Election budget? Yes and no

Illustration: TBS

Can we call it an election year budget?

Yes, but mostly no.

Will it be able to address the twin troubles of rising inflation and pressure on the external sector?

The answer may be no.

And will the proposed budget make industries happy?

Mostly yes.

But what about agriculture?

It will continue getting stimulus.

What about making life easy for business?

In his fifth budget speech delivered on Thursday for the fiscal 2023-24, Finance Minister AHM Mustafa Kamal has shown some hopes in improving the ease of doing business through reforms in income tax, customs and VAT laws.

But the country's fledgling financial sector seems forlorn with little commitment and actions proposed.

So, why can we call it both an election year budget and yet not?

The government has expanded its expenditure target by a sizeable 15.3% given the global recessionary trend and the fact that this year's outlay has actually shrunk by 2.6%.

Development expenditure for the next fiscal year has also been targeted 14.7% higher against this year's revised outlay which is a mere 0.7% more than the original target.

That is what an election year budget should look like when political expediency matters. (One can always argue the increase is not much if adjusted for inflation.)

You spend more to give more money to the people (party people included). When you have money the public go happy (party people also turn euphoric as they have their electioneering bills to count).

But the buck stops just there when reality kicks in.

Where will the money come for the spending spree? It seems the finance minister has gone on an overdrive to squeeze every possible penny out, just what the IMF had wanted in exchange of its budgetary support for the country's fledgling forex reserves. A 15.5% revenue growth target looks starkly different from this fiscal year's zero growth.

Not only the middle and lower class people will be hit, this will also have a cascading effect over consumer spending. Remember, Bangladesh's majority of the GDP is generated from consumption (74%). This means growth will take a direct hit for whatever it counts for.

The expediency to collect more tax will only make life harder for the common people.

So, none of these unsavoury prospects go well for an election year.

And what if tax collection falters, as it has this year like many more preceding ones?  

That will either mean to cut expenditure with less money exchanging hands, meaning an unhappy vote bank, if such banks exist in reality.

Or reaching out to the banks' vaults. Bank borrowing through treasury bills will increase. The resultant show will be an increase in treasury bill interest rates, creating more liability in terms of interest payment.

But that will surely hit investment at a time when entrepreneurs may already be feeling jittery over the prospect of an approaching election. The private investment curve is already heading south, and with further cuts employment and wages will be hit.

This will leave a bitter taste in the mouths of the voters. Bank borrowing will lead to higher inflation at a time when things are already costlier than before. So, when faced with a prospect of low wage or unemployment, social unrest will brew.

On the other hand, the corporate Bangladesh will also feel the bitter pill of the double whammy of the IMF's loan conditions and a deteriorating macroeconomic situation.

Moody's has already downgraded Bangladesh's credit rating to "risky", immediately spinning them into a high cost regime. LC opening will be costlier and so will be foreign loans.

At the same time, the Corporate Bangladesh will face higher-tax headwinds. Having to pay tax on interest payment is just one of them, but many rebates will be withdrawn and supplementary duty to be raised.

So the economic reality will force the finance minister to trim his wish for an election year budget.

The quest for money

From mobile phones to cars, plastic kitchen wares to home, pens and cement to steel will be costlier because of the budget proposals, which will further add to the soaring cost of living.

Income tax proposals, such as a minimum tax of Tk2,000 and making return submission mandatory for specific services, will make the limited-income group's life difficult.

The country's middle class or above, who make up about 40 million, are going to be key targets of income tax expansion as raising the revenue-GDP ratio and the number of taxpayers is among the commitments to avail IMF's $4.7 billion budget support.

"We want to harness all potentials of generating revenues," Finance Minister AHM Mustafa Kamal tells the House, explaining how expansion of tax net, simplification of return submission, automation, rationalisation of tax exemptions will help him increase tax revenue significantly.

"Efforts will be there to augment non-tax revenues through updating fees/rates, identifying potential sources," he adds.

In contrast, people in India with annual income up to Rs7 lakh (Tk9 lakh) have been exempted from tax in the current budget, which also raised the tax-free ceiling of retirement benefit to Rs25 lakh (Tk32.5 lakh) from Rs3 lakh for non-government salaried people.

India succeeded in taming inflation, still its Finance Minister Nirmala Sitharaman had tax rebates to offer to give fixed-income people more relief as her party BJP eyes a consecutive third term.

But Mustafa Kamal seems to have little fiscal space to offer much breaks to individuals even though his party too is seeking re-election after six months.

