The Financial Express

Growth with equity: The budget for 2017-2018

| Updated: October 22, 2017 14:29:56

Growth with equity: The budget for 2017-2018

A budget can be analysed to find fault with or for appreciation from many perspectives ranging from balancing income and expenditures and implementation capacity of the government. This write-up examines the budget proposal for 2017-2018 from the point of view of growth and equity, as a sequel to the last article that appeared on June 07 in this daily.
The proposed budget of Tk 4.27 trillion, which is 26.7 per cent higher than the revised budget for 2016-2017, has set a target of achieving 7.4 per cent gross domestic product (GDP), 0.2 per cent higher than that reported to have been achieved during the outgoing fiscal. The per capita income is envisaged to increase to US$ 1602 from US$ 548 in 2005-2006. Higher GDP growth is expected to result from higher exports, remittance and investment. Increase in investment will play a crucial role in the increase of GDP and it is expected to rise to 31.9 per cent of GDP during 2017-2018. In the fiscal 2016-2017 total investment was 30.3 per cent of GDP where the share of public sector was 7.3 per cent which is envisaged to rise to 8.6 per cent leaving private sector investment to rise from 22 per cent to 23.3 per cent of GDP. The rise in total investment and that of private sector investment as percentage of GDP are not high but they are positive indicating that the government's agenda of increasing growth to over 8.0 per cent in the near future to attain middle-income status by 2021 remains steadfast. In this growth-oriented strategy the private sector is expected play a greater role, particularly in the productive sectors. To stimulate private sector investment care has been taken to levy tax at the optimum level, reducing the tax burden where ever it is possible. Thus, the corporate tax on garment industries, a major contributor to GDP, has been reduced from the present 20 per cent to 15 per cent. This has, however, been somewhat off-set by raising source tax on exports of garment to 1.0 per cent from the present 0.7 per cent. Still, on balance benefit from corporate tax reduction will prevail. Besides garments tax rates on a number of domestic industries, including ceramics, battery and solar panel, have been reduced. The corporate tax rates on other industries and companies, have remained unchanged, showing a pro-growth policy. Thus corporate tax on publicly traded industries and companies will continue to be 25 per cent while that on non-traded industries will be unchanged at 35 per cent. Publicly traded banks, insurance and merchant banks will pay corporate tax at 40 per cent and non-traded financial institutions will pay 42.5 per cent as at present. All types of tobacco products have been subjected higher corporate tax than at present and will amount to 45 per cent. This will however put 2.0 million bidi workers at risk of unemployment. Besides tax incentives private sector investment is expected to benefit from the ensuing monetary policy for the first half of the next fiscal as it has from the previous ones. The dual objectives of monetary policy of containing inflation and promoting growth can be said to be a permanent feature of the country's macro-economic policy.
To stimulate private sector investment the government has established Bangladesh Investment Development Authority (BAIDA) merging Privatisation Commission and Board of Investment to provide one stop service to private sector industries and to remove impediments to investment. The ongoing programme of establishing Economic Zones will continue with 10 more Zones expected to be added during FY 2017-2018. Various steps will be taken to promote public-private partnership (PPP) or infrastructure development. 20 more projects will be added to existing 45 projects and Tk 3.8 billion will be invested for these. To maximise aggregate growth reliance will be made on mega projects in the infrastructure sector for which the public sector will play a catalytic and leading role. For this a higher percentage rise in the public sector investment rate as a percentage of GDP than the same for private sector has been targeted in the 2017-2018 budget.
Public investment is undertaken through the Annual Development Plan (ADP). Implementation capacity under ADP has been sought to be improved through intensive monitoring, appointment of consultants to provide experts services and improve co-ordination between the concerned ministries and development partners in 20 largest-aid-recipient projects. Growth stimulating 10 larger projects have been brought under 'Fast Track' monitoring and steps have been taken to accelerate their development. These efficiency-enhancing measures will continue during 2017-2018.
To accelerate growth the country has fixed a target of generating 24 thousand megawatts of electricity by 2021 for which a few big major plants are being installed, solar energy supply is being increased and a nuclear power plant is being installed. Expensive rental power plants will be gradually phased out from 2018. Preparatory work will start during 2017-18 to install a LNG terminal to import gas to meet domestic demand. 
Skill development of workers raises the return on investment. Realising this the government has been implementing a number of programmes which will be further expanded during the next fiscal. The National Human Resources Development Fund will be set up during 2017-2018 to mobilise resources for skill development training for both public and private sector.
