Next budget targets higher spending without raising taxes

The finance ministry is preparing a Tk6.03 trillion budget for the forthcoming 2021-22 fiscal year, aiming to recover the economy from the Covid-19-induced slowdown by increasing public expenditure through borrowing instead of raising taxes.

The ministry is going to set a target of 7.2% growth in gross domestic product (GDP) by keeping the industrial sector afloat through continuation of the ongoing incentive programmes and reining in the increase in poverty rate through expansion of social security programmes.

For the first time, the revenue target of the National Board of Revenue (NBR) is not going to rise in the new budget as compared to the original budget for the outgoing fiscal, according to sources at the policymaking level. 

In fact, the revenue target for the fiscal 2021-22 against the GDP is lower when compared to the revised budget of the current year. As a result, the revenue board will not need to levy new taxes on trade and commerce in the next budget.

However, the non-tax revenue target is going to increase in the budget for the next financial year. The finance ministry hopes to raise extra funds from the savings of the autonomous corporations and the recent auctions of 2G and 4G spectrums.

In addition, there will be initiatives to boost the morale of general citizens by increasing money flow.

Senior Finance Secretary Abdur Rauf Talukder outlined various aspects of the proposed budget at a virtual meeting of the Budget Monitoring and Resources Committee chaired by Finance Minister AHM Mustafa Kamal on Sunday.

Several government policymakers present at the meeting shared all this information with The Business Standard.

They said the finance secretary told the meeting that the strategy to increase government expenditure for economic recovery will be continued in the next financial year as well.

"The ongoing lockdown put in force in the wake of the second wave of the coronavirus in the country since March 2021 will disrupt the economy to some extent. In this context, additional allocation will be given in the annual development programme by increasing the budget deficit. In addition, social security programmes will continue to be extensively expanded and incentive packages will continue to be implemented," Abdur Rauf Talukder was quoted as saying at the meeting. 

"The overall government expenditure, including development expenditure, could increase significantly in the coming days, as the government needs to implement various incentive packages and adopt expansionary fiscal policy support programmes to offset the economic losses caused by the coronavirus pandemic.

"Due to the ongoing lockdown, there is a risk of a new downward trend in revenue collection from various sources, including income tax and value-added tax. Overall, revenue collection will slow down and government spending will increase. This may increase the budget deficit. However, there is no special risk in the long run. This is because the country's debt-to-GDP ratio is still quite positive," he added.

Fahmida Khatun, executive director of the Centre for Policy Dialogue, endorsed the government's move not to increase the NBR's revenue target, saying revenue would not increase unless economic activities increase. Therefore, not to increase the revenue target of the NBR in the next budget is a sign of discretion, she thinks. 

Zahid Hussain, former lead economist at the World Bank's Dhaka office, said ensuring vaccination for all should be the highest priority of the next budget. Apart from that, adequate allocations should be kept aside to remove the weaknesses in the health sector, he added.

Zahid Hussain further added that there should be punitive and incentive measures in the budget with regard to following the hygiene rules in mills and factories. He recommended providing food and cash assistance to the poor and incentives to labour-intensive small factories.

He said financing in all these sectors is possible only by restructuring the allocations even without increasing the size of the budget that much. He acknowledged some shortfalls in the budget but suggested ensuring funding in the priority sectors.

Deficit financing is not a problem for Bangladesh, Zahid Hussain said, adding, "Banks have excess liquidity. The government's debt-to-GDP ratio is very low. The government has the opportunity to borrow from domestic sources as well as those outside the country. If good programmes can be formulated, there is a possibility of getting help from foreign agencies."

In the original budget for the current financial year, the NBR's revenue target was set at Tk3.3 trillion, which was 10.4% of the GDP. In the next budget, the target is going to be increased by only Tk78 crore and will be 9.5% of the GDP. 

In the revised budget for the current financial year, the NBR has set a target of Tk3.01 trillion, which is 9.7% of the GDP.

Dr Ahsan H Mansur, executive director of the Policy Research Institute (PRI), told The Business Standard that due to the coronavirus, it will not be possible to collect more than 2.5 trillion in revenue this year. Therefore, it would not be right to set a revenue target of over Tk3 trillion in the forthcoming budget, he said.