He tasked the revenue authority with earning Tk4.30 lakh crore in the next fiscal year – 16% more than the revised target of the current fiscal year.

It will be an uphill battle for the NBR whose earnings went into a nosedive in April, posting a 2.29% negative growth for the second time since the Covid-19 outbreak.

Subsidy pressure to stay

The subsidy pressures will mount in the next fiscal year too, despite the commitment made to the IMF for its loan package. "Increased subsidy and interest expenditure and a part of accumulated subsidy arrears are being met from the fiscal buffer created through austerity measures," he said.

Already, the price of electricity, gas and fuel has been increased to reduce the subsidy expenditure and formula-based price adjustment system in the energy sector will be finalised by September this year, he announced.

The total subsidy will gradually decrease, but due to accumulated arrears, the burden of subsidy expenditure will take some time to fully subside, the finance minister said, explaining why he has to keep a higher amount in the next fiscal year for power and agriculture subsidies.

He said subsidy and incentives allocations soared to 2.2% of GDP in the revised current fiscal year from 1% in pre-Covid years due to increased import costs of fertilisers, fuel and gas.

Human capital for Smart Bangladesh

The finance minister pins hope in the power of youths to build Smart Bangladesh.

"Sixty-six percent of the total population in our country is active and 28% of them is youth. In the coming days, the youth will be the champions of our smart journey towards a developed Bangladesh," he said.

But he has a little to offer to build necessary skills other than a Tk100 crore allocation for research, innovation and development work.

Allocation for health still remains less than 1% of GDP and education little over 2%, meaning that people will have to spend more out of their own pocket to get healthcare for the family and educate their children.

Difficult time, yet hope for the best

The finance minister foresees tough times ahead due to the unstable war situation and signs of recession in the global economy and hopes to overcome it with "great prudence and foresight".

"We have to face a difficult situation in the next financial year," he says, urging austerity habits and creating new revenue streams in the economy. He proposes a multi-modal increase in travel tax rates to reduce unnecessary foreign travel among the public.

"This policy will give us more revenue and save dollars," he believes.

He builds hopes in the IMF's projection of global recovery and moderation in inflation especially in the countries important for our trade and remittances.

Falling trends in global food, fertiliser and fuel prices, favourable changes in the global economy, and at home, post-Covid momentum in economic activities and prospects of good yields in the agriculture sector – all make him hopeful of 7.5% GDP growth in the coming fiscal year from 6.03% this year.

"To achieve the growth target, we will gradually come out of the contractionary policy and invest in ongoing and new growth-inducing projects including the mega-projects," he says, hoping that higher public investment will pave the way for private capital in productive sectors.

Falling global prices and initiatives to keep the food and supply systems normal will help inflation "much controlled" in the next fiscal year and the annual average inflation is expected to stand at around 6%, the finance minister hopes.

Marginal people are the worst victims of inflation, but the elderly and widow beneficiaries will get only Tk50 to Tk100 more per month to fight the price inflation. The number of beneficiaries rose one lakh in each of the two categories.

The universal pension scheme, if finally put into force, will come as a great support for people other than government employees.

The finance minister was frank in admitting how the external position weakened, import growth, remittance fell, current account deficit increased, financial account also turned negative due to slow implementation of foreign aided projects and export earnings repatriation.

The twin deficit in the current account and financial account worsens the balance of payment situation, he said, depicting the gravity of the situation, without discussing much about how to rebuild foreign exchange reserves, prevent taka from losing its value further, diversify export and boost remittance.

He reveals his plan to look for bilateral and multilateral foreign financing sources for low-cost credit facilities since total public debt remains well below the safe limit.

He is hopeful of keeping the budget deficit limited to 5%, which is higher in the current fiscal.

As a measure to reduce cost, the finance minister announced that minimum capacity charge payment to rental power plants will be phased out.

He also stated that macroeconomic stability will be maintained through adopting cautious and accommodative policy.

Some solace for industries

The next year's budget, which widely differs from usual election year budgets full of generous waiver and incentives intended to keep electorates happy, offers little solace for businesses hard-pressed by shortage of gas and electricity, slowing demand and growing cost.

However, there are some boosts for local industries as the new budget seeks to raise import duties on a number of products to protect local manufacturers, while giving duty rebates for some others.

The finance minister hopes economic zones, development of the logistics sector and reform of financial management will help private investment to increase to 27.4%of GDP in the next fiscal year.

Some reforms, including those in customs, VAT and income tax laws, are aimed at simplifying procedures for the ease of doing business.