Some thoughts on the upcoming budget
IT is well known that government expenditure as a proportion of GDP is the lowest in Bangladesh among all Asia-Pacific countries. At the same time, there is an urgent need for higher levels of public expenditure in areas such as social security, infrastructure and human resources development.
The actual proportion in FY09 would be around 15%. Based on my estimate of GDP in FY 10 at current market prices and public expenditure -- GDP ratio of 17%, the size of the budget should be about Tk. 116,000 crores. This would be ambitious, but not unachievable.
Financing
Out of 17%, domestic revenue should be targeted to finance 12%, and the remainder from domestic borrowing and external assistance. The distribution of 5% deficit financing between these two sources will depend on the government's capacity to mobilise external assistance. Domestic borrowing will be the residual. At 12% of GDP, revenue target should be about Tk. 78,900 crores and, looking at historical proportions, NBR tax revenue target can be fixed at Tk. 59,945 crores. It should be emphasised that achieving these targets would require a lot of hard work and genuine commitment by the administrative machinery. There is no need for raising exemption limit on personal income taxes. The present limit is 37.5% higher than in FY 07. The sum of inflation in the subsequent two years has been considerably less than this figure. In real terms, therefore, the present exemption limit is much higher than that of FY 07. Regarding import duties, excepting for food items, there should be no zero rate. The duties on capital machinery, intermediate goods and raw materials were reduced last year. The investors are also benefiting from the fall in international prices of these goods. So, there is no case for further reduction. Tax structure
It should be remembered that cheap capital machinery encourages higher capital intensity to the detriment of employment creation. Low duties on raw materials and intermediate goods militate against domestic production. The country thus becomes locked into excessive import-based industrialisation. And a high rate of duty on finished products is a sure recipe for inefficiency. The corporate tax rates were also reduced last year, except for financial institutions. The latter may be given an assurance that their tax rates will be reviewed in FY 11 budget provided they reduce both the lending rate and the prevailing large spread between deposit and lending rates. They should not be given the liberty of reducing lending rate at the cost of depositors' interest. The global recession should not be allowed as an excuse for all-round reduction of tax rates. Even in FY 10, Bangladesh is expected to have a satisfactory growth rate of around 5.5%. Moreover, the country has the unenviable honour of having the lowest revenue-GDP ratio in Asia-Pacific region. In principle, I support the finance minister's declaration to abolish tax holiday. The benefits under this scheme were considerably reduced last year. Apart from tax holiday, there are various other exemptions, rebates and deductions for corporate tax- payers. Ideally, there should be a thorough study of the potential revenue loss and economic impact of all these provisions. My suggestion is that the abolition of tax holiday be postponed till FY 11 budget, by which time it should be possible to complete a comprehensive study. Composition of expenditure
The priority sectors in FY 09 budget were education and IT, local government and rural development, transport and communications, agriculture and water resources development, and energy and power. These priorities may be largely retained for obvious reasons. One important issue in the allocation of expenditure is the size of ADP. Applying FY 09 proportion to the proposed total expenditure level, ADP size turns out to be about Tk. 29,700 crores. Probably this is what provides the rationale for the finance minister's hint that ADP size would be around Tk. 30,000 crores. But one should not be oblivious of the fact that the highest ever expenditure did not even reach Tk. 20,000. The finance minister himself has complained on many occasions about the poor capacity of the administrative machinery to implement ADP. In this backdrop, it would be pointless to propose a bloated ADP size. I suggest that the size of ADP be fixed at Tk. 26,000 crores. The balance from whatever figure the finance minister may have in mind may be allocated to social safety net, including Employment Guarantee Scheme as well as Agricultural Research Endowment Fund and the Climate Fund -- the two special funds that were set up last year. In addition, the government should reduce provisions to cover perennial losses incurred by SOEs; they should be subjected to hard budget constraint. Another moot issue on the expenditure size of the budget this year is export subsidy, particularly for the garments sector. The movements in the volume, value and unit price of garments exports do not yet justify any subsidy. The situation which should trigger any consideration for subsidy is when the sale price in the export market falls below the production cost, taking due account of the decline in the prices of imported inputs. Even in this scenario, the government should bear in mind at least two considerations. First, whether the assistance should be given in the form of outright cash incentive or as a subsidised loan for a period of two years to tide over the present difficulty, if any. Second, in the event outright cash grant is contemplated, the base for calculation needs to be re-examined. To my mind, the base should not be gross value of export, but the differential between the production cost and the sale price in the export market.
