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Budget through laypersonâs lens
THE finance ministry is busy preparing the national budget for the 2024â25 financial year. In tandem, pre-budget discussions are held with stakeholders, with the...
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Budget through layperson's lens
by Abdul Bayes 12 May, 2024, 00:00
| New Age/Mehedi Haque
THE finance ministry is busy preparing the national budget for the 2024â25 financial year. In tandem, pre-budget discussions are held with stakeholders, with the finance minister presiding over. In fact, such discussions have been a regular exercise for a long time to capture different perceptions about the economy. The preparation of the national budget in any country has always been challenging amidst what economists call 'limited resources and unlimited wants'. But the preparation for the forthcoming budget is going to be more challenging than the preparation of the earlier ones, especially the ones prepared before the Covid outbreak, as the realities on the ground have reversed by 180 degrees.
A sense of optimistism in resource allocation once prevailed as global trade and investment conditions remained favourable. However, internal and external economic conditions have dramatically deteriorated since the Covid outbreak. The wounds have been worsened by the Russia-Ukraine war and the threat of disruption in the supply chain, especially of oil and essential food items, and the Iran-Israeli conflicts could cause a catastrophic condition.
On the domestic front, soothing signs of macroeconomic stability are seemingly things of the past. Various constraints have creeped up to thwart macroeconomic stability. These are, among others, an inflation rate running on an average at 10 per cent for two consecutive years, the foreign exchange reserve running down fast, constraining imports and, thus, growth, an increasing exchange rate, one of the lowest tax-to-GDP ratio for a prolonged period, massive capital flight, rampant corruption and massive loan default. The associated misconceived monetary and fiscal policies just went on to aggravate the situation. All of these adverse factors put the economy under a great pressure, particularly in terms of the mismatch between the demand for and the supply of resources. The drivers of these deviations are well documented and there is no need for elaborate discussions now.
Against this backdrop, it would, however, be wise to go for a contractionary budget, slashing the size of the budget by, say, 5â6 per cent. This would be in sharp contrast with pre-Covid budgets rising by 10â15 per cent in a row for a decade. Of course, a cut in budget size would adversely affect the economic growth rate for a year, but the tradeoff is very much needed to rein in inflation and reduce pressure on the foreign exchange reserve. It is needless to say that a firm political commitment is needed to economise on the use of scarce resources.
To mention a few, the so-called 'political projects' should not be patronised at all, wasteful projects should be set aside and financially viable large-scale projects should be prioritised. Of course, these measures are suggested until the economy cools down. In other words, instead of focusing on achieving a higher gross domestic product growth rate, the priority should be to restore macroeconomic stability. Again, economist Ahsan Mansur argues, 'In the current situation, it would not be right to borrow too much from the domestic banking system and the needs of the private sector must be considered. The interest rate on Treasury bills has already gone up to 11 per cent due to the government's heavy borrowing. It may increase further. But this interest rate should not be 18 or 19 per cent by any means.'
By and large, we are of the view that the next budget should focus on controlling consumer goods price spiral, expanding social safety net programmes and provide more allocation for education and health sectors. We also expect that the subsidy syndrome that has prevailed for ages should come under serious scrutiny and be reflected in the budget speech. Why should the 40-year-old apparel sector need subsidy while nascent industries are crying for for meagre assistance from the exchequer? Why should 12 per cent of export earnings be allowed to be retained abroad even now? It is our view that, first, only the agricultural sector and small and medium industries should be sheltered by subsidy and, second, tax rebates should be reduced after rationalisation.
Given political commitments, domestic resource mobilisation could be beefed up by relying more on direct taxes, expanding the tax net and introducing automation in tax collection. Indirect taxes and distorting trade taxes should be avoided as far as possible. Mohammad Farashuddin, an eminent economist, estimates that out of 8.7 million highly solvent people, only 900,000 people pay taxes. The economist also showed tax collection from 25 million people with per capita income of $5,000, if ensured and spanned over a period, it could provide for a significant increase in tax-GDP ratio.
Likewise, the arrest of capital flight a year of $700 crores, if addressed with earnest and commitment, could improve the fragile foreign exchange reserve situation. We can possibly mention many other sources of resource generation such as privatising the loss-making public-sector enterprises, the persuasion of a truly shared austerity measures with lesser allocation for unproductive sectors and economising on revenue expenses of ministries.
The banking sector doldrums and the associated solutions should claim a lot of attention from the finance minister as the sector is in shambles. Is merger of bad banks with good ones a solution? Without a revolution in the governance of the banking sector, with political interference, without putting criminals to justice? Would it not sound like old wine in a new bottle?
Keeping drastic institutional reforms at bay, a routine work of allocating resources covering revenue and development budget might fail to pull the economy out of the crisis. A zero-tolerance to loan default, tax evasion, corruption and capital flight warrant firm political commitment and wisdom where words will not count, but deeds will. A government is known by the commitment it keeps.
