Budget 2015-16 The Story of Superfluity

Cover Story

Sadiq Zafrullah#

Dreamy target of 7 percent growth in GDP is once again the main dish of the proposed budget for fiscal year 2015-16. It has achieved only 6.51% of growth in GDP whereas the target was 7.3% in FY14-15. Since the course of achieving the target is too harsh, why the subjects of revenue collection, tax net, ADP, private and Foreign Direct Investment (FDI) are not being reviewed thoroughly to eradicate the gaps is another delicious topic for discussion.
Country’s 44th (FY15-16) budget has been played off with total outlays of Tk. 2.9 trillion (Tk. 295100 crore) which is 18% higher than the FY14-15 and highest ever in the history of Bangladesh. The budget was tabled at a time when the national economy is in relative comfort because of decreasing global oil market, controlled inflation, healthy foreign currency reserves, political stability and investment-friendly climate for many Asian nations like Japan, India and China.
The budget estimates 31% growth in revenue though no more than 19% achieved in the last fiscal year. The revenue receipts for FY2015-16 have been estimated at Tk. 208443 crore which is 12.1 percent of GDP, of which NBR tax revenue is estimated at Tk. 176370 crore (10.3 percent of GDP). Tax revenue from non-NBR sources has been estimated at Tk. 5874 crore (0.3 percent of GDP). Besides, Tk. 26199 crore (1.5 percent of GDP) is expected to be collected from non-tax sources.
To realize the target of the growth in revenue, the growth has to be increased by 27% to 35-36%. But it should also be taken into consideration that the percentage of the growth was at around 10% last three year.
This jumbo-sized budget isn’t a matter rather budget financing and missing is of great concern. Achieving the revenue target is the biggest challenge for the budget. Budget is merely a number. It doesn’t bring the development of the country. Budget has to be properly implemented. Generally, there are several divisions of allocation for projects but no direction to implement those. This is one of the various problems.
The budget deficit for the FY15-16 is set to be Tk. 86657 crore or 5.0 percent of the Gross Domestic Product (GDP). To make up the deficit, 45% of the budget deficit will come from debt. Revenue has a little role to play in order to balance the expanded outlays. The Finance Minister AMA Muhit plans to take Tk. 38523 crore loan from the local banks to conciliate the deficit. In response, several business organizations expressed their concern and told that there will be a negative effect on the flow of loans in the private sector. Entrepreneurs will suffer much from this. And it’ll be again an obstacle to achieve the targeted revenue. The Metropolitan Chamber of Commerce and Industry (MCCI) requested the government to reduce the amount of loan they are to take from the local banks.
Analysis shows economic challenges relating to growth in GDP, revenue collection, government expenditure, budget deficit, foreign aid, private sector credit, export, inflation, non-performing loan, and saving-investment gap, tax-GDP ratio which the economy has underwent during the FY 2014-15 and should be taken into account for the budget for FY 2015-16.
Expansion in private investment is the basic need to achieve a 7% growth. Hence, government should work on the elevation of Foreign Direct Investment (FDI).  Bangladesh needs immediate action to increase the FDI. And to encourage the investors, interest rate of bank loan should be brought down to single digit. Except for the construction/infrastructure and energy activities, all other main activities (e.g. agriculture, manufacturing and services together accounting for about 90 percent of our economy) rely mainly on private investment.
Although, overall investment remains stable at around 28-29 percent of the GDP, private investment has been stagnant during the last five years. Private investment as a percentage of the GDP has remained stagnant at around 22 percent between FY11 and FY14. Impressive growth of agriculture, manufacturing and services against this backdrop suggest some missing elements into the growth puzzle. Considering the gap between national savings and investment (i.e. ranging between 0.65 and 2.1 percentage-points over FY11 to FY14 period), some experts/economists argue a hypothesis of underestimation of private investment in Bangladesh.
