Fiscal Policy of Bangladesh

Jamshed uz Zaman

When budget is declared

z Opposition Parties claim: Budget against the poor;

z Government Parties claim: Welfare oriented budget.

Some declares Some declares hartalhartal..

How to understand a budget favors whom?

z A budget may favor poor or rich class; Importers or exporters; Primary producers or manufacturers; etc.

z Government claims that the budget is surplus, but most often it is true. Govt.s claim it because

Political popularity, People are afraid of inflation.

Is deficit budget always unacceptable?

z No. Deficit budget are preparedIn deflationary situation,When resources fall short of needs,To help implementation of monetary

policy.

z Deficit does not necessarily mean imposition of new taxes.

Components of Budgetz Revenue Budget

Revenue Receipts + Revenue Expenditure -

Surplus/Deficit

z Food Budget Food Aid Counterpart Fund Food Import VGD, FFW Subsidy

Surplus/Deficit

z Capital Budget Receipts Payments

Surplus/Deficit

z Development Program Expenditure Receipts

Revenue Surplus New Tax Measures Net Domestic Capital Extra Budgetary Resource Counterpart fund Net food aid Foreign Assistance Foreign Direct Investment Borrowing from the public Borrowing from Banking

System- Central Bank- Commercial banks

Total Budget has to be deficit to achieve the long term goalsz We have to check whether the budget is

inflationary, ADP if helps productivity no inflation. ADP if does not helps productivity inflation.

z We have check dependence on foreign assistance

Is increasing or notz Whether there is long term goals

Anti terrorism Anti drug abuse Law and order situation improvement Socio-economic development.

Tax/Revenue Ratio has to be increased to finance the deficit

z Non tax revenue are vulnerable and not dependable.

z Tax revenue ratio should be increased.

z But how? Our tax base is very low.

74

76

78

80

82

84

86

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0

5

10

15

20

25

Tax/RevenueNon-Tax/Revenue

Whether newly imposed taxes are always bad?

z Not always bad Social Economic Religious

z Are they against poor Check Incidence

z Ratio of direct and indirect tax.

It is difficult to increase Tax/GDP Share in a poor country

Share of Revenue in GDP 1987

Bangladesh 9.5

India 14.5

Pakistan 16.7

Indonesia 23.1

Tax/GDP Ratio in Bangladesh

6

6.5

7

7.5

8

8.5

9

9.5

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

To increase Tax/GDP ratio

z Fiscal Sector reform is necessary,z Tax administration should be modern,z Tax evasion and corruption have to be

stopped.

z Sometimes new taxes are imposed.z DIRECT TAX should be increased to

help poverty alleviation.

Asian Developing countries have much higher direct taxes over revenue

Direct Tax in Total Revenue

Bangladesh 9

Pakistan 10

India 17

Singapore 27

Malaysia 34

Indonesia 58

Direct Tax to Total Tax. Increase in this ratio does not prove budgets are pro-poor

Direct tax toTotal tax

10

12

14

16

18

20

22

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Revenue receipts are dependent on external factorSources of Revenue: Percentage of Total

FY 2004 2005 2006

Import Duty 27 26 23

VAT (import) 17 18 17

SD (import) 6 6 5

Subtotal 50 51 45

Excise 1 0 0

VAT (local) 16 17 19

SD (local) 14 12 14

Subtotal 31 30 33

Income 18 19 21

Other 1 1 1

Grand Total 100 100 100

z About 45-50 percent taxes come from external sources

z Economy is heavily dependent on external factor,

z Receipts are vulnerable to external factor,

z Proportion of income tax should immediately be increased.

z Fear of political hazard. Those who should pay higher income tax are very powerful. They may even topple a government.

Original Allocation vs. Actual Expenditure

0

5000

10000

15000

20000

25000

30000

1

9

9

2

1

9

9

3

1

9

9

4

1

9

9

5

1

9

9

6

1

9

9

7

1

9

9

8

1

9

9

9

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

3

2

0

0

4

2

0

0

5

2

0

0

6

2

0

0

7

Original Allocation

Actual Expenditure

Dependence on Foreign Assistance

0102030405060708090

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Foreign Financing Domestic Financing

Borrowing from the central bank is inflationary which is against the poor

-100

-50

0

50

100

150

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Public Bangladesh Bank Commercial Banks

BB controls inflation through controlling money supply. Most often BB targetz M2 = NDA + NFA

NDA = Credit to Govt. + Credit to Public Sector + Credit to private sector + others.

z When Credit to Govt. credit to privatez When Credit to Govt. M2 z When M2 inflation .z THERFORE better COORDINATON between

fiscal and monetary policy is necessary.

To Summarized issues relating to Deficit Budget

z Financed by foreign assistance is dependence and uncertain,

z Financing by public, not inflationary,z Borrowing from commercial banks not

inflationary.z Borrowing from Bangladesh Bank is

inflationary.

Characteristics of Fiscal System in Bangladesh Falling/Tax/GDP ratio, Tax base is narrow, Dominance of indirect tax, Customs + VAT (import) 50% of total tax Vulnerable to external fluctuations Growth in Non-development expenditure Heavy dependence on Foreign Aid Dependence on Deficit Financing No Far-sightedness.

These calls for aFISCAL

SECTOR

REFORM