The Financial Express

Not just another budget

Not just another budget

There are compelling reasons for not considering the budget proposal for the next fiscal year (2019-2020) as a routine exercise or just as another budget. It has not been so during the past decade under the present political dispensation. Being optimistic about the continuity of fiscal policy over the medium term because of consecutive tenure, the party in power took a bold decision to accelerate the growth of gross domestic product (GDP), lifting it from the group of six per cent in which it was stagnating at the turn on the century. The annual budget has been used as the main instrument to achieve this bold and ambitious goal. The challenge of winning the status of middle-income country after attaining lower middle-income country status acted as the spur. Each year, since the acceleration started ten years ago to break out of the jinx of six per cent growth of GDP, the budget has had the overarching objective of embarking on a trajectory of ever higher growth rate to achieve middle-income status.

The present budget is not only designed for this purpose, it also aims to bridge the present growth strategy with the one that would take the country to higher income status by 2042 when the growth of GDP is envisaged to be over ten per cent. Being on the cusp of the end of the Seventh Five Year Plan and the beginning of the next one within the framework of the Perspective Plan, the present budget proposal has conflated the growth rate of 2018-2019 and the target for the same during 2019-2020 as part of the continuous policy for achieving a higher incline of the growth curve. The growth rate of GDP proposed in the budget for the next fiscal should, therefore, be seen both as based on experience and the vision for the future. The fact that the architect of the present budget is the erstwhile planning minister who spearheaded the strategy for accelerated growth year to year to attain higher income status by 2042 also makes the present budget very special and distinct.

MITIGATING UNINTENDED CONSEQUENCES OF THE GROWTH STRATEGY: The proposed budget, besides being growth-oriented, has also to address a number of other important goals that are expected to be achieved through higher GDP and in some cases, to mitigate the unintended consequences of the growth strategy. Among the unintended consequences of growth in recent years, the worsening of distribution of income has been highlighted by economists and the civil society including media as being most alarming poised to threaten social stability in the country. The stakeholders outside government expect the budget for the next fiscal to attenuate this threat before it wrecks havoc imperiling the very growth process. Among other goals that have traditionally been assigned to the budget for realising is stabilisation of price levels to protect middle and the lower income earning groups from hardships caused by inflation. Since the budget includes both development and non-development expenditure and it is development expenditure that contributes to GDP, it has become important to see the proportion of the two types of expenditures in the annual budget. Finally and very importantly, the budget is judged how far it is realistically designed to implement the proposal for income and expenditure with mobilisation of resources and allocation  of the same among various sectors of the economy.

First, the proposal for GDP growth merits consideration as it sets the background for all the other components of the budget. In the budget proposal for the next fiscal it has been pointed out that on the momentum of the present growth of GDP it is expected to reach 8.13 per cent at the end of 2018-2019 fiscal. The budget has set a target of 10 per cent growth of GDP by 2023-2024 and maintaining that rate till 2041 to attain higher income status. As part of this long-term goal, the GDP for 2019-2020 has been projected in the budget proposal at 8.2 per cent which is 0.2 per cent above the 8.0 per cent GDP growth for the benchmark year of 2018-2019 and 0.1 per cent less than the actual growth rate for the current fiscal. So the growth rate targeted in the budget for the next fiscal does not appear as over-ambitious. On the face of it and on the basis of achievement in this regard during the current fiscal unleashing a momentum, the growth rate of 8.2 per cent of GDP targeted during the coming fiscal appears quite realistic. Though the World Bank estimate for GDP growth during the current fiscal is at 7.5 per cent, the Asian Development Bank (ADB) has endorsed the GoB (Government of Bangladesh) estimate of 8.1 per cent. The divergence in estimate may be due to the unrealistic calculation of incremental capital output ratio by World Bank that has included capital-intensive projects in the infrastructure sector where output is dispersed over the entire economy and as such is difficult to add together.

PRIVATE SECTOR VS PUBLIC SECTOR: The crux of attaining the GDP growth is not, however, the targeted rate but the investment made in the private and public sector to achieve it. Though in the past private sector was expected to be an engine of growth, any investment in the sector has been tardy for a number of reasons including absence of adequate enabling environment consisting of infrastructure facilities, supply of energy, ease of doing business and paucity of credit from banks at moderate rates and a conducive tax regime. The budget proposal for 2019-2020 has projected private sector investment to increase from 23.40 per cent of GDP to 24.20 per cent. The problem is not with the possibility of achieving the target because the private sector investment has hovered over 23 per cent during the past several years. The proposal for a modest increase in private sector investment indicates a shift in emphasis in favour of public sector investment. In view of a number of mega projects in the public sector this may make sense but as a long-term growth strategy the emphasis on public sector investment is misplaced because almost all the entities in this sector are sick and have recorded lacklustre performance. Assuming that the proposal for the private sector investment is for the short term, even the small increase in this regard over the past years will need improved infrastructure, availability of credit from banks with moderate interest rates, a business-friendly tax regime and a simple regulatory mechanism.

