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 Food Budget Capital Budget Revenue Receipts + Revenue Expenditure - Surplus/Deficit Food Budget Food Aid Counterpart Fund Food Import VGD, FFW Subsidy Capital Budget Receipts Payments 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 to 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 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 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

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 SD (import) 6 5 Subtotal 50 51 45   Excise 1 VAT (local) 16 19 SD (local) 14 12 31 30 33 Income 21 Other Grand Total 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

Dependence on Foreign Assistance

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

BB controls inflation through controlling money supply BB controls inflation through controlling money supply. Most often BB target ΔM2 = ΔNDA + ΔNFA ΔNDA = ΔCredit to Govt. + Δ Credit to Public Sector + ΔCredit to private sector + Δothers. When ΔCredit to Govt.↑ credit to private↓ When ΔCredit to Govt.↑ ΔM2 ↑ When ΔM2 ↑ 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