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.
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 Revenue Receipts + Revenue Expenditure - Surplus/Deficit Food Budget Food Aid Counterpart Fund Food Import VGD, FFW Subsidy Surplus/Deficit Capital Budget Receipts Payments Surplus/Deficit 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 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 86 84 82 80 78 76 74 19 88 1989 1990 19 91 Tax/Revenue Non-Tax/Revenue 1992 19 93 1994 1995 19 96 1997 1998 19 99 2000 20 01 2002 2003 20 04 2005 2006 20 07 25 20 15 10 5 0 Non tax revenue are vulnerable and not dependable. Tax revenue ratio should be increased. But how? Our tax base is very low.
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 9.5 9 8.5 8 7.5 7 6.5 6 Tax/GDP Ratio in Bangladesh 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Share of Revenue in GDP 1987 Bangladesh 9.5 India 14.5 Pakistan 16.7 Indonesia 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 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 22 20 18 16 14 12 10 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Revenue receipts are dependent on external factor Sources 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 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 Original Allocation Actual Expenditure 20000 15000 10000 5000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Dependence on Foreign Assistance Foreign Financing Domestic Financing 90 80 70 60 50 40 30 20 10 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Borrowing from the central bank is inflationary which is against the poor Public Bangladesh Bank Commercial Banks 150 100 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