Business

FY2025 national budget: business as usual

Perhaps the biggest disappointment is the inability of the budget to address the equity issue by instituting a redistributive fiscal policy. This was a major policy objective of the Eighth Five-Year Plan but has remained unimplemented.

The much-anticipated national budget for FY2025 was formally announced on June 6. Every year the budget draws considerable attention because it deals with people's money. But this year the budget received additional scrutiny because of the ongoing severe macroeconomic imbalances that have persisted for more than 24 months.

Optimistically, people were expecting some extra-ordinary budgetary acumen that would not only help stabilise the macroeconomy but also assist in arresting the downward slide of GDP growth, exports and the investment rate.

The new budget has several nice features including more realistic revenue projections, removal of several tax exemptions, alignment of several VAT rates to the standard 15 percent rate, and digitisation of the VAT system to improve efficiency. These are welcome steps and will likely help increase the tax-to-GDP ratio.

Yet, a review of the main features of the FY2025 budget suggests that it would not only likely miss the stabilisation target, but it will also not be very effective in spurring GDP growth or supporting the equity agenda.

Stabilisation challenge for fiscal policy

Near double digit inflation, shortage of foreign reserves, and import controls have prevailed for almost two years. Severe import controls have hurt the growth of exports, manufacturing sector value-added and GDP growth. The situation called for a coordinated use of monetary policy, exchange rate and fiscal policy to control inflation through monetary and fiscal tightening and use exchange rate flexibility to boost exports by offsetting the adverse effects of the large appreciation of the real exchange rate during 2011-2022.

After nearly two years of delay, on May 8, the government finally eliminated interest rate controls by moving to a market-based interest rate. It also unified the exchange rate and adopted a crawling peg system as a step toward instituting a flexible market-based exchange system.

The next logical step would have been to align fiscal policy to support these reforms. The adjustment challenge for fiscal policy was to reduce fiscal deficit to around 3 percent of GDP to restrict budget borrowing from the banking sector to around 1 percent of GDP. Detailed calculations show that this level of government bank borrowing would avoid a crowding out of private credit while remaining consistent with the inflation control target of monetary policy.

As against this, the FY2025 budget sets a fiscal deficit target of 4.6 percent of GDP that requires bank borrowing of 2.5 percent of GDP. This level of bank borrowing will exert substantial pressure on the interest rate, crowd out private credit and force an expansion in domestic credit, thereby jeopardising the monetary policy focus on inflation control and exchange rate stability.

Budget's impact on GDP

The two main fiscal channels for influencing GDP growth are through the incentives for private investment and exports based on taxes and subsidies, and through public development spending, especially on transport, energy, power, agriculture, water and human capital.

On the incentive front, some tweaking of VAT and trade tax rates are proposed, whose aggregate impact on investment, exports and GDP growth is hard to evaluate. But, importantly, the budget misses out on the key reform of trade taxes that is essential to eliminate the anti-export bias of trade policy and push export diversification. This is a serious policy gap at a time when the export growth has plunged to only 2 percent in the first 11 months of FY2025.

Regarding development spending, the budget makes a brave effort to push ADP spending by 27 percent over the estimated spending of Tk 222,100 crore in FY2024. Given the past track record of revenue and implementation shortfalls, it is most likely that actual ADP spending will grow much less (around 8-10 percent). Even so, the GDP growth effects would depend upon sound sectoral allocations.

The ADP seeks to emphasise transport and energy as in the past, allocating 40.2 percent of the ADP to these two sectors. Yet, ADP spending on water, agriculture and health will remain subdued. Without addressing adequately, the supply side constraint of primary energy (gas, oil, coal, renewable energy) owing to foreign exchange shortage, the growth impact of additional power investment will be minimal. There is already substantial unused power capacity. In transport, the long-gestation lag in completion of mega projects will likely limit the short-term effects on GDP growth.

Refocusing ADP spending on the implementation of the Bangladesh Delta Plan (e.g. on flood control, irrigation, riverbank erosion, salinity and waterlogging) and skills development probably would yield better shorter-term results by limiting the adverse effects of climate change on agriculture and filling the skills gap in the manufacturing sector. As in the past several years, the inadequate attention of the budget to the implementation of the Bangladesh Delta Plan is a serious policy gap.

Budget and equity

Perhaps the biggest disappointment is the inability of the budget to address the equity issue by instituting a redistributive fiscal policy. This was a major policy objective of the Eighth Five-Year Plan but has remained unimplemented.

Although on paper the personal income tax system is progressive, there is very little reliance on personal income taxes. This budget is no exception. As in previous years, 65 percent of revenues are targeted to come from indirect taxes, which are generally regressive in nature especially when combined with the inflation tax.

On the spending side, the FY2025 budget proposes a mere 3.2 percent of GDP for social sectors: spending on health (0.7 percent of GDP), education and training (1.7 percent of GDP) and social protection, excluding civil service pensions (0.8 percent of GDP).

These levels of spending are basically unchanged from the previous two years. At a time when inflation is badly hurting the poor, the FY2025 budget ought to have shown much greater sensitivity and scaled up spending on social sectors while cutting subsidies and lowering spending in other areas.

The author is vice-chairman of the Policy Research Institute of Bangladesh.

Comments

FY2025 national budget: business as usual

Perhaps the biggest disappointment is the inability of the budget to address the equity issue by instituting a redistributive fiscal policy. This was a major policy objective of the Eighth Five-Year Plan but has remained unimplemented.

