The budget for FY2014-15 has just been announced. Once again, there is skepticism about whether it can be implemented. One complaint by expert economists of the country has been against its size.
There could be two different ways to evaluate the size of a budget. One is through the lens of the necessity, i.e., what the size of the budget to achieve the objectives of our development plan should be. The other is through the lens of our ability, i.e., how much we can afford to implement. The second lens does not make any reference to our development goal.
Do we need a big budget? This question should be judged in the light of two things; what our development objective is and how apposite the situation at the ground level is to support the accomplishment of development objectives.
Basic necessities like road and rail connectivity, skills, supply of energy, etc., are still inadequate. To improve the situation the government has to invest a lot in these sectors. This is why the need for a big budget cannot be denied.
The main criticism about the size of fiscal budget pertains to the second lens; the limited capacity to implement the budget. It is related to two things; one is the inadequate resources at the disposal of the government, and the other is the limited administrative and technical capacity to implement the activities chalked out in the budget.
The first problem leads to deficit financing -- funding of the planned activities by borrowing from domestic and foreign sources. Deficit financing is a reality particularly in developing countries where bare minimum infrastructure is yet to be developed. With drying up of the scope to mobilise external resources, reliance on borrowing from domestic sources has increased over time in developing countries all over the world. Many people argue that domestic borrowing by the government, especially from the banking sector, limits investable funds to the private sector. This is used as an argument to contest the use of a big budget, in addition to limited capacity of the government to implement it.
The most important question is whether we should shy away from a 'big budget' simply because of our inadequate implementation capacity or undertake measures to increase our implementation capacity. Before getting into that discussion, let us how big our budget is this year.
Every fiscal budget has two components; current and development expenditures. Current expenditures are non-discretionary in the sense that they do not provide any flexibility. Only development expenses, popularly known as Annual Development Programme (ADP) in Bangladesh, contribute to the capacity building of the country. In evaluating a fiscal budget, one should see to what extent the budget is going to contribute to capacity building, the development expenditure earmarked in the budget.
The size of the ADP in the last fiscal year was about Tk. 67,323 thousand crore. This year the target has been set at Tk. 81,808 thousand crore, a growth of 21.5%. This is not different from the growth of ADP during last couple of years, but matches the average growth (graph 1)
The current rate of growth of ADP failed to generate adequate momentum to meet the milestones laid out in the sixth five year plan. Every year, the government fails to meet the target for revenue collection and developing expenditure. Therefore, if the status quo continues the current budget will be doomed to face the same outcome. Instead of raising their voice to create pressure on the government so that the same failure does not happen this year, most experts come up with the same statement 'this budget cannot be implemented.' As a result, the people also consider it as not-implementable, and the government feels it is not obliged to walk the extra mile to implement the budget. This has been the same old story in Bangladesh for quite some time. This needs to be changed.
To take the pace and level of development to the next level, two interrelated things need to be changed. Government has to break the shackles of low level of development expenditure and the experts have to provide a menu of policy action on how to do that. Let us do it from this year. If we can motive the government to do three things, implementation of the current budget will not be difficult.
Enhance the capacity of the NBR to collect more revenue as planned in the budget. At the same time, consistency among different policies is also warranted. On one hand, the government is introducing new tax slab, covering new areas, and introducing new types of tax. On the other hand, the government is giving amnesty to those who breached the tax law to whiten their black money paying by a token penalty of 10%. This policy is definitely not going to help the attainment of the objective of increasing tax revenue.
As mentioned earlier, deficit financing is a reality in Bangladesh. In absence of adequate external resources, the government has to borrow from domestic sources. Commercial banks have to be the main providers. The history of Bangladesh does not record any evidence of credit crunch due to public borrowing. The credit crunch in 2010 was attributable to the bubble in stock price and diversion of funds there instead of the banking sector. Even the banks were also more inclined to invest in stock market instead of providing credits to the private sector at that time. Therefore, we should create pressure on the government to protect the banking sector and other financial intermediaries from corruption and manipulation. With economic growth, investable surplus also grows. The question is whether the surplus is channelised into the banking sector or not.
Finally, the efficiency of project implementation needs to be enhanced.
The writer is Researcher at Bangladesh Institute of Development Studies (BIDS), and former economist, World Bank. Email: firstname.lastname@example.org