FY22 Budget: Is it really pro-poor?

The Financial Express

 Mustafa K Mujeri   | Published:  June 21, 2021 19:47:49

For achieving ‘Vision 2041’ and becoming a high income country by 2041, Bangladesh’s national budget has to be pro-poor. The FY2021-22 national budget–which has been termed as ‘Bangladesh towards a Resilient Future: Protecting Lives and Livelihoods’ by the Hon’ble Finance Minister–has been framed to facilitate the recovery of different sectors from the shocks and disruptions caused by the prolonged effects of the Covid-19 pandemic.

The medium-term strategy of the budget seeks to achieve a GDP growth rate of 7.2 per cent in FY2021-22 compared with 6.1 per cent in FY2020-21. Strong domestic demand has been targeted to become the main source of growth for which focus will be placed on boosting consumption and investment and on enhancing exports to augment external demand. The emphasis will be on creating employment and implementing poverty reduction strategies through addressing the Covid-19 challenges, thereby raising incomes and domestic demand. Further, to promote inclusive growth, guidelines will be adopted for implementing programmes on expanding labour-intensive and export-oriented industries, diversifying agriculture, expanding services sector activities, developing ICT-based entrepreneurship and expanding job opportunities in overseas markets.

For addressing the Covid-19 pandemic challenges, the budget prioritises the health sector and implementation of stimulus packages. Further, food security, human resources, rural development and job creation, industry, SMEs, rural nonfarm sector and expanding the coverage of social safety net programmes are taken as priority areas for the budget. For sustaining high growth, the budget puts emphasis on timely implementation of nationally important projects including the mega projects in the infrastructure sector and on bringing qualitative changes in the lives of the people through reducing poverty and inequality.

The FY2021-22 budget sets the total expenditure at Tk. 603,681 crore, which is 17.5 per cent of GDP, including an allocation of Tk. 225,324 crore for the annual development programme (ADP). Health, agriculture and employment generation have been given priority while allocating resources for the ADP.  In the ADP, 29.4 per cent has been proposed for human resources (e.g. education, health and other related sectors), 21.7 per cent for agriculture (including rural development, water resources and others), 12.1 per cent for power and energy, 26.4 per cent for communications, and 10.4 per cent for other sectors. For reducing poverty and income inequality, the budget puts emphasis on expanding the coverage of social protection programmes, employment opportunities, microfinance, and efficiency enhancement trainings.

Although the emphasis on social safety nets and protection is well-placed in the context of Covid-19, the budget does not seem to have paid much attention to the informal sector workers (both wage and self-employed) who have been the hardest hit by the pandemic. The Covid-19 pandemic-led economic downturn has been led, along with supply chain disruptions and other factors, by private consumption decline which has traditionally been the key driver of aggregate demand in Bangladesh. Major macro indicators suggest that the fall in consumption (resulting from job and livelihood losses especially of the informal sector participants in both rural and urban areas) has already led to spikes in current poverty rates (although many of the new poor could be turned into ‘transient poor’ if timely support can be provided to restore their livelihoods and stop emergency asset depletion) and at least temporary economic welfare losses.

For these groups, both immediate reliefs and smart measures are necessary to address the deep-seated vulnerabilities of their informal sector livelihood activities and address the impacts of the pandemic. These policies will have to recognise that the informal workers and the cottage, micro and small enterprises (CMSEs) in the informal sector traditionally have little room to maneuver and cope with the unexpected shocks of the magnitude created by the Covid-19 pandemic. During the pandemic, while the poor have been facing rising and volatile food prices leading to further decline in their poverty conditions, many informal workers living marginally above the poverty line have experienced sharp drops in earnings which have driven them into poverty.

Further, few informal workers are covered under the existing social protection measures and have any savings or access to finance or credit. For these households, making financial services accessible and ensuring their productive use is the priority in the budget, as are measures which ease their access to productive assets to resume livelihoods. For these households, asset possession underlies resilience against shocks and vulnerability. As such, the budget needs to adopt measures for creating and protecting assets and install policies, such as productive resource conservation, price stabilisation schemes and microinsurance linked with financial services.

The budget can make a beginning towards universal social protection as well as initiate policies that support greater productivity, skill and human capital development of the informal workers. Emphasis could be given on digital technologies for creating new opportunities for the informal workers that will also make Bangladesh more competitive and better integrated into the global market through improving digital access and supporting the workers to take advantage of online platforms. This will also help graduate the informal workers to higher return markets through skill upgrading and tightening of the low-end segments of the labour, service and commodity markets where the returns are low. The process will greatly facilitate the informal workers to escape from poverty.

The budgetary measures should also recognise that there are many categories of informal workers who are especially vulnerable to several sources of risk and who need broad protection, such as households dependent on casual wage labour, women headed households (separated, divorced, and widowed) and their dependents, socially excluded women, older people, chronically ill, and similar other vulnerable groups. Well-designed social assistance is necessary to support the involvement of these groups in the income generation process and help them access health and education/skill development services needed for interrupting inter-generational poverty.

In the budget, the allocation in the social safety net sector has been proposed at Tk. 107,614 crore (3.1 per cent of GDP) compared with Tk. 95,574 crore in FY2020-21. The portfolio of programmes include allowances for population groups with special needs, food security and disaster assistance programmes, public works/employment programmes, and programmes focused on human development and empowerment. However, despite the proposed increase in coverage, most of the informal workers and a large segment of the existing poor would remain outside the purview of any social protection programme. For raising effectiveness of the sector, new and innovative programming is necessary in the budget.  