The much-anticipated national budget for FY2025 was formally announced on June 6. Every year the budget draws considerable attention because it deals with people's money. But this year the budget received additional scrutiny because of the ongoing severe macroeconomic imbalances that have persisted for more than 24 months.

Optimistically, people were expecting some extra-ordinary budgetary acumen that would not only help stabilise the macroeconomy but also assist in arresting the downward slide of GDP growth, exports and the investment rate.

The new budget has several nice features including more realistic revenue projections, removal of several tax exemptions, alignment of several VAT rates to the standard 15 percent rate, and digitisation of the VAT system to improve efficiency. These are welcome steps and will likely help increase the tax-to-GDP ratio.

Yet, a review of the main features of the FY2025 budget suggests that it would not only likely miss the stabilisation target, but it will also not be very effective in spurring GDP growth or supporting the equity agenda.

Stabilisation challenge for fiscal policy

Near double digit inflation, shortage of foreign reserves, and import controls have prevailed for almost two years. Severe import controls have hurt the growth of exports, manufacturing sector value-added and GDP growth. The situation called for a coordinated use of monetary policy, exchange rate and fiscal policy to control inflation through monetary and fiscal tightening and use exchange rate flexibility to boost exports by offsetting the adverse effects of the large appreciation of the real exchange rate during 2011-2022.

After nearly two years of delay, on May 8, the government finally eliminated interest rate controls by moving to a market-based interest rate. It also unified the exchange rate and adopted a crawling peg system as a step toward instituting a flexible market-based exchange system.

The next logical step would have been to align fiscal policy to support these reforms. The adjustment challenge for fiscal policy was to reduce fiscal deficit to around 3 percent of GDP to restrict budget borrowing from the banking sector to around 1 percent of GDP. Detailed calculations show that this level of government bank borrowing would avoid a crowding out of private credit while remaining consistent with the inflation control target of monetary policy.

As against this, the FY2025 budget sets a fiscal deficit target of 4.6 percent of GDP that requires bank borrowing of 2.5 percent of GDP. This level of bank borrowing will exert substantial pressure on the interest rate, crowd out private credit and force an expansion in domestic credit, thereby jeopardising the monetary policy focus on inflation control and exchange rate stability.

Budget's impact on GDP

The two main fiscal channels for influencing GDP growth are through the incentives for private investment and exports based on taxes and subsidies, and through public development spending, especially on transport, energy, power, agriculture, water and human capital.

On the incentive front, some tweaking of VAT and trade tax rates are proposed, whose aggregate impact on investment, exports and GDP growth is hard to evaluate. But, importantly, the budget misses out on the key reform of trade taxes that is essential to eliminate the anti-export bias of trade policy and push export diversification. This is a serious policy gap at a time when the export growth has plunged to only 2 percent in the first 11 months of FY2025.

Regarding development spending, the budget makes a brave effort to push ADP spending by 27 percent over the estimated spending of Tk 222,100 crore in FY2024. Given the past track record of revenue and implementation shortfalls, it is most likely that actual ADP spending will grow much less (around 8-10 percent). Even so, the GDP growth effects would depend upon sound sectoral allocations.

The ADP seeks to emphasise transport and energy as in the past, allocating 40.2 percent of the ADP to these two sectors. Yet, ADP spending on water, agriculture and health will remain subdued. Without addressing adequately, the supply side constraint of primary energy (gas, oil, coal, renewable energy) owing to foreign exchange shortage, the growth impact of additional power investment will be minimal. There is already substantial unused power capacity. In transport, the long-gestation lag in completion of mega projects will likely limit the short-term effects on GDP growth.

Refocusing ADP spending on the implementation of the Bangladesh Delta Plan (e.g. on flood control, irrigation, riverbank erosion, salinity and waterlogging) and skills development probably would yield better shorter-term results by limiting the adverse effects of climate change on agriculture and filling the skills gap in the manufacturing sector. As in the past several years, the inadequate attention of the budget to the implementation of the Bangladesh Delta Plan is a serious policy gap.

Budget and equity

Perhaps the biggest disappointment is the inability of the budget to address the equity issue by instituting a redistributive fiscal policy. This was a major policy objective of the Eighth Five-Year Plan but has remained unimplemented.

Although on paper the personal income tax system is progressive, there is very little reliance on personal income taxes. This budget is no exception. As in previous years, 65 percent of revenues are targeted to come from indirect taxes, which are generally regressive in nature especially when combined with the inflation tax.

On the spending side, the FY2025 budget proposes a mere 3.2 percent of GDP for social sectors: spending on health (0.7 percent of GDP), education and training (1.7 percent of GDP) and social protection, excluding civil service pensions (0.8 percent of GDP).

These levels of spending are basically unchanged from the previous two years. At a time when inflation is badly hurting the poor, the FY2025 budget ought to have shown much greater sensitivity and scaled up spending on social sectors while cutting subsidies and lowering spending in other areas.

The author is vice-chairman of the Policy Research Institute of Bangladesh.

Comments

মুরগির খাঁচাও এর থেকে বড় হয়, আয়নাঘর পরিদর্শনের পর ড. ইউনূস

আয়নাঘরে বেশ কয়েকটি খুপরি দেখা যায় যেখানে দিনের বেলাতেও আলো প্রবেশ করে না। নেই বাতাস চলাচলেরও কোনো ব্যবস্থা। এরকম একটি আয়নাঘর দেখে তাকে মুরগির খাঁচার সঙ্গে তুলনা করেন প্রধান উপদেষ্টা।

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