A dispassionate disaggregation

IN a least developed country like Bangladesh the financial sector and the money market are grossly imperfect. This severely constrains the smooth operation of the transmission channels of monetary policy. In consequence, fiscal policy is arguably the most potent macroeconomic policy instrument to accomplish the development objectives. Fiscal policy is embodied in the budget. The allocation of expenditure across various activities, the level of revenues raised and its distribution among various sources, the resultant deficit and the methods of financing a given level of deficit impinge on the accomplishment of development goals relating to, interalia, growth, inflation, incentives to save and invest, income distribution, employment and poverty alleviation.

This article seeks to analyse selected aspects of FY14 budget from this perspective. It should be emphasised at the beginning that the achievement of the goals of a budget depends on its implementation. Therefore, this article will specially focus on the likelihood of meeting some of the quantitative targets and the implications of potential failure to achieve these targets. Furthermore, a realistic budget must be based on the immediate past experience and also likely developments in the politico -- economic scenario during the upcoming year.

Quantitative targets
Table-1 represents some important quantitative targets of FY14 together with the original budget and revised estimates of FY13

Some comments about the quantitative targets
* Estimate of deficit as percentage of GDP is contingent on the level of deficit as well as GDP. The basis of estimate of the level of GDP is unclear. Preliminary estimates of Bangladesh Bureau of Statistics show 6.03 percent real growth in FY13; the budget statement notes growth rate ranging between 6.3 percent and 6.8 percent. The justification cited (expected higher production of Boro paddy, potato and corn) is less than convincing, given that the share of entire crop agriculture including vegetables in GDP is only around 10 percent. The share of the above-mentioned crops is unlikely to be higher than 6-7 percent. It is not clear what rate of GDP growth has been used to estimate budget deficit as proportion of GDP. If the expenditure level remains unchanged and GDP growth is lower, deficit will be higher.

* There are serious questions about the feasibility of reaching NBR revenue target which accounts for about 80% of total revenues. The revised estimate in the budget document retains the same figure as original budget provision of FY13. The collection during the ten months of FY13 is Tk. 83,031 crores leaving a balance of Tk. 29,228 crores to be realised in the remaining two months. This is evidently a herculean task. The actual realisation of revenue from this source during FY13 is unlikely to exceed 1,06,000 implying a required growth of about 28 percent during FY14. The various indicators such as significantly negative growth of imports including capital machinery and raw materials, considerable deceleration in the flow of credit to the private sector, notable increase in the share of classified loan in the banking system, falling levels of profit in banks and likely slowdown of export growth in the wake of recent developments in the garments sector inevitably point to deceleration of economic activities. The situation will be further aggravated by likely continuation of confrontational politics. In addition, a number of tax-related proposals will have a depressing impact on revenue collection. One can, therefore, predict with reasonable degree of certainty that NBR tax revenue collection will fall short of FY14 budget estimates.

* Net external assistance, including grants, for FY14 is estimated to be Tk.21,068 crores. Using the exchange rate of April 2013, this turns out to be $2.7billion. The estimate for FY 13 was $2.38billion and actual disbursement during the first ten months was $1.18 billion, less than half of budget provision. For entire FY13, net disbursement is likely to be around $1.7 billion. Raising this by one billion dollar to $2.7 billion in FY14 is most unlikely.

* Financing through sale of saving instruments will also definitely fall short of budget provision in FY14 amounting to Tk. 4,971 crore despite some tax incentives provided in the budget. The actual net sale in the first ten months of the current fiscal year was only Tk.679 crores. In this context, it may be observed that the saving capacity of many people has declined due to persistently high inflation over the past few years. This is also reflected in the slower growth of bank deposits. In this situation, mere provision of tax incentives cannot raise net sale of saving instruments dramatically.

* Annual Development Programme (ADP) allocation for FY14 excluding Padma Bridge amounts to Tk. 59,018 crores. Here again, the immediate past experience with respect to implementation capacity has to be taken into account. For example, the budget provision for FY12 was Tk. 46,000; the eventual implementation was Tk37,508 crore. This is very much consistent with my prediction (see my paper in the The Daily Star dated 14 June 2012) wherein I stated that actual ADP implementation would be in the range of Tk. 36,000 to 37,000 crores in FY12.

