%. This makes next year's target of 24% higher development spending appear unrealistic.
She also flagged delays in large projects. Eight of the 20 megaprojects face looming deadlines next fiscal year, though none have been completed. Such delays will drive up costs and further strain public finances.
Fahmida noted that allocations for education, health, and agriculture have decreased in absolute terms. "This is worrying, given the government's stated commitment to human resource development," she said.
Although the education budget has increased in absolute size, its share of GDP has declined. The next fiscal year's proposed allocation for education is 1.53% of GDP, whereas most least developed countries spend over 2% of GDP on education.
The proposed budget indicates low priority for education sector development, the CPD said, revealing that the government's per capita actual expenditure on primary education averaged $136 during 2016-23. Countries such as Nicaragua, Honduras, and Mauritania, whose per capita GDP was lower than that of Bangladesh, have a higher per capita expenditure on primary education.
The CPD also highlighted that allocations for the health sector have stayed below 1% of GDP for the past 20 years, showing a persistent lack of priority.
Per capita health spending is Tk2,435 this year, only Tk22 increase from the year before.
As a result, people's out-of-pocket health spending will likely rise, despite such costs falling in India, Pakistan, Sri Lanka, and Bhutan.
Bangladesh has the 8th highest out-of-pocket health spending per capita among 44 LDCs and 73% of Bangladesh's total health expenditure was out-of-pocket in 2022, the CPD states in its analysis.
Fahmida also discussed social safety net programmes, agriculture, power, energy, environment, climate change, and local government issues.
Mixed signals on trade policy
Fahmida noted that the budget includes some positive initiatives to prepare for Bangladesh's graduation from Least Developed Country status, such as reducing tariffs and minimum tariff values for selected goods and imposing new customs duties on others.
To counter US retaliatory tariffs, the government has withdrawn import duties on 110 products, reduced them on 65 products, and removed or partially withdrawn supplementary duties on hundreds more.
However, under WTO rules, these tariff cuts will also benefit other trading partners, potentially reducing government revenues.
CPD welcomed the decision to withdraw VAT on LNG imports, which should help lower electricity production costs and avoid further electricity price hikes.
However, the imposition of VAT on construction services will increase building costs, while higher VAT on tableware is positive for the environment but will increase product prices.
Call for deeper reforms
Economist Mustafizur Rahman structural reforms in the tax system are necessary to ensure fairer revenue collection.
"The budget's reliance on revenue from indirect taxes risks fuelling inequality. Greater emphasis on income taxes, wealth taxes, and inheritance taxes is needed to reduce disparities," he said.
He also criticised the budget's complacency towards combating money laundering.
"The government has taken steps to curb money smuggling, which has boosted remittances by nearly 30% over the past year. But there's no clear statement on money laundering in the budget, while it gives black money a chance to become legal," he said.
