A budget of less: How will it fare in FY26?

Infographic: TBS

Cutting short a high-flying expansionary budget into a cautious, conservative one was not an easy exercise. The interim government had to trim the development outlay in this fiscal year to meet subsidy arrears accrued from the past regime. Growth slowed amid political turbulence, and such a transition never offers investment confidence. Revenue earning was never encouraging, and this time it is even less than what it should have been.

The interim government had no choice but to live within its means. The new fiscal year begins Tuesday with a budget lower in size than the outgoing year—first such instance in Bangladesh.

The 2025-26 fiscal year (FY26) is set to mark a gloomy start, with more red and yellow lines than green indices—a state of the economy labelled by the Centre for Policy Dialogue (CPD) as disquieting developments amid partial recovery. 

Export earnings remain resilient, and remittance inflow robust, helping rebuild foreign reserves and stabilise the exchange rate.

In contrast, most other key indicators have turned red. While inflation pressure persists, a large shortfall in revenue collection makes the government rely more on bank borrowing. Private investment remains low, as does economic growth. As loan scams of the previous regimes are exposed, banks are seeing a surge in toxic loans, limiting their ability to finance the private sector if demand peaks. Some banks are facing a liquidity crisis as bad loans require higher provisioning.

Import payments are rising, which might hint at enhanced activities in the private sector, despite a strain on foreign exchange reserves.

Against such a backdrop, how will the new budget fare?

CPD sees more concerns than hopes. It says macroeconomic projections are optimistic, but fiscal framework is unlikely to hold. Trend in private investment and credit growth is positive. But a decline in public expenditure will leave key social sectors underfunded.

The development outlay for FY26 is 13% lower than the original annual development programme (ADP) for FY25, ending on 30 June. Fourteen out of fifteen sectors in the ADP saw cuts in allocations. "Regrettably, education, health, and agriculture have seen declines," CPD points out.

Allocations for both education and health declined as a share of GDP—less than 2% and 1%, respectively. Bangladesh's education spending is the third lowest among 39 LDCs, and health expenditure is the second lowest among 44 LDCs.

This comes in stark contrast as the country awaits graduation from LDC status in 2026, when it will be under pressure to improve the quality of life.

Higher allocations for youth and job creation are a positive step.

Expecting inflation to drastically fall to 6.5% in FY26 from over 9% now is "ambitious." Though acknowledged in the budget as one of the biggest challenges, measures to control inflation are inadequate, CPD said in its key observations on the new budget earlier this week.

The tax-free income threshold will be raised to Tk3.75 lakh, effective from FY27—a year later. CPD thinks this raise should have been implemented in FY26, taking into account the over 20% rise in prices over the last couple of years. Changes in tax slabs will put a higher burden on relatively low-income groups—a 12.5% rise for people with Tk 6 lakh annual income and 7.6% rise for those earning Tk 30 lakh. "This goes against the principle of equitable tax burden and equity," it says.

Revenue mobilisation is projected to grow faster than public expenditure in the new fiscal year. A 9% growth in revenue, as projected, will require mobilisation of Tk1.28 lakh crore in additional revenue—a tough task for the National Board of Revenue (NBR), with officials protesting over reform initiatives for more than a month now.

The interim government's council of advisers approved the Tk7.9 lakh crore new budget on 22 June, with Finance Adviser Salehuddin Ahmed acknowledging the current difficult conditions compelled them to stick to a traditional approach.

Placing the budget on 2 June, he said they marked a shift from the tradition of growth-driven approach to a people-focused approach.

While cutting expenditures will help keep the budget deficit lower, it will not only cut public investment in physical infrastructures, but will also leave insufficient funds for social sectors.

Less investment means slower growth and poorer quality of life. So, small is not always beautiful.

The budget being exceptional in terms of its smaller-than-previous size does not mean anything to people hard-pressed by persisting inflation. Saving money on health and education budget will not help them save on out-of-pocket healthcare and education bills.

Bangladesh's per capita health spending, which sees only a Tk 22 increase to Tk 2,435 this year, is the 9th lowest among 191 countries—embarrassing for a country graduating from LDC just a year later.

The finance adviser, stating the new budget's philosophy, had said the overall development of people would be the government's priority, not growth and physical infrastructures.

"Unfortunately, these objectives are not backed by budgetary measures," CPD says.

The budget, however, demonstrates a futuristic approach toward LDC graduation in regard to tariff rationalisation, as required under the WTO. Customs duty tiers have been restructured and duties reduced on certain goods. Trade rules have been amended to enhance competitiveness in preparation for the country's graduation from LDC.

In its latest outlook, the Planning Commission's General Economics Division (GED) said the new budget took steps to rationalise the tariff regime in recognition of post-LDC graduation requirements.

Import duties on 110 products have been eliminated, while 65 other products saw duty cuts as part of broader trade reforms and preparations for tariff negotiations with the USA.

GED finds the growth and inflation projections exceptionally realistic.

"This is quite exceptional as the growth target in previous years consistently exceeded the IMF's estimate, which is now more conservative than the IMF's forecast of 6.5%," it says. The same goes for inflation, which is targeted at 6.5% when IMF projected 5.2% for FY26, GED adds, stressing the need for effective implementation of the budget to achieve macroeconomic stability and inclusive development.

But the budget is not just about trimming allocations to fit expenditure to shrinking income. A developing economy like ours needs to spend more for its people's welfare. There is no alternative to mobilising more revenue for the government to meet people's needs and reduce debt. The task is heavy for revenue officials who are now protesting the government's reform initiatives which include splitting NBR into two separate entities. Revenue officials cannot afford to stay away from work and keep their offices shut. They must end disputes through talks and return to work. Because, revenue people have been tasked with a "mission impossible"—arranging Tk 5.64 lakh crore in FY26. The budget has been trimmed, but their target has not.