Out of 17%, domestic revenue should be targeted to finance 12%, and the remainder from domestic borrowing and external assistance. The distribution of 5% deficit financing between these two sources will depend on the government's capacity to mobilise external assistance. Domestic borrowing will be the residual. At 12% of GDP, revenue target should be about Tk. 78,900 crores and, looking at historical proportions, NBR tax revenue target can be fixed at Tk. 59,945 crores. It should be emphasised that achieving these targets would require a lot of hard work and genuine commitment by the administrative machinery. There is no need for raising exemption limit on personal income taxes. The present limit is 37.5% higher than in FY 07. The sum of inflation in the subsequent two years has been considerably less than this figure. In real terms, therefore, the present exemption limit is much higher than that of FY 07. Regarding import duties, excepting for food items, there should be no zero rate. The duties on capital machinery, intermediate goods and raw materials were reduced last year. The investors are also benefiting from the fall in international prices of these goods. So, there is no case for further reduction. Tax structure
It should be remembered that cheap capital machinery encourages higher capital intensity to the detriment of employment creation. Low duties on raw materials and intermediate goods militate against domestic production. The country thus becomes locked into excessive import-based industrialisation. And a high rate of duty on finished products is a sure recipe for inefficiency. The corporate tax rates were also reduced last year, except for financial institutions. The latter may be given an assurance that their tax rates will be reviewed in FY 11 budget provided they reduce both the lending rate and the prevailing large spread between deposit and lending rates. They should not be given the liberty of reducing lending rate at the cost of depositors' interest. The global recession should not be allowed as an excuse for all-round reduction of tax rates. Even in FY 10, Bangladesh is expected to have a satisfactory growth rate of around 5.5%. Moreover, the country has the unenviable honour of having the lowest revenue-GDP ratio in Asia-Pacific region. In principle, I support the finance minister's declaration to abolish tax holiday. The benefits under this scheme were considerably reduced last year. Apart from tax holiday, there are various other exemptions, rebates and deductions for corporate tax- payers. Ideally, there should be a thorough study of the potential revenue loss and economic impact of all these provisions. My suggestion is that the abolition of tax holiday be postponed till FY 11 budget, by which time it should be possible to complete a comprehensive study. Composition of expenditure
The priority sectors in FY 09 budget were education and IT, local government and rural development, transport and communications, agriculture and water resources development, and energy and power. These priorities may be largely retained for obvious reasons. One important issue in the allocation of expenditure is the size of ADP. Applying FY 09 proportion to the proposed total expenditure level, ADP size turns out to be about Tk. 29,700 crores. Probably this is what provides the rationale for the finance minister's hint that ADP size would be around Tk. 30,000 crores. But one should not be oblivious of the fact that the highest ever expenditure did not even reach Tk. 20,000. The finance minister himself has complained on many occasions about the poor capacity of the administrative machinery to implement ADP. In this backdrop, it would be pointless to propose a bloated ADP size. I suggest that the size of ADP be fixed at Tk. 26,000 crores. The balance from whatever figure the finance minister may have in mind may be allocated to social safety net, including Employment Guarantee Scheme as well as Agricultural Research Endowment Fund and the Climate Fund -- the two special funds that were set up last year. In addition, the government should reduce provisions to cover perennial losses incurred by SOEs; they should be subjected to hard budget constraint. Another moot issue on the expenditure size of the budget this year is export subsidy, particularly for the garments sector. The movements in the volume, value and unit price of garments exports do not yet justify any subsidy. The situation which should trigger any consideration for subsidy is when the sale price in the export market falls below the production cost, taking due account of the decline in the prices of imported inputs. Even in this scenario, the government should bear in mind at least two considerations. First, whether the assistance should be given in the form of outright cash incentive or as a subsidised loan for a period of two years to tide over the present difficulty, if any. Second, in the event outright cash grant is contemplated, the base for calculation needs to be re-examined. To my mind, the base should not be gross value of export, but the differential between the production cost and the sale price in the export market.
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