Abdul Bayes, a former professor of economics and vice-chancellor, Jahangirnagar University, is now an adjunct faculty at East West University.
by Abdul Bayes 12 May, 2024, 00:00
| New Age/Mehedi Haque
THE finance ministry is busy preparing the national budget for the 2024â25 financial year. In tandem, pre-budget discussions are held with stakeholders, with the finance minister presiding over. In fact, such discussions have been a regular exercise for a long time to capture different perceptions about the economy. The preparation of the national budget in any country has always been challenging amidst what economists call 'limited resources and unlimited wants'. But the preparation for the forthcoming budget is going to be more challenging than the preparation of the earlier ones, especially the ones prepared before the Covid outbreak, as the realities on the ground have reversed by 180 degrees.
A sense of optimistism in resource allocation once prevailed as global trade and investment conditions remained favourable. However, internal and external economic conditions have dramatically deteriorated since the Covid outbreak. The wounds have been worsened by the Russia-Ukraine war and the threat of disruption in the supply chain, especially of oil and essential food items, and the Iran-Israeli conflicts could cause a catastrophic condition.
On the domestic front, soothing signs of macroeconomic stability are seemingly things of the past. Various constraints have creeped up to thwart macroeconomic stability. These are, among others, an inflation rate running on an average at 10 per cent for two consecutive years, the foreign exchange reserve running down fast, constraining imports and, thus, growth, an increasing exchange rate, one of the lowest tax-to-GDP ratio for a prolonged period, massive capital flight, rampant corruption and massive loan default. The associated misconceived monetary and fiscal policies just went on to aggravate the situation. All of these adverse factors put the economy under a great pressure, particularly in terms of the mismatch between the demand for and the supply of resources. The drivers of these deviations are well documented and there is no need for elaborate discussions now.
Against this backdrop, it would, however, be wise to go for a contractionary budget, slashing the size of the budget by, say, 5â6 per cent. This would be in sharp contrast with pre-Covid budgets rising by 10â15 per cent in a row for a decade. Of course, a cut in budget size would adversely affect the economic growth rate for a year, but the tradeoff is very much needed to rein in inflation and reduce pressure on the foreign exchange reserve. It is needless to say that a firm political commitment is needed to economise on the use of scarce resources.
To mention a few, the so-called 'political projects' should not be patronised at all, wasteful projects should be set aside and financially viable large-scale projects should be prioritised. Of course, these measures are suggested until the economy cools down. In other words, instead of focusing on achieving a higher gross domestic product growth rate, the priority should be to restore macroeconomic stability. Again, economist Ahsan Mansur argues, 'In the current situation, it would not be right to borrow too much from the domestic banking system and the needs of the private sector must be considered. The interest rate on Treasury bills has already gone up to 11 per cent due to the government's heavy borrowing. It may increase further. But this interest rate should not be 18 or 19 per cent by any means.'
By and large, we are of the view that the next budget should focus on controlling consumer goods price spiral, expanding social safety net programmes and provide more allocation for education and health sectors. We also expect that the subsidy syndrome that has prevailed for ages should come under serious scrutiny and be reflected in the budget speech. Why should the 40-year-old apparel sector need subsidy while nascent industries are crying for for meagre assistance from the exchequer? Why should 12 per cent of export earnings be allowed to be retained abroad even now? It is our view that, first, only the agricultural sector and small and medium industries should be sheltered by subsidy and, second, tax rebates should be reduced after rationalisation.
Given political commitments, domestic resource mobilisation could be beefed up by relying more on direct taxes, expanding the tax net and introducing automation in tax collection. Indirect taxes and distorting trade taxes should be avoided as far as possible. Mohammad Farashuddin, an eminent economist, estimates that out of 8.7 million highly solvent people, only 900,000 people pay taxes. The economist also showed tax collection from 25 million people with per capita income of $5,000, if ensured and spanned over a period, it could provide for a significant increase in tax-GDP ratio.
Likewise, the arrest of capital flight a year of $700 crores, if addressed with earnest and commitment, could improve the fragile foreign exchange reserve situation. We can possibly mention many other sources of resource generation such as privatising the loss-making public-sector enterprises, the persuasion of a truly shared austerity measures with lesser allocation for unproductive sectors and economising on revenue expenses of ministries.
The banking sector doldrums and the associated solutions should claim a lot of attention from the finance minister as the sector is in shambles. Is merger of bad banks with good ones a solution? Without a revolution in the governance of the banking sector, with political interference, without putting criminals to justice? Would it not sound like old wine in a new bottle?
Keeping drastic institutional reforms at bay, a routine work of allocating resources covering revenue and development budget might fail to pull the economy out of the crisis. A zero-tolerance to loan default, tax evasion, corruption and capital flight warrant firm political commitment and wisdom where words will not count, but deeds will. A government is known by the commitment it keeps.
Abdul Bayes, a former professor of economics and vice-chancellor, Jahangirnagar University, is now an adjunct faculty at East West University.
