1. Fiscal Policy of Bangladesh
Jamshed uz Zaman

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

3. 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.

4. 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.

5. 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

6. 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.

7. 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.

8. 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.

9. 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

10. 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.

11. 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

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

13. 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 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.

14. Original Allocation vs. Actual Expenditure

15. Dependence on Foreign Assistance

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

17. 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.

18. 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.

19. 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.

20. These calls for a
FISCAL
SECTOR
REFORM