FY23 budget: Need for expansion, but govt opts for contraction

At a time when there is a need for expansionary fiscal policy to increase government spending for rejuvenating the Covid-hit economy now running on the recovery lane and also protecting the people from commodity price shocks, the overall expenditure for the next fiscal year, as outlined by the Finance Division, is not going to increase much in proportion to GDP.

Besides, the government is also going to trim its total budget outlay alongside cutting allocation for Annual Development Programme (ADP) by 8% in the ongoing fiscal year.

For FY23, the finance ministry will formulate a budget to the tune of a little over Tk683,432 crore, which is 13% higher than this fiscal year's main budget and 15% higher than the revised outlay, according to the finance ministry's official document.

Finance Secretary Abdur Rouf Talukder will present the budget outlay for the next fiscal year in a meeting of the coordination council on fiscal, monetary, exchange rate to be held in the third week of this month.

Finance officials involved in the next budget formulation said industry and services sectors have begun to recoup pandemic-induced losses. And, for continuation of this trend, additional spending will be required for implementing government-declared stimulus packages.

On the one hand, there is a risk of rising government subsidy burden owing to rising fuel and fertiliser prices in the global market; on the other hand, there is a need to increase development and non-development expenditure to tick up money flow among consumers amid rising inflation.

The government also has that opportunity because the way revenue collection has been increasing, development expenditure has not gone up at that rate.

Again, considering the pandemic situation, the government cut back on unnecessary and luxury expenditure. As a result,  in July-February of the current fiscal year, the government's budget deficit stood at only Tk4,641 crore, which was almost three times lower than in the same period of the previous fiscal year.

Infograph: TBS

Revenue mobilisation of the National Board of Revenue has ticked up by more than 15% till February of FY22, thanks to the rebound of economic activities from Covid-led downturn and a rise in commodity prices in the international market as well as higher import payments. Therefore, the finance ministry is not making any changes in targets for collecting tax and non-tax revenue in the revised budget for FY22.

Nevertheless, this fiscal year's revised budget is going to be slashed by about Tk10,000 crore and the ADP allocation already saw a cut of around Tk18,000 crore, meaning that the government's non-development expenditure has increased more than the target, while its development spending has dropped.

The total revenue collection target for the next fiscal year may be set at Tk438,318 crore, which is 10% of GDP and 0.1 percentage points higher than the current fiscal year's target.

Similarly, the revenue board's collection target is going to see a slight rise in proportion to GDP. Its collection target for the current fiscal year amounted to Tk333,000 crore, which was 8.4% of GDP. The NBR may set a revenue collection target of Tk374,544 crore for the next fiscal year, which will be 8.5% of GDP.

The finance ministry is planning to boost non-tax revenue collection in the new fiscal year. Initiatives have been taken to hike ticket prices of government hospital visits, entrance fees for various government parks, including zoo, bridge tolls, and entrance fees for protected forest areas. 

In the meantime, entrance fees for the protected forests of the Sundarbans, Bangabandhu Safari Park in Gazipur, tolls for Bangabandhu and Muktarpur Bridge have already been raised. 

The fees of the rest will increase gradually. The tolls on Postogola Bridge over the River Buriganga, which connects the capital with Keraniganj, may be withdrawn. The government has been collecting tolls on this bridge for 40 years.

When the Padma Bridge opens to traffic next June, revenue will be collected in the form of tolls on this bridge and Dhaka-Mawa Expressway. A section of metrorail will be launched in December, so will Karnaphuli Tunnel. Revenue from metrorail fares and Karnaphuli tunnel tolls will also be added to the government coffers.

As a result, the target for non-tax revenue collection can be raised from Tk43,000 crore to Tk45,550 crore in the new financial year, said Finance Division officials.

The amount of development allocation is not increasing in keeping with revenue collection owing to rising subsidies, including interest expenses, social safety net and government operating expenses. 

Besides, finance ministry officials think that soaring prices of various construction materials, including rod and cement, under impacts of rising commodity prices in the country may lead to an increase in government's spending on project implementation.

But, allocations for ADP have been reduced, rather than earmarking more for it. Besides, even in the new fiscal year, the amount allocated for it is not increasing much in proportion to GDP.

The budget for FY23 may require an allocation of Tk253,068 crore for ADP, which is 5.7% of GDP, while the size of ADP in the revised budget for the current fiscal year will be slashed to Tk 207,550 crore, which is 5.26% of GDP.

Economists emphasised increasing government spending even with a higher rate of borrowing to help the economy recover from the pandemic-led crisis. But the reality is just the opposite. Because of a cut in the ADP allocation in the revised budget, the amount of deficit in the revised budget is also being reduced as compared to the target of the original budget.

The deficit financing target for the current fiscal year was Tk214,681 crore, which was 6.2% of GDP. The revised budget deficit is being cut by Tk10,000 crore to 5.2% of GDP.

The finance ministry is estimating a deficit of Tk245,511 crore for the next fiscal year, which will be 5.5% of GDP. More than half of the deficit will come from internal sources, of which Tk92,830 crore will be collected from the banking sector and the rest will be met with money collected in the form of savings certificates. And, 108,200 crore will be taken from foreign sources.

Finance ministry officials say there is no long-term risk to Bangladesh's foreign debt. This is because at the end of the last fiscal year, the government's debt-to-GDP ratio was only 32.4%.

Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, told The Business Standard that an expansionary budget is defined by the deficit between expenditure and revenue generation. The deficit target in the revised budget for FY22 is far lower than the original budget. 

The current budget is expansionary but the implementation is contractionary. Even in the six months of the fiscal year, the government had some budget surplus instead of a deficit. 

Import revenue is increasing due to high imports at high prices, which may lead the deficit to fall below 4% of GDP.

As the deficit in the current fiscal is very low, it is expected to increase to 5.5% in the next budget, which can be deemed as an expansionary one. 

And, the 5.5% deficit is usual and the intention of the budget is expansionary. Only time will tell whether the implementation will be expansionary or not, he noted.

If the lion's share of the budget allocation goes to health, education, social security, and necessary urban infrastructure, the deficit due to the expansion will not create any tension, the economist said.

If the revenue expenditure, administrative costs, travel, and costs for low priority projects increased, the deficit will create risks for economic development, he concluded.

Economist Debapriya Bhattacharya said, "I strongly maintain that the government does not have the capacity to implement an expansionary budget. The intention of having an expansionary budget is more rhetoric than reality."

There are two main reasons behind it. One is the lack of necessary resources for financing expanded public expenditure outlay. But more important are institutional rigidities and a lack of efficiency in the public expenditure system. The latter is holding back a higher level of impactful public investments, he pointed out.

Further, given the increasing market prices and debt servicing liabilities, the extent of expansionary policies to be programmed and pursued is a judgement call. The factors favouring an expansionary stance – i.e. low inflation, moderate fiscal deficit and manageable public debt – have weakened in the recent past.

Dr Sayema Haque Bidisha, research director at South Asian Network on Economic Modelling, said, "We have a tradition to reduce revised budgets drastically by cutting the expenses of the social sector. It worsens the social sector development and human capital."

"Now, we are facing a disaster and we have a demand for huge amounts of money to protect the life and livelihood of poor and marginalised people."

"We have to analyse which portion of the additional budget goes for the poor and which portion for spending on salary, interests and mega infrastructures," Sayema added.