Reversing the stagnant private investment trend will be a key challenge for realizing not only the growth target of the FY15-16 budget but also the 7% growth in GDP. b1
Prominent Economists Bazlul H. Khondker, Professor of the Department of Economics at University of Dhaka, and M. Abu Eusuf, Director at Centre on Budget and Policy, suggested a combination of three factors may be needed to spur private investment. Ensuring low lending rate (preferably less than two digit levels) along with uninterrupted supply of electricity-gas and establishing specialized economic zones. Although, pragmatic monetary policy has helped push the lending rate down but rising non-performing loans b2especially by the state-owned banks (i.e. around 20-25 percent between December 2013 and December 2014) still act as a major impediment to realize the desired level.
What is frequently discussed is how to prioritize sectors in framing a budget instead of doing the job by increasing or decreasing expenses based on some speculations. Unless the sectors are prioritized, the economic potential of the country may be untapped. Sectors’ prioritization means attaching importance in budgetary allocation to those, which have the potential accelerate the economic development of the country, stated by Dipok Kumar Roy, an associate member of ICAB in an article published at the Financial Express.
In developing countries like Bangladesh, the budget is mainly focused on poverty reduction. If we see the ultimate goal of Vision 2021, we find that Bangladesh aspires to become a middle income country where poverty will be completely eradicated. A budget focused on poverty reduction is mainly designed to ensure basic needs of life and to scale up the standard of living boosting the sectors prioritized based on the potential and the opportunity that exists. A reform plan of expenses focusing on prioritized sectors needs a sizeable amount of revenue income, especially collection of tax that constitutes a significant part of revenue, to save the country from taking foreign loans for financing a deficit budget. The plan of revenue collection and reform of expenses are not enough, unless the financial management is good and transparent. So, the budget 201516 should have a clear strategy on collection of a sizeable amount of revenue and efficiency in fund spending.
In the article, Dipok Kumar Roy also expresses concern regarding lower tax-GDP ratio. The significant portion of the revenue is tax (about more than 84 per cent). The collection of tax is far lower compared to the Gross Domestic Product (GDP). The taxGDP ratio in the country is nowhere near that in any developed country. It is the lowest among the comparable countries in Asia like India, Sri Lanka and Pakistan, Philippines, Vietnam and Indonesia.
The growth in taxGDP ratio is not consistent at all with the GDP growth of more than 6.0 per cent over the last 10 years. Widening the tax net instead of raising the tax rates has intensively been discussed ahead of framing the budget for the fiscal year 201516. In developed countries as stated earlier the taxGDP ratio is significantly high, because the people feel encouraged to pay tax in the hope that the paid tax would be back to them with a better value, which they cannot generate or buy with the money they pay in tax. In Sweden, free education up to the university level, subsidies for unemployed people, pension schemes for every taxpayer and free medical services for those below 18 years are provided. So, the government has to ensure the benefits to the people against the tax payment. We are far away from the taxGDP ratio as in Sweden and other developed countries. We are also far off the mark in providing better and improved services for our citizens and taxpayers. But we should have made effective efforts to raise the ratio every year to attain a reasonable rate in line with the growth in GDP.
If we review the average global rate of tax in accordance with information of www.taxrates.cc, we see the ‘Global Average Indirect Tax Rate’ (VAT) and ‘Global Average Individual Tax Rate’ are almost constant, which tend not to increase the tax burden on individuals, rather keep them flexible to spend with an increase in income. On the contrary, the ‘Global Corporate Tax Rate’ tends to decline. This will ultimately increase the GDP as well as the government’s revenue resulting in a higher taxGDP ratio. There are some examples: (i) President Calvin Coolidge cut taxes drastically in 1929, resulting in growth of 61 per cent in total revenue; (ii) John F. Kennedy significantly cut income tax rates in 1961, leading to GDP growth and increased federal revenues of 62 per cent; And, (iii) Ronald Reagan cut taxes for all classes of the population in 1982, resulting in double federal tax revenue. So, apparently it is not the increase in the rates that can ensure growth in the taxGDP ratio. Rather, the tax base should be increased in line with the consistent GDP growth. The tax base in Bangladesh is below 1.0 per cent of the total population. In India it is 5.0 per cent.
