Budget FY20 - an act of delicate balancing

Updated on 01/04/2019 - By InM - No Comments


Mustafa K. Mujeri | Published:  March 31, 2019 23:20:05 | Updated:  April 01, 2019 10:04:49

Budget 2019/20 will be the first budget of the new government; and for the Finance Minister as well. As such, the budget is likely to attract a wide attention from the experts as well as the general public. No doubt, the budget will deliver a strong message for the government's long-term vision and its political manifesto.

The unveiling of the country's much-anticipated 2019/20 budget will come at a challenging time for the Bangladesh economy. On the external front, our  exports  are  facing  growing  headwinds  -  as  opposed  to  the  fair  winds of earlier years - due to heightened global trade tensions, economic uncertainty, and slower global growth.

On the domestic front, slow revenue growth and growing financial needs for addressing the stock of government debt and contingent liabilities are narrowing the fiscal space and preventing public investments from driving the needed economic activities to the required extent. In this situation, Bangladesh will have to depend increasingly more on private consumption and investment to support economic growth in the next few years.

This year's budget will have to reflect a careful balancing act on the part of the Finance Minister between safeguarding growth, sustaining private sector confidence, promoting fiscal responsibility, managing debt sustainability, and protecting the poor and vulnerable. In recent years, low-income  households have been disproportionately affected  by  the  rising  cost  of  living, for which the government will have to  think of  ways  to  improve  the  effectiveness of the country's social protection system.

GOOD GOVERNANCE, FISCAL RESPONSIBILITY, AND TRANSPARENCY: Further, the new budget needs to open up several initiatives with renewed vigour.  First, efforts to strengthen good governance, fiscal responsibility, and transparency will be positive steps in the budget. Second, better targeting of cash transfers to account for household size and other factors can also be steps in the right direction. Third, the new budget's strengthened focus on promoting education, skills, and entrepreneurship can also be a highly welcome development. 

This  latter  priority  is  critical  for Bangladesh  to  compete  and  thrive  in  the new digital economy. As indicated in the World Bank's 2018 Human Capital Index, which quantifies the contribution of health and education to the productivity of the next generation of workers, Bangladesh ranks 105 among 157 countries with a score of 0.48. Bangladesh's human capital outcomes could be made better for its development ambitions, particularly in relation to the quality of education in science and technology.

TAXATION SYSTEM: The new budget needs to put more focus on taxation including VAT. In this context, the issue of including imported services within the scope of VAT, particularly those related to the digital economy, may be assessed as a timely initiative. This should be well-aligned with growing international practices. There should also be a programme to further expand the scope of VAT over the coming years.

There needs to be a move to make the taxation system more progressive by broadening the coverage of individuals and businesses paying income taxes, and by increasing the real property gains tax and stamp duties on premium properties. These can be constructive measures embedded in the budget. In the area of debt sustainability, prudent management of fiscal commitments over the short- and medium-term will be required. Part of these fiscal management responsibilities includes the development of an effective mechanism for targeting subsidies. The budget will also need to bolster efforts to diversify fiscal revenues. 

INVESTOR CONFIDENCE & EMPLOYMENT: An important policy issue for the budget will be to decide on whether 'it is the business of the government to be in any business at all'. The policy direction of not being in business, if pursued, will boost investor confidence and promote pro-competition economic reforms. Infrastructure, agriculture, and digital infrastructure should enjoy greater and much needed support including ease of doing business and simpler tax compliances.

The budget should not remain casual about employment. The Labour Force Survey (LFS) 2016-17 reveals a grim picture of falling labour force participation rate and stagnant unemployment rate -suggesting adverse changes in the labour market. Indeed, the data point to a 1.1 percentage point decline in labour force participation rate from 59.3 per cent in 2010 to 58.2 per cent in 2016-17, an unexpected shift in a period of rapid income growth.

Meanwhile, unemployment rate among the youth (aged 15-29) have surged to high levels, including for educated young people. Of  the  total youth  labour  force  population  of 20.1  million,  an  estimated  2.1  million (10.6  per  cent)  are  unemployed. It should be acknowledged that all is not well on the employment front.

In the present situation, the natural expectation is that there would be some measures in the budget to tackle the problems of open unemployment and poor quality jobs. For example, a simple and obvious thing to do would be to fill up all vacancies in government employment - currently 18 per cent of total government jobs or more than 300,000. The budget estimates should reflect accommodation of an expansion of that order. Further, the budget should reflect systematic thinking on the issue of job creation. To move along these lines, the budget could include projects to encourage productive self-employment.

Further, if  the  heavy  lifting  of  economic  growth and job creation in the coming years is to be shouldered by the private sector, then public policy to create supportive infrastructures and services should be  an  important  first  step. Bangladesh's Global Doing Business ranking of 176 among 190 economies does not adequately symbolise and reflect the country's ambition to further enable private sector-led development. Creating a stable and predictable regulatory regime, a growing economy, and strong fundamentals is important as Bangladesh requires huge FDI (foreign direct investment) in the coming years to overhaul its infrastructure sector to boost growth.

