2. What is Fiscal Policy? Fiscal Policy is the decision of the government about: How to earn revenue and gather resources from various sources For what to spend those earnings and resources How much to spend and When to spend 2

3. There are two sides of fiscal policy 3 Inflow of money into the govt.’s pocket: earning Outflow of money from the govt.’s pocket: spending

4. Earnings: Revenue and Resources 4

5. Why does the government need revenue? To maintain its daily activities, i.e. to run the government To ensure protection for the helpless To provide necessary services to people that otherwise nobody would provide (Market failure) To ensure development of the country To build buffer against risk! 5

6. Where does the revenue come from? Tax revenue Direct: income tax, wealth tax etc. Indirect: VAT, tariff, excise duty etc. Non-Tax revenue Fees & charges: registration, sales of forms, stamps etc. Fines: mobile court fines, police fines etc. Printing of money 6

7. Where does the government keep its revenue? The government’s account is maintained by the Treasury which is located at Bangladesh Bank The “account” in which all these revenues are deposited is called the “Consolidated Fund” Consolidated Fund was created under Article 84 of our constitution 7

8. Resources from other sources Grants Loans from Domestic sources Treasury bills/bonds savings schemes borrowing from the banks Foreign sources Bilateral Multilateral 8

9. Revenue trend in Bangladesh Revenue as percent of GDP is increasing Around 80 percent of public revenue in Bangladesh is derived from tax sources. 9

10. Revenue trend in Bangladesh (crore taka) 10 FY 98-99 FY 99-00 FY 00-01 FY 01-02 FY 02-03 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 Total Revenue1976720074243422489331120354003920044868494726053969382 Tax Revenue1616716079197782133224950283003195036175392474801256789 Non-Tax Revenue 36003995456435616170710072508693102251252712593 As percentage of GDP Total Revenue9.008.479.6010.2110.3510.6310.5810.7910.5911.1711.31 Tax Revenue7.366.787.807.818.308.508.628.708.408.869.25 Non-Tax Revenue 1.641.691.802.402.052.131.962.092.192.312.05

11. Spending 11

12. How does spending help? Theoretical framework How much spending will affect depends on two factors-  The multiplier effect and  The crowding-out effect The multiplier effect denotes that a certain amount of spending will have bigger impact than the size of the spending. The crowding-out effect arises out of a mechanism that offsets the increase in AD. 12

13. The multiplier effect The MPC helps the money spent rolling from hand to hand in an infinite chain of successive rounds of spending. Suppose, the MPC in Bangladesh is 0.75 and govt. increases spending by Tk. 20 billion for social safety net. The rounds of spending are as below: Govt. spending = Tk. 20 billion First change in consumption (C) = (MPC X Tk. 20 billion) Second change in C = (MPC X MPC X Tk. 20 billion) Third change in C= (MPC X MPC X MPC X Tk. 20 billion) … … … … … Total change in C = (1 + MPC + MPC 2 + MPC 3 + …….) X Tk. 20 billion = Tk. 20 billion /(1 – MPC) = Tk. 80 billion. 13

14. The Crowding-out effect 14 MD1 MD2 AD1 AD3 AD2 r1 r2 r M Y P 1. An increase in G increases AD 2. This increases money demand 3. As a result r increases 4. And AD falls back

15. How does spending help? If the government wants to increase GDP… 15 Government increases spending that increases demand for goods and services As a result, producers produce more goods GDP increases

16. How does spending help? If the government wants to check inflation… 16 The government reduces spending Demand for goods and services fall Price of goods fall in the short run and as a result reduces inflation

17. For what to spend? Through spending the government tries to affect: Macroeconomic stabilization Equity: horizontal and vertical Efficiency in resource allocation: Provision of public goods Check market failure 17

18. Macroeconomic Stabilization To stabilize price To raise growth rate To raise employment level To reduce deficit 18

19. How government spending helps keep macroeconomic stabilization? 19 Subsidy for food production Food production increases Food price stabilizes

20. How government spending helps keep macroeconomic stabilization? 20 Introduction of employment generating activities Allocation and disbursement of funds Employment level raised

21. Equity Inequality prevails in all societies. Government tries to reduce the gap between the rich and the poor For this, the government collects taxes from the rich and spends it for the poor 21

22. Efficiency of resource allocation Private entrepreneurs may not be interested in investments where return of investment is not good for him but good for the country In this case, the government may step ahead and supply resources for such investments Example: building roads and highways, Public-Private Partnership (PPP) 22

23. Is government spending always good? Government spending is necessary to keep the economy on track. However, if the spending is not in line with the economic objective then it may be detrimental Example: Suppose a country is facing high inflation. Price is increasing very rapidly. But as the national election is close the government decides to spend more on social safety net programs and development activities to win popularity. What will be its impact on the economy? 23

24. Public Expenditure: Types Government spending may be broadly classified into two categories- Revenue expenditure Development expenditure Revenue expenditure mainly includes government employees salary, benefits and establishment costs. Development expenditure mainly includes money spent on development activities. Is revenue expenditure good or bad? 24

25. In which way public expenditure of Bangladesh moving?  The government spends huge amounts of money on  building socio-economic and physical infrastructure  human resource development and  poverty alleviation.  Besides, the government has to incur expenditure for:  Administrative  welfare and  other service oriented activities. 25