In the next budget, the government will create a fund styled "Vaccine Support Fund", for which the government is expecting to receive $2 billion or about Tk17,000 crore in loan assistance from foreign sources in addition to the budget allocation. 

The new budget is also going to have an announcement on giving Covid vaccine to all the adult citizens of the country in the new financial year to revive economic activities. 

In addition, $2.75 billion or around Tk23,500 crore is expected to come as budget support from development partners. 

 The finance ministry says since July last year, the country's electricity consumption was on the rise compared to the same period of the previous year, while gas consumption also rose to the pre-Covid level. 

Imports through Chittagong port have also increased when compared to last year. The Export Promotion Bureau has informed the Finance Division that it expects exports to grow by 12% by the end of the current financial year.

Expecting a bumper yield in the Boro season, the finance ministry is set to forecast 5.3% inflation in the new fiscal. Officials believe that the price of fuel oil in the international market may remain within $60-85 per barrel. The inflation target has been set at 5.4% this year, even though the 12-month average inflation at the end of February stood at 5.6% due to a surge in rice prices.

After reviewing the indicators that play a key role in growth, the Finance Division thinks the drivers of growth are in a good position in terms of demand.

There has been positive progress in remittance, import and export, farm loan distribution and import of industrial raw materials. At the end of December last year, the production index of medium and large industries grew by 6.82%.

But there has been a negative growth in private sector credit flow, opening of letter of credit for capital equipment import, foreign direct investment and implementation of the ADP.

"We have been expecting slower growth for the next three years," the finance secretary told the meeting.

"However, the growth in the current financial year will be more than the estimates of the World Bank and the IMF. The revised budget estimates 6.1% growth, which could increase to 7.2% in the next fiscal year. In the next two years, the rate may increase further to 7.6% and 8% respectively," he added.

Though the ADP spending in the current financial year is not satisfactory, the Finance Division has set the ADP allocation in the next budget Tk2.25 trillion – Tk28 crore more than the revised target.

The allocation is also 6.5% of the GDP, and more than the target in the Eighth Five Year Plan.  

Although the current budget has the same proportion of ADP allocation against the GDP, the Finance Division fears that a large portion of the money will remain unspent by the end of the 2020-21 fiscal year.

In the revised budget for the current fiscal year, the size of the ADP has been fixed at Tk1.98 trillion, which is 6.4% of the GDP.

However, the finance secretary told the meeting that the pandemic-led crises impeded most of the developmental works which may lead to a lower ADP implementation rate than the target by the end of the year.

Though the government's implementation strategy aims at raising the spending by widening the deficit, the spending target in the upcoming budget is said to be somewhat shrinking compared to the current fiscal year.

The size of the original budget for the current financial year was Tk5.68 trillion, which was 17.9% of the GDP.

In the next fiscal year, the government will spend 17.3% of the GDP.

The Finance Division has set the revised budget for this year at Tk5.39 trillion.

Fahmida Khatun said an expansionary fiscal policy had been expected from the last fiscal year due to the pandemic, which will increase the development spending. If necessary, the budget deficit will also increase.

"Because money must reach the people to ensure the overall economic recovery and rebound, the money flow must be re-energised for the survival of the people," she added.

She said the inflation rate hovers around 5.5-6% a year while the GDP growth has been estimated at over 6% even amid the pandemic. Considering these two factors, the size of the new budget should be increased by at least 12-15%.

In pre-pandemic years, Bangladesh had always prepared the national budgets with a deficit of 5%. But, the Finance Division is preparing the next budget with a deficit of Tk2.12 trillion, which is 6.5% of the GDP.

In the medium-term budget structure, the rate deficit rate has been targeted to reduce to 5.5% in phases in the next two fiscal years. The original as well as revised budget for the current fiscal also projected a deficit of 6% of the GDP.

Dr Ahsan H Mansur said the government will have to increase its spending to overcome the pandemic-induced crises.

"Even if the budget deficit exceeds 8% of the GDP to ride out the virus fallout, I think there will be no major issues," he noted.

Regarding the budget deficit, Fahmida Khatun said small and medium entrepreneurs would have to be provided with lump-sum payments for their survival. Besides, the 2-3 crore newly poor will have to be brought under cash assistance.

"We will have to increase the expenditure even if the deficit goes sky-high," she concluded.