Fiscal Policy of Bangladesh

Jamshed uz Zaman

When budget is declared



Opposition Parties claim: Budget against the poor; Government Parties claim: Welfare oriented budget. Some declares hartal. hartal.

How to understand a budget favors whom?



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



No. Deficit budget are prepared

In deflationary situation, When resources fall short of needs, To help implementation of monetary
policy.

Deficit does not necessarily mean imposition of new taxes.

Components of Budget


Revenue Budget

Development Program

Revenue Receipts Revenue Expenditure

Surplus/Deficit

+ -

Expenditure Receipts

Food Budget Food Aid Counterpart Fund Food Import VGD, FFW Subsidy
Surplus/Deficit

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

Capital Budget Receipts Payments

Surplus/Deficit

Total Budget has to be deficit to achieve the long term goals



We have to check whether the budget is inflationary, ADP if helps productivity no inflation. ADP if does not helps productivity inflation. We have check dependence on foreign assistance Is increasing or not 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

Tax/Revenue 86 84 82 80 78 76 74 10 5 0


Non-Tax/Revenue

25 20 15


Non tax revenue are vulnerable and not dependable. Tax revenue ratio should be increased. But how? Our tax base is very low.

19 8 19 8 19 8 9 9 19 0 9 19 1 9 19 2 19 9 3 9 19 4 9 19 5 9 19 6 19 9 7 9 19 8 9 20 9 0 20 0 20 0 1 0 20 2 0 20 3 0 20 4 20 0 5 0 20 6 07

Whether newly imposed taxes are always bad?



Not always bad

Social Economic Religious

Are they against poor

Check Incidence

Ratio of direct and indirect tax.

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

Tax/GDP Ratio in Bangladesh 9.5 9 8.5 8 7.5 7 6.5 6 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Share of Revenue in GDP 1987 Bangladesh India Pakistan Indonesia 9.5 14.5 16.7 23.1

To increase Tax/GDP ratio

  

Fiscal Sector reform is necessary, Tax administration should be modern, Tax evasion and corruption have to be stopped. Sometimes new taxes are imposed. 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 Pakistan India Singapore Malaysia Indonesia 9 10 17 27 34 58

Direct Tax to Total Tax. Increase in this ratio does not prove budgets are pro-poor
Direct tax toTotal tax 22 20 18 16 14 12 10

20 0

20 0

20 0

20 0

19 9

19 8

19 9

19 9

19 9

19 9

Revenue receipts are dependent on external factor

Sources of Revenue: Percentage of Total FY Import Duty VAT (import) SD (import) Subtotal 2004 27 17 6 50 2005 26 18 6 51 2006 23 17 5 45  Excise VAT (local) SD (local) Subtotal 1 16 14 31 0 17 12 30 0 19 14 33    

Income Other Grand Total

18 1 100

19 1 100

21 1 100

About 45-50 percent taxes come from external sources Economy is heavily dependent on external factor, Receipts are vulnerable to external factor, Proportion of income tax should immediately be increased. 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

30000 25000 20000 15000 10000 5000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Original Allocation Actual Expenditure

Dependence on Foreign Assistance

Foreign Financing
90 80 70 60 50 40 30 20 10 0

Domestic Financing

19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

Borrowing from the central bank is inflationary which is against the poor
Public
150

Bangladesh Bank

Commercial Banks

100

50

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

- 50

- 100

BB controls inflation through controlling money supply. Most often BB target



   

M2 = NDA + NFA NDA = Credit to Govt. + Credit to Public Sector + Credit to private sector + others. When Credit to Govt. credit to private When Credit to Govt. M2 When M2 inflation . THERFORE better COORDINATON between fiscal and monetary policy is necessary.

To Summarized issues relating to Deficit Budget

   

Financed by foreign assistance is dependence and uncertain, Financing by public, not inflationary, Borrowing from commercial banks not inflationary. 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 a

FISCAL SECTOR REFORM