MARGINAL AND SMALL FARMERS, LOWER MIDDLE CLASS: The budget needs to devote special attention to the marginal and small farmers, as well as to the lower middle class of the society. For the purpose, the focus could be on three major segments, namely the farming or agriculture sector, informal sector, and low paid salaried class. The tax adjustments should benefit the low middle class households and salaried individuals; and the tax slabs of the richer income groups may be appropriately adjusted for the sake of equity. From the consumer point of view, the budget may cover supportive fiscal initiatives for the middle class, low-income communities and small/marginal farmers. Focused initiatives may also be launched towards customs duty rationalisation, single window clearances, and digitisation in documentation. Further, income tax adjustments may result in more money in the hands of the salaried class, which in turn will fuel consumption especially in fast-moving consumer goods (FMCG), automobile and real estate sector.

MSMES, GEM, R&D: Supports are needed for the micro, small and medium enterprises (MSMEs) and extended government e-marketing (GeM) platform may be introduced to support domestic trade and services. Particularly, the support to MSMEs will boost traditional textile and allied sectors to go on high gear in research and development (R&D). This has the potential to enable the growth of the R&D base and help the small business sector to emerge as a major employer.

The budget needs to offer new initiatives that will support the growth of manufacturing sector like textiles, agricultural processing and the digital economy. Initiatives may be introduced to make a given share of all procurement by the government from the MSMEs sector, of which a certain share should be from women-owned enterprises. As handloom textiles, leather and other cottage industries mostly belong to the informal sector, the policies may also be targeted to these enterprises. This will boost the confidence among the small players, which will grow the economy and create jobs.

The budget needs also to prioritise the science and technology-related money allocation including the digital economy. Training programmes may be initiated for youth for diverse skilled jobs and funds may be allocated for the creation of technology innovation hubs (TIH), application innovation hubs (AIH) and technology translation research zones (TTRZ).

INFLATION, FISCAL MANAGEMENT: Since tax adjustments may lead to more consumption, expenditure, and liquidity in the economy, the budget should not entirely shift the burden of addressing inflationary pressures to monetary policy and the Bangladesh Bank. Effective fiscal management is the cornerstone of good economic policy and is crucial for financial and macroeconomic stability. The Budget Management Act was enacted in 2009 with the objectives to improve fiscal discipline; move towards keeping fiscal deficit within limit; and free up resources for private sector investment which would in turn play a critical role in boosting GDP (gross domestic product) growth. From the very beginning of the new government, a major objective should therefore be to achieve fiscal consolidation.

Probably, the budget would contain welfare programmes targeted to specific sections of the population. In the past, earlier governments had also announced many such programmes, some of which turned out to be big ticket expenditure items resulting in a significant drain on budgetary resources. These programmes should be well designed to create positive impacts on household productivity and welfare of the targeted population. 

GOVERNMENT BORROWING PROGRAMME: Domestic borrowing by the government is likely to remain as a major source of financing fiscal deficit. The government should be careful about financing growing expenditure by raising government bond yields since a rise in government bond yield increases the overall cost of borrowing in the economy thereby crowding out private investment. Further increases in the government borrowing programme may also add to the existing stress in the bond market.

Moreover, government securities are primarily purchased by the commercial banks, insurance companies, and pension funds. At present, the commercial banks hold more bonds than required by the regulatory norms. With a likely ambitious expenditure plan in the budget, it may be worthwhile to ask: do the banks really have the appetite to absorb additional security issuances? If not, what will happen to the security rate and subsequently to private investment and growth?

CONTRADICTIONS: In a modern market economy, a crucial element of fiscal prudence is counter-cyclicality. This means that the government should save during good times, benefit from higher tax revenues, and work towards building a budget surplus or lowering the deficit. When the economy faces a recession and tax revenues decline, the government should spend more to boost aggregate demand and run down the budget surplus or run a higher budget deficit. This is a fundamental principle of macroeconomics. In this context, there seems to be a contradiction between the apparent state of the Bangladesh economy and the fiscal policy of the government.

Looking at the recent GDP growth rate figures published by BBS (Bangladesh Bureau of Statistics), it is seen that GDP growth during the last 5-6 years has been the highest since independence. In such circumstances, the government should have been running low deficits or even surpluses. Instead the budget deficit-to-GDP ratio has hovered around 5.0 per cent throughout the period.

Thus there exist some contradictions. The Bangladesh economy, according to the government figures, is recording spectacular growth consistently for almost a decade and is one of the fastest growing economies in the world. Then, why are large segments of the population, including small/marginal farmers, small traders and businessmen, low middle class individuals, workers in the informal sector, and other low-income groups, not faring well in the economy? Why are many of these groups need welfare support to survive? The picture is not consistent with the narrative that the Bangladesh economy is booming.

The above shows that it is essential for Bangladesh to ensure that the benefits of development reach all sections of society in an equitable manner. It also partly reflects Bangladesh's economic potential to compete at the global frontier and become an Emerging Asian Tiger.

Mustafa K. Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM)



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