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FRIDAY, MAY 30, 2025
Will this peculiar form of fiscal conservatism reverse the downturn?

Panorama

Rashed Al Mahmud Titumir
05 June, 2021, 12:25 pm
Last modified: 05 June, 2021, 01:11 pm

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Will this peculiar form of fiscal conservatism reverse the downturn?

The budget proposals are more based on rhetoric than driven by data, hence diminishing the legitimacy of the policies

Rashed Al Mahmud Titumir
05 June, 2021, 12:25 pm
Last modified: 05 June, 2021, 01:11 pm
Rashed Al Mahmud Titumir
Rashed Al Mahmud Titumir

Cash injections have emerged worldwide as the antidote to fallouts from the pandemic, drawing lessons from the last global financial crisis. 

The mechanism is simple – offer eased credit for liquidity support to businesses, and fiscal expansion by increasing government spending on cash-relief to all citizens to stave off the slowdown in the economy. 

Drawing on thoughts such as functional finance and Chartalism, these policies are governed by the notion of deficit spending for boosting aggregate demand aka Keynesianism. 

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Governments opted for policies of creating new money by using fiscal policy for both households and firms, expecting to raise aggregate demand, at the behest of advocates of the Modern Monetary Theory (MMT) and expansionary fiscal policy.

Coming off as a stark dissimilarity, the national budget 2021-22 laid out in Bangladesh proposes reductions and exemptions in taxation, and downsizing of allocations in the social sector, otherwise recognised as fiscal conservatism. 

It seems to be drawing from the age-old orthodox Ricardian equivalence, or the Laffer curve, in explaining the tax cuts. 

The Ricardian equivalence suggests that current tax cuts translated into future taxes will have an equivalent effect on the economy. 

The Laffer curve postulates that an increase in tax cuts will lead to higher tax revenue. 

Health sector is neglected in the proposed budget. Photo: Mumit M
Health sector is neglected in the proposed budget. Photo: Mumit M

The budget has followed at least two textbook fiscal conservatism mechanisms of reduction of public spending, no matter the size or condition of the poor population and cut in taxes. 

The government has remained conservative in spending in social sectors at a time when recovery-successful governments across the world have disbursed direct cash transfer in order to offset the income loss. 

Despite the new poor population, social sectors were allocated 20.9% of the ADP, decreasing from 22.3% ADP allocation in the previous fiscal year.  

Another mechanism of supply-side economics was visible through reduction and exemptions of taxes. 

Besides cuts in corporate taxes, it announced tax exemptions for several projects such as Made in Bangladesh. 

The tax-cut largesse, however, is not as bountiful to cottage, micro, small and medium enterprises (CMSMEs) that have received debt-financed stimulus at slower rates of disbursement than larger export-oriented industries, despite being a major employer of the labour force as a whole. 

The lower allocation in the healthcare and education sector, during a time when both the sectors have been the worst hit, may raise an eyebrow on the aims of the budget for protecting the lives and livelihoods of all citizens. 

Social safety net schemes have expanded in beneficiaries, with little significant change in allocation, lest integrate the new poor population. 

The qualitative change promised by the finance minister may not be a reality, as the expansion of allocation in absolute terms does little to solve high inclusion and exclusion error of social safety nets. 

Nevertheless, this conservative approach exhibits peculiarity, at least on three fronts. The neo-liberals argue for diminishing the size of the government, yet public sector salaries have occupied a large share of government spending over the years, with a year-on-year rise. 

Conservatives also prefer efficiency to equity, yet the budget continues to augment allocations for megaprojects known for their cost overruns. 

The austerity-philes advocate for balancing the budget, yet the deficit for the budget stands at 6.1% of the GDP. 

The national budget, therefore, is rather a peculiar twist to the ordinary fiscal conservatism, in a manner that offers preferential attention to selected coterie, whilst cutting down on the public spending for distressed millions. 

What this indicates is a weird fiscal conservatism, and stitching these three peculiarities together is the desire for upholding patronage among networks, leading to a clientelist fiscal conservatism.  

The previous budget had laid out an ambitious plan for recovery without really taking into account the possibility of a second wave of the virus. 

The proposed budget strikes a similar note as the country is far from reaching herd immunity as vaccination roll-out has slowed down due to a shortage in supply. 

The budget proposes an ambitious plan of vaccinating 80% of the population, but the rate of vaccination per month mentioned will take almost four years. 

Within the next year, given that the supply increases, only 20% of the population may receive vaccines leaving the country at risk of possible third or fourth waves. Who knows! 

With the country still coping from the shock, the budget was imbued with the aspirations of a well-rounded recovery and reconstruction plan.

The budget proposals are more based on rhetoric than driven by data, hence diminishing the legitimacy of the policies. The government calculation may use statistics as old as five years leaving scope for overestimation in some cases. 

Neither there is a provision of quarterly GDP estimates that could have depicted the economic conditions better, nor are there efforts to have a national household database in place to service the needy, with monthly statistics on the labour market participation.

Crises have always paved the way for reforms beyond conventional wisdom around the world. 

An alternative to the conventional framework of the national budget can be envisioned upon four pillars of respite from the Covid-19 crisis – relief, rehabilitation, recovery, and reconstruction. 

Such would entail addressing and incorporating the needs of the new poor population in the absence of basic income, increased median wage, and a fully-fledged social security that reaches cash-relief to the last mile while equally mindful of the businesses that employ most of the people.


Dr Rashed Al Mahmud Titumir is a professor of Economics at the Department of Development Studies at the University of Dhaka. He is also the  chairperson of the think-tank Unnayan Onneshan.

Analysis / Top News

health / Budget / Policy

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