Several factors of the budget have significantly transformed for FY15-16 from that of last year. Announced 8th pay-scale will be implemented from 1st July onward.  Additional Tk. 12883 crore will be needed for the 13 lac government staffs. It will be allocated separately. As a whole Tk. 42158 crore is allocated for those staffs according to the new pay-scale. If implemented since July, the salaries and bonuses of the stuff will be twice as previous. And this year’s budget confirms that there will be taxes for all kind of allowances they get plus the income tax will continue. Previously, they only paid taxes on the basic salary they get.b3
The former Deputy Director of Bangladesh Bank, Khondokar Ibrahim Khaled, admires the initiative taken to attract the investors to the stock market by lowering the tax rate by 2.5%. It is quite business oriented, he thinks. However, he also doubts the effectiveness since the stock market hasn’t been reformed yet.
Center for Policy Dialogue (CPD), a civil society think tank, analyzes the Budget 2015-16 as usual. Dr. Debapriya Bhattacharya, a fellow of CPD, states, the new budget usually presented with newer projects and plans to reform. But there is no assessment of how much has been implemented during the last budget. And this time was no exception.
On the development side, the proposed budget for fiscal 201516 has allocated Taka 970 billion for funding the Annual Development Program (ADP). This marks an increase of Taka 22 billion over the revised ADP of Taka 750 billion for the outgoing fiscal. However, all available indicators, as of now, would tend to suggest that the actual utilization of the funds even under the revised ADP for FY1415 would witness a notable shortfall. This will be obviously so, in terms of matching physical progress about implementation of development projects included in it. However, this has not been an unusual picture over the years in an uninterrupted sequence.
The development expenditure under the proposed budget for FY1516, plus the additional amount of money that the autonomous bodies will spend on some of their respective projects under self-financing scheme, has been proposed to be raised to 11.6 per cent of the country’s GDP. If that can be realized at the end of the next fiscal, it will be a ‘quantum leap’ in ADP implementation capacity in a single year. This is because the share of development expenditure, taking with the revised ADP and self-financed projects of autonomous bodies into consideration, stands at 5.1% of GDP in the outgoing fiscal. From this point of view, the projected level of development expenditure in the forthcoming fiscal is obviously quite ambitious unless some ‘miracle’ happens about project implementation performance. However, taking 760 projects for ADP instead of last year’s 999 projects is somewhat positive.
Budget allocation patterns tend to suggest a low but stable allocation to health and education sectors. More specifically, allocation to health sector as percent of the GDP has remained stable at around 0.8 between 2009 and 2015. Allocation to the education sector is higher than the health sector and has remained stable at around 2 percent of the GDP over the same period. These figures compare poorly with social sector allocations found in other countries. For instance, allocations to education and health sector in Malaysia as percent of GDP in 2011 were 5.9 and 4 respectively. The corresponding figures for Thailand were 5.8 and 4.6 respectively. In the case of India, the corresponding figures were 3.9 and 4 respectively. Bangladesh needs to find a way to raise social sector allocation as well as improve service delivery quality to pursue productivity led growth.
Over and above, the introduction of ‘child’ budget is an innovative stride to the conventional budget framework. While welcoming such innovations, we believe separate budget frameworks are needed for three distinct groups in Bangladesh who are usually left out of the gains of economic expansion. These are children, people with disability and the elderly.b5
Notwithstanding, the Finance Minister proposed to raise the number of elders, who get allowance, from over 2.7 million to three million, and widows, abandoned and destitute women getting similar benefits from one million to 1.11 million. He also proposed to raise the number of poor disabled getting allowances from 400,000 to 600,000, and the number of disabled students getting stipends from 50,000 to 60,000. The rate of stipends would also be raised, according to him. A social safety net strategy paper would be formulated and a project titled ‘Strengthening Public Financial Management for Social Protection’ would be implemented to increase the effectiveness and accountability of the social safety net programs. b4
The estimates provided in the budget for FY2015-16 are bold, ambitious but a little commensurate with the vision of attaining the middle income goal. Hence, it is important restructuring the present functioning of the Ministry of Finance in order to ensure enhanced effectiveness, strengthened capabilities and greater accountability, suiting to the need of the country.

About Sadiq Zafrullah
The writer is a student at the Department of Economics, University of Dhaka.