BORROWING FROM BANKS: Fund for the public sector investment during 2017-2018 will exceed the tax and non-tax revenue. Instead of increasing further tax burden on private sector the government has opted for domestic and foreign borrowing. Borrowing from banks, may, however, crowd out private sectors borrowing to some extent. Increase of foreign loan from present $ 2.7 billion to $ 7.6 billion appears rather unrealistic but it speaks of government's desire to spare the private sector from further tax burden. 
On the basis of the above facts and figures the budget proposal for 2017-2018 leaves no doubt that it is growth-oriented though the high percentage of total allocation to non-productive sectors undermines this agenda somewhat. For instance, public administration, public order and security and defence sectors account for 24.7 per cent of the total budget outlay. 
Whether the aggregate growth targeted in the budget can be achieved or not is an issue with which this write-up is not dealing. The query underlying this write-up is to find out the overarching objective(s) of the budget. On the basis of the emphasis given on public sector investment and to stimulating private sector through tax and other incentives it is obvious that growth has been given top priority. Now it remains to be seen whether promoting equity, i.e., welfare of the common people is of equal concern to the government as reflected in the budget.
IMPACT OF VAT ON THE POOR: Though the budget proposal mentions about promoting welfare of all classes of people, particularly the lower middle class and the poor, raising of present tax levels and imposition of new ones will increase the prices of essential items. Particularly the imposition of VAT at 15 per cent and supplementary duty on imports is expected to increase the prices of goods consumed by the lower middle class and by the poor. Though over 1000 items have been exempted from VAT most of these do not figure in the consumption list of the poor. As a result, of rise in prices of both food and non-food items it will not be feasible to contain inflation to 5.5 per cent as targeted in the budget proposal. Inflation was at 6.1 per cent up to March 2016-2017 though the target was 5.8 per cent. Since then the prices have gone up after Ramadan started. This price spiral along with the pressure from rise in tax levels will make it difficult to contain inflation within 5.5 per cent. This will mean a significant rise in the cost of living of the poor and the lower middle class. In this connection it may be mentioned that the increase in VAT on gas and electricity will have a multiplier effect on the prices of other consumer goods. The proposal to increase excise duty on bank deposits will further aggravate the welfare of middle class. On the other hand, the proposed allocations to social sectors that contribute to the welfare of middle class and the poor appear to be inadequate to meet even the minimum requirement of expenditures. For instance, allocation for the health sector has been a meagre 5.2 per cent. The majority of middle class and poor depend on government provision of health services and they will suffer because of the meagre allocation. According to UNESCO 20 per cent of total budgetary allocation should be earmarked for education. But the budget provides for only 16 per cent of the total allocation which is lower by 1.89 per cent than last year.
Though the budget proposal mentioned about promoting welfare of all classes of people, particularly the middle class and the poor the incidence of taxes on them will make it difficult to meet the cost of living. On the other hand, provision of public goods and service like health and education will also not be adequate to compensate. Though the social safety net programm,e has been expanded in the budget for the poor it is not enough to mitigate their suffering from rising cost of living. If the increasing tax revenue was meant for higher investment to promote welfare of the middle class and the poor the government concern for promoting equity with growth could be understood. Government's reliance on higher degree of indirect tax with resultant greater incidence on middle class and the poor and the absence of countervailing measures like substantial allocation for social security indicate secondary priority to equity i.e. redistribution of income to reduce inequality.
It seems the government is determined to the degree of obsession to attain vision 2021, taking the country to the group of middle-income countries for which aggregate growth has superseded equity consideration. It is an agenda that goes against the grain in the present era of populism. Whether the government should be praised for the courage of its conviction about attaining middle-income status by achieving 8.0 per cent GDP growth that will make poverty history or it should be excoriated for ignoring equity and welfare of the middle class and the poor at present will depend on whether one shares the ambitious vision of the government. Whatever the decision one makes, it has to be admitted that it takes a lot of courage and confidence to make an unpopular budget proposal before election.  
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