* In light of the above discussion it can be concluded that if the expenditure target for FY14 is to be met, there will be a hefty increase in government borrowing from the banking system over the budget figure of Tk. 25,993 crores with deleterious consequences for already slowing private sector investment and GDP growth. It should be noted here that for FY13, targeted bank borrowing has been revised to hit Tk.28,500 crore against the budget figure of Tk. 23,000 crores.

Expenditure patterns

Table-2 shows the allocation of expenditure of the total budget (both development and non-development). FY09 has been taken as a comparator to assess the shift of emphasis over the five year period. Incidentally, FY09 budget was the second and the last budget that I presented to the nation.

* The reduction of allocation to health and education militates against development of human resources.

* The fall in allocation to agriculture and local government and rural development is not beneficial for the rural population.

* The increase in allocation to transport and communication is welcome in light of the importance of this sector for accelerating growth. However, a significant part of the increase is attributable to Padma Bridge. I am not convinced of the economic justification to construct Padma Bridge by using domestic resources right now.

* Lower allocation to social security and welfare can be hardly justified in view of a very large number of people living below poverty line, despite notable progress in the reduction of the proportion of the total population below the line.

* Energy and power crisis is yet to be resolved. Hence, the reduction in allocation to this sector is beyond comprehension.

* Finally there has been a dramatic increase in expenses for public administration which does not enjoy a great deal of confidence of the people in terms of efficiency, integrity and quality of services.

* FY14 budget allocates Tk. 15,443 crores for subsidies against the revised estimate of Tk. 16,808 crores for FY13. There is no explanation how the reduction will be effected. More specifically, allocation for subsidy to agriculture in FY14 is Tk. 3,000 crore less than the revised estimate for FY13. In an election year, subsidy reduction in this sector would be impossible. Overall, the subsidy is likely to overshoot by a significant margin.

A few comments about tax proposals
* If my estimation of NBR tax revenue collection of FY13 is correct, the budget estimate for FY would represent more than 28 percent increase. Yet, a host of measures which are likely to have a depressing impact on tax revenues have been proposed. These include enhancement of exemption limit for personal income taxes (though welcome in consideration of the inflation), tax rebates on investment for individuals, proposals for capital market incentives, extension of tax holidays etc. With regard to income taxes, the only increase relates to cigarette manufacturing company and mobile phone company. To put the two distinct types of companies at par with respect to taxation is obviously of questionable merit. And the reduction of tax differential between listed and unlisted mobile phone company when only one such company has been listed so far is a disincentive for others to be listed on the stock exchange.

* With regard to custom duties and regulatory and supplementary duties on imports, the number of items on which reduction has been proposed dominates the number on which increased rate has been proposed. Revenue implications as well as the consequences of these proposals for investment, consumer welfare, incentive for increasing efficiency of domestic producers etc. do not appear to have been properly analysed. The increases in duty on milk powder, LPG gas cylinder and newsprint and the reduction of import duty on capital goods are some of the cases in point.

* Concerning treatment of undisclosed income, I remain opposed to it on the grounds cited in my paper referred to earlier. The government should try to close the sources of earning black money, rather than giving opportunity for whitening such money year after year.

The implementation gap
It has been claimed that all the budgets of the present government were ambitious, but fully implemented. Table-3 shows the implementation performance with regard to FY12 for which latest close-to-actual estimates are available.

The numbers speak for themselves. No comments are needed excepting that the only item where the target was heftily overshot was borrowing from banks.

Concluding observations
I understand and sympathise with the Government's desire to increase revenue and expenditure as proportions of GDP. However, the quantitative targets of FY14 do not seem to be anchored on experiences of the recent past and the upcoming politico-economic scenario. Sectoral expenditure allocations do not conform to generally agreed priorities and some of the tax proposals are of dubious merit.
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The writer is a former Adviser to the Caretaker Government of Bangladesh, Ministries of Finance and Planning.