Without reforms in the system, tax money will be spent in vain

Dr Debapriya Bhattacharya, distinguished fellow at the Centre for Policy Dialogue, talks to Nahela Nowshin of The Daily Star about what the budget FY2018-19 addresses and, more importantly, what it doesn't.
Dr Debapriya Bhattacharya

What's your take on the FY19 budget, particularly in light of an election year?

If you listen to the budget speech, it becomes obvious that it is a lot of stocktaking of the last decade relating achievements of the government in power. You try to remind people what you have done—the finance minister has tried to do that. And he has also tried to point out that a number of things that are under implementation.

What the finance minister conveniently did not mention was what promises were not addressed at all. For example, in its 2008 election manifesto, the party in power promised to produce a comprehensive employment strategy. It also promised to appoint a tax ombudsman and digitise the land management system. All these issues did not make any progress.

The budget has, as usual, tried to reach out to a larger section of disadvantaged people by extending the safety net, introduced the idea of launching a national social security system. Promise was also made to have a pension scheme for the private sector. These are laudable initiatives.

What is also observed is that the budget correctly sought to reach out to certain sections of the domestic-market-oriented industries by enhancing the customs and regulatory duties for goods produced in the country e.g. mobile phones and motorcycles. The budget also tried to look "green" by putting supplementary duty on polythene. It has tried to support differently-abled people by putting five percent tax on medical centres if the latter fail to ensure that they are friendly for the physically challenged. For the larger community of farmers, the budget has rightly put 25 percent customs duty and three percent regulatory duty to discourage import and enhance local farmers' competitiveness.

There is also a large number of rural development projects in the annual development programme (ADP) which are easy money to spend. There is also a sizeable unallocated fund provided in the budget. From the point of view of the upcoming elections, the budget has socially targeted measures and there is also money allocated beyond fiscal discipline which may be released fast. Allocations have been made to make progress in visible landmark projects. 

There are also some important tax measures which try to, as you know, mollify the upper class by giving them certain benefits. The banking sector is a case in point. Provisions for continuation of "making black money white" are another issue.

You had previously dubbed the banking sector as an "orphan". How will the measures in the budget impact the ailing industry?

The orphan banking sector is now being abused. Given the need for addressing the anarchy in the banking sector, it is now evident that the government is going in exactly the opposite direction. It has increased the number of family directors and their tenure in private banks through amendment of the Bank Company Act, and slashed the cash reserve ratio in the central bank to get more money into the banks. And now banks have gotten their corporate tax reduced by 2.5 percent. Without taking any measures for reforms within the misgoverned banks these steps are sending wrong signals. The government has also stepped back from the idea of putting a Bank Regulation Commission. It only shows who really calls the shots in deciding on measures relating to the banking sector.

It also brings up other issues. Are we giving bank licences to the right people? Are they being supervised properly by the central bank? And is the finance ministry providing proper oversight? What is happening with the corporate governance within the banks? The proposed corporate tax reduction of the banking sector will possibly not have any effect on the lending and deposit rates as well as on the liquidity.

More than a third of the youth labour force with tertiary education remained unemployed in the last fiscal. Does the budget adequately address issues related to job creation?

First of all, we see that a decade back, every fourth young person was out of job. Now, every third person is. So the share of youth unemployment has gone up. Secondly, we have now established that the quality of education in the country is not being recognised by the market. That means the more educated you are, the higher the possibility of remaining unemployed. In fact, the cut-off point is intermediate level education—that is what the numbers say. We also noted that the possibility of remaining unemployed has increased within the young female population, and the likelihood of being out of job is higher in rural areas. Whatever growth in employment we are observing is not bringing in as much remuneration as even five years ago. It essentially means that whatever jobs are being created largely do not fall into the category of decent work, are less remunerative, and in the informal sector. Regrettably, there is no recognition of and sensitivity to this problem in the budget philosophy or in the budgetary measures. It is assumed that the business-as-usual approach will anyway create some jobs for the youth. This is a totally misunderstood issue.

Mismatch between budgetary targets, revenue and implementation of ADP has always proved to be a challenge. What are some major reasons for this consistent trend? Do you foresee this happening this time around too?

Absolutely. The old trend will persist. The government has to put up an ambitious revenue target on the income side so as to sustain the expanding public expenditure programmes. But the government lacks the capacity to gather the resources from those who are supposed to pay taxes. A large portion of the eligible population are either evading paying taxes or paying less than the proper amount. Along with that, the government does not have the capacity to spend these huge amounts of money, thus a large part of the ADP remains unutilised.

Our major suggestion has been that the government needs to have a detailed and effective plan to deliver the budgetary targets. How are we going to raise these resources and on what accounts? How are we going to improve the capacity to deliver on the ADP? And even if they spend the money, will the projects deliver the necessary quality of outputs? There's also no guarantee that this spending will reach the targeted population. New methods are needed to assess the impact of spending of the scarce public resources—for that we need a results-based monitoring system and an assessment of how the targeted people have benefitted from the public expenditure programme. Without reforms within the system, we will be spending scarce tax money to no avail.

There is an additional concern this time regarding polls-time activities hampering the progress of implementation.

This is a valid concern because we may witness slowdown of the whole administrative machinery towards the end of the year, till a new government is put in place. So at least two to three months will be a downtime in this fiscal year. This will, unfortunately, coincide with the peak period of ADP implementation—that is the winter season.

Going by recent commentary on the budget, it seems that it's far from being "pro-people". How will the different sections of society be affected by the measures in the budget?

The budget has gone easy on the high-income people and also, to some extent, the low-income people. What the budgetary measures will do is create spending pressure on the emerging middle class of the country—they will be carrying the burden of a large portion of the incremental tax collection pressure. If the value of Taka weakens vis-à-vis foreign currencies, because of the growing deficit in the balance of payment, then import will become costlier. At the same time, if the interest rate remains high, then these two factors together will have an impact on the inflation rate. Food inflation is already moving upward. Given the fact that the global economy is picking up, commodity prices will go up—particularly for oil, food and fertiliser. All these things combined will increase our import bill and will have a downstream effect on the price situation. I worry that Bangladesh's emerging middle class along with the young population will possibly carry the brunt of the many budgetary measures in the coming days. Indeed, the emerging middle class in Bangladesh is yet to learn how to exercise its social power in influencing the allocative decisions of national budget.

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