In Bangladesh, inequality significantly undermines poverty reduction and inclusive development at present. There exists a strong positive association between income inequality and income poverty, material deprivation, and multidimensional poverty. Further, the mechanisms which drive this relationship are complex and cover social, economic, spatial, and political dynamics and even crimes (e.g. drugs) particularly those that have the potential for economic gain. To reduce inequality, there is a need for changing the growth pattern into a more inclusive one including changes in social norms and redistributive policies. Although this is a longer term agenda, the budget needs to be explicit on addressing the challenges of inequality to create awareness and reach a social consensus.

It is true that in a democratic polity, the usual focus of a politically motivated budget is on policies that favour the voting electorate who are less likely to support redistributive (or ‘pre-distributive’) policies. For the political parties, this is necessary to amass support of the expanding middle class and powerful elite and ensure political gains. But to sustainably reduce poverty, it will be necessary for the budget to tackle inequality. In particular, distribution has to be the central element in fighting poverty in Bangladesh, and distribution objectives should be placed as an integral component of the poverty reduction agenda of the budget.

Overall, the FY2021-22 budget differs marginally on where to allocate public spending relative to previous budgets. From the poverty perspective, the important issue is: Has the budget proposed a lopsided public expenditure pattern and a regressive tax system? At the aggregate level, spending on areas as crucial as health and education or social protection remains mostly static in the FY2021-22, whether looked at as a proportion of GDP or as a proportion of total government expenditure or in real terms. For the poor, sectoral allocations with programmes that directly target the poor people are important. Under the health sector, this includes universal health coverage including child and maternal healthcare. Under the education sector, allocations to basic education, specifically free primary education programmes and school health and nutrition are important. Budgetary allocations to social protection, namely cash transfer to vulnerable groups, including orphans and vulnerable children, older people and people with disabilities are also important. Even in the traditional domain, these programmes in the budget have shown little innovation. 

Regarding domestic revenue mobilisation, the target for total revenue income in FY2021-22 budget has been set at Tk. 389,000 crore, which is 11.3 per cent of GDP. For raising revenue collection, the budget proposes massive reforms in the revenue administration, business-friendly tax rates, prevention of mismanagement, corruption and misuse in the tax revenue management through automation. The total number of income taxpayers in the country is only about 25 lakh (less than 2 per cent of the total population) although there are more than 4 crore people who belong to the middle income category and above.

The budget intends to increase the number of tax payers within the earliest possible time, but until that happens, these few lakhs will be the ones who will be required to pay income tax.

Given the low tax-GDP ratio, it is no doubt important to raise the country’s tax levels with tax reforms. But along with creating the additional fiscal space, there should also be a clear understanding of how the fiscal space will be used and how the additional tax burden will be distributed. There must also exist public institutions that are capable of enforcing the policies in a competent, efficient and corruption-free manner. In most cases, the costs of tax increase tend to be more certain than the benefits from higher public spending in the country. In the present situation, it would be better if higher revenues could be obtained from a truly progressive income tax that would bring more equity in the tax system. This could be supplemented by higher taxes from widening the base of the value added tax (VAT).

It is true that everyone pays indirect and other taxes and duties which the producers can pass on to the consumers. In fact, only around a quarter of the government’s total tax revenue comes through direct taxes which is extremely low in a country such as Bangladesh. The budget should adopt a time bound strategy for enhancing the income tax share such that the share of direct taxes can be made much higher than that of indirect taxes. This is necessary to uphold the interests of the consumers and the production sectors. The budget should consider measures towards ensuring the continuity and stability of tax policy and transparent and efficient enforcement procedures and adopt simplified business operations.

Obviously, a big issue in the tax system is that of tax evasion and avoidance on the part of big businesses and rich individuals. The impact of tax evasion on the poor households is that revenues that could be used by the public sector for development assistance, transfer funds, employment creation, services and other investments are lost. It is a source of major concern since this is a symptom of weak institutions and poor policies. It thwarts sustainable and inclusive development. Also there remain issues of providing ‘subsidies’ to the rich through various tax and duty adjustments and concessions. For transparency, the budget documents should follow the practice of including a ‘statement of revenue foregone’ because of such measures making it easier to track these subsidies given to the rich.    

With acute income and wealth inequalities, the issue of imposing wealth tax should be actively considered for the budget agenda. But the challenge is whether the government has the ability to enforce wealth taxes on the elite that have a vast arsenal of tools to avoid and evade taxes. The country’s wealthy individuals have access to sophisticated tax sheltering strategies and may reduce their tax burden by offshoring assets to tax havens. The Panama Papers and the ‘Begum Para’ in Toronto reveal offshore entities and money laundering/illegal transfers are used by many wealthy individuals even from low income countries including Bangladesh.

Wider coverage of third-party reporting, coupled with systematic cross-validation of reported information and increased scrutiny of high net worth taxpayers can strengthen enforcement capacity of the tax administration in the country. Voluntary disclosure schemes may help collect new information about assets and income and generate more revenues from wealthy taxpayers. For such programmes to be effective in improving compliance in the shorter and longer term, strict enforcement needs tough noncompliance sanctions and a credible threat of detection along with absence of corruption in the system. With better enforcement, wealth taxes can complement progressive income taxes to reinforce progressivity and address inequality in the context of Bangladesh where elites are no doubt difficult to tax.

In the context of the FY2021-22 budget, the Covid-19 pandemic highlights that Bangladesh needs to adopt an integrated disaster and development paradigm, particularly with respect to its ongoing development process. The current paradigm needs to evolve and integrate practical ways to deal with such future crisis for the sake of survivability and sustainability. The experience of Covid-19 has no doubt contributed to some progress in the budget policy development along these directions, but the reality is that such progress in budget policy making can only be effective only if the capacity to respond to the complex intersections of economic, social, pandemic and other disaster impacts especially on the most vulnerable populations also matches in reality.

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