26. Recent trend of public expenditure in Bangladesh 26 FY 98-99 FY 99-00 FY 00-01 FY 01-02 FY 02-03 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 (up to February) Public Exp (a+b) 2977934464373994075742075471845390359030668369360899962 a) Rev Exp 1745419243214982570726804303673513239557489207110874362 b) Dev Exp 1232515221159011505015271168171877119473179162250025600 Percentage of GDP Public Exp (a+b) 13.5514.5414.7514.921414.1714.5414.214.317.2716.29 a) Rev Exp 7.948.128.489.418.929.129.489.5210.4713.1212.12 b) Dev Exp5.616.426.275.515.085.055.064.683.834.154.17

27. Recent trend of public expenditure % of GDP 27

28. Economic structure of revenue expenditure % share of major economic categories 28 ParticularsFY 03-04FY 04-05FY 05-06FY 06-07FY 07-08FY 08-09 (up to February) Pay and allowances27.8726.2927.6429.3926.8826.68 Pay of officers2.692.582.872.622.382.32 Pay of staff11.3310.9113.5212.5711.4810.41 Allowances13.8512.8011.2514.2013.0213.94 Goods and services17.1917.3916.9314.3514.849.69 Supply and services11.6610.6410.469.849.717.92 Repair and maintenance5.536.756.474.515.131.77 Payment of interest20.5819.5120.6120.8921.4627.63 Domestic17.0515.9117.0617.9218.8324.89 Foreign3.533.603.552.972.632.74 Subsidies and current transfers28.8331.3230.2432.5933.1734.26 Subsidies4.756.474.727.248.358.99 Grants-in-aid17.2518.4519.4018.59 18.51 Subscription to the international organizations 0.08 0.03 Write-off of loan advances0.00 0.010.001 Pension and gratuity6.756.326.046.686.146.72 Block1.551.901.701.392.830.54 Unexpected0.700.510.140.571.590.03 Other0.851.391.560.821.240.51 Procurement of assets & public works5.585.204.953.823.731.2 Procurement of assets4.364.033.933.153.180.66 Purchase of land0.030.140.070.120.080.25 Construction and works1.191.030.950.550.470.25 Gross total101.60101.61102.07102.43102.91100.00 Deduction recovery1.601.612.072.432.910.001 Total- Non-development revenue expenditure 100.00

29. Is the government fulfilling its welfare commitment? Public Expenditure By Social Sectors: The Social Sectors are getting increasing prominence day by day 29

30. Annual Development Program expenditure for social sectors (crore taka) 30 SectorFY 98-99 FY 99-00 FY 00-01 FY 01-02 FY 02-03 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 Education & Religion17762014227421712591234221102865293030303519 Sports and Culture528511379911171101679697132 Health & Family Welfare 12561469161614431542194814682151240324422585 Labor & Manpower91418 2742728870105113 Social Welfare, Women & Youth Dev 169180189173220183186196160140334 Sub-total (1+2+3+4+5)32623762421038844471463239465467565958146683 As % of Total ADP Exp (6/8*100) 23.3022.8023.1324.2826.1524.3819.2525.4326.2025.8426.11 Total ADP Allocation1400016500182001600017100190002050021500216002250025600

31. Revenue expenditure for social sector (crore taka) 31 SectorFY 98-99FY 99-00 FY 00-01 FY 01-02 FY 02-03 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 Education & Religion 29883279370038424086462852456508808587179664 Health & Family Planning 887972109912861334149718032065268228983441 Youth, Sports & Cultural Affairs 5573677184140 184205185195 Labor & Manpower 28313536424145465870 Social Welfare & Women Affairs 1411772032292834558951067125017782134 Sub-total (9+10+11+12+13) 40994532510454645829676181289870122801364815504 As % of Total Rev Exp (14/19*100) 24.4524.5724.7024.0823.0323.8123.4525.9327.0423.5624.31 Total (ADP+Rev) (6+14) 736182949314934810300113931207415337179391946222187 As % of total Pub Exp (16/(8+19)*100) 23.9323.7423.9724.1624.2924.0421.8925.7526.7724.2024.83 As % of GDP (16/20*100) 3.353.503.673.423.433.423.263.693.803.593.62 Total Revenue Allocation 1676518444206622269225307283903466438070454125792263764 GDP at Market Prices219697237086253546273201300580332973370707415728472477541919613640

32. What is the balance in the government’s pocket? If revenue earning is higher than expenditure, the government has surplus If revenue earning is lower than expenditure, the government faces deficit In Bangladesh the government maintains a deficit budget 32

33. How the deficit is met Deficit means that spending is more than earning Therefore, additional money is needed for filling out the gap between spending and earning This additional money is called “financing” Financing may be either from domestic or foreign sources From foreign sources financing may come as bilateral or multilateral loans Financing from domestic sources comes from borrowing from banks, issuance of savings schemes and bonds… and if needed from printing money. Which one would you prefer for deficit financing- domestic or foreign? 33

34. Trend of deficit financing in Bangladesh 34

35. Implications of budget deficit High budget deficit means government is spending more than its ability And in doing so it is borrowing from various sources If the borrowing comes from domestic sources it means less money is available for the private sector. This may hinder private sector development initiatives. If the borrowing comes from foreign sources it means the country is exposed to foreign currency risk (for example- speculative attack, current account deficit) Increased amount of borrowing increases interest rate and, therefore, debt liabilities. High interest rate may make debt unsustainable. In such cases, the country will be exposed to financial crisis. Recent example is Greece. 35

36. Question: What is the most prominent document that elaborates the Fiscal Policy of Bangladesh? As head of the government how would you design your next fiscal policy? 36

37. 37