In contrast to private sector investment, public sector investment has risen sharply to 8.17 per cent of GDP in the current fiscal compared to 6.82 per cent five years ago. With mega projects in communications and energy sectors, public sector investment has increased at a faster rate and in greater volume in recent years surpassing the rate in the private sector as pointed out above. It seems a public sector-led growth strategy has been adopted by the government for the time being. Whatever the compulsions for this may be, it should not be the long-term strategy because of the inefficiency inherent in the public sector.

The question that is pertinent now is whether the private and public sector investment as percentage of GDP that has been proposed in the budget for the current fiscal is adequate to achieve the growth of GDP by 8.2 per cent at the end of the next fiscal. The projected increase is of 0.66 per cent in private sector investment and above 1.0 per cent in public sector investment. Since the projected growth of rate of GDP during next fiscal has been estimated at a modest level with an increase of only 1.0 per cent, on the basis of performance of the two sectors in respect of investment during the past year the targeted growth rate of GDP appears achievable. But this will depend on mobilisation of resources on public sector above the present level and the availability of credit from banks at moderate rates of interest. In view of experience with mobilisation of resources through taxes in the public sector and the crowding out of private sector from commercial credit because of government borrowing, even the projected increase in investment in the two sectors appears dicey. Unless the tax net is widened and tax evasion is reduced significantly the prospect of increasing revenue by budgetary provisions will only result in the repetition of the past. Since bank borrowing by government is unavoidable, there should be immediate reforms to rid banks of the culture of poor credit management so that genuine borrowers can avail of bank loan as and when they need.

Along with the volume of investment, particularly in the public sector, the type and quality of investment is also crucial. In the annual development programme (ADP) not all projects are priority ones and having cost and time overruns in most of them make their benefit less than was envisaged at the beginning. There is, therefore, a great need for being prudent in the selection of projects giving priority to those that have a high benefit-cost ratio. Streamlining the implementation of projects in ADP for their timely completion can hardly be emphasised.

TREND OF INCREASE IN NON-DEVELOPMENT EXPENDITURE CONTINUES UNABATED: The budget proposal for 2019-2020, as usual, shows the division between development and non-development expenditure. The trend of increase in non-development expenditure is continuing unabated and is reflected in the budget proposal for the next fiscal. Almost two-third of expenditure proposed in the budget has been allocated for non-development expenditure. Among the sectors claiming sizeable shares of budgetary allocation for expenditure are public administration, law enforcement and defence. Sectors like education and health have allocations of 2.0 per cent and little over 1.0 per cent respectively, showing a lack of emphasis.

THE GROWING PROBLEM OF INCOME INEQUALITY: As regards addressing the growing problem of income inequality, no explicit, not to speak of a bold attempt, has been made in the budget showing the low priority attached to this. It seems the government is so obsessed with the growth in GDP alleviating this malaise has not received any attention. On the other hand, tax exemptions, indifferent   collection of wealth tax, preponderance of indirect tax like VAT, import duty, surcharge as proposed in the budget are likely to shift the incidence of taxation on the middle and lower income groups aggravating the problem of income inequality.

The budget proposal provides for as many as 17 social safety net (SSN) projects that will cover 113 million (1.13 crore) people in 2019-2020. Allocation for SSN projects has been increased by 15.5 per cent and amounts to Tk 743.67 billion (74,367 crore) as against 644.04 billion (64404 crore) in the current budget. There seems to be an implicit attempt to view this as contributing to reduction in income inequality and also of poverty. Since the target group of beneficiaries of SSN projects are almost destitute having no income there cannot be any comparison between them and the ultra rich. As regards poverty reduction through SSN projects, it is pointed out that the various assistance given to them are for subsistence and not for income generation, and as such cannot be considered as part of poverty reduction programme.

GOVERNMENT BORROWING FROM BANKS: Finally, the budget proposal providing for massive borrowing by government from banks and other sources to finance the deficit can only increase pressure on the prices of goods and services impacting the standard of living of the middle- and lower-income groups. The implementation of capital-intensive infrastructure and energy projects has already impacted the price levels in the market and this may be expected to continue till productive activities enabled by these projects are on stream. Fortunately, inflation has remained at little over 5.0 per cent during the past year and unless there is devaluation it is not likely to deteriorate alarmingly. As long as the budget deficit is contained below 6.0 per cent a sharp spike in inflation is not likely to take place. However, as a pre-emptive measure essential consumer goods should be made available through the Trading Corporation of Bangladesh (TCB) as is done in times of crisis. Mentioning this in the budget will go a long way in discouraging profiteers.

It is early to make final comment now because the budget has been presented only as a proposal. It is expected that the proposal(s) will be modified in the light of comments made by stakeholders. The government should be gracious enough to accept positive comments and not consider them as mindless criticism.    



Share if you like