Budget Balancing Strategies for FY25: Economists’ Considerations

Economists question the government’s plans to increase revenues to match the significant state budget expenditures while adopting a restrictive fiscal policy consistent with restrictive monetary policy.

As the budget increases every year, there is a significant gap between revenues and expenditure – the budget deficit, which must be managed effectively to achieve a balanced budget.

Increasing reliance on debt due to insufficient income increases pressure on the economy as the government has to cover interest payments.

Economists suggest that Bangladesh has cut unnecessary spending, lowered spending targets, found strategies to increase revenues and addressed revenue leakages to balance revenues and expenses.

They also proposed introducing incentives and introducing reforms to increase exports and remittances.

Zahid Hussain, former chief economist of the World Bank’s Dhaka office, believes the government is losing significant revenue due to “flawed” policies and plans.

For example, he stated: “The government is losing about Tk 3 trillion in customs revenue due to tax exemptions.

“These revenue losses persist for a long time, 10-20 years. However, the intended purpose of granting these exemptions was never achieved. “But companies are always putting pressure on the government to continue layoffs, saying they would suffer without them.”

He recommended limiting spending targets, minimizing revenue loss and refraining from undertaking new megaprojects.

Economics teacher and researcher Professor Sayema ​​Haque Bidisha called for changes to the spending system.

Prioritizing spending is essential to ease pressure on a challenged economy – a strategy she believes the government is currently neglecting.

“Spending money is not the main problem. It is important to ensure proper allocation. With our limited income, overspending is not possible. We must prioritize spending on the most critical sectors.

“Spending should be aimed at benefiting ordinary people and avoiding waste,” she said.

Finance Minister Abul Hassan Mahmood Ali is scheduled to present the state budget for the financial year 2024-25 in Parliament on June 6.

Reports suggest that the government may set a tax revenue target of around Tk 5.5 trillion to cover the heavy expenditure.

Despite repeated revisions to revenue targets, actual collections are often insufficient.

This persistent shortfall has led to an increasing reliance on debt to make up the budget deficit.

The upcoming budget is expected to have a deficit of around Tk 2.62 trillion, or more than one-third of the total budget, which will be financed by borrowing from both local and foreign sources.

For several years, the target budget deficit has remained at just above 5%. GDP.

In the current financial year, the deficit was 5.2 percent. GDP.

Finance Ministry officials are currently considering lowering this target in the upcoming budget to below 5%.

However, borrowing with a significant deficit will remain the main option, with much of it coming from the domestic banking sector.

Economists point out that due to lower than expected revenues, the government is increasingly turning to debt to finance the budget.

In the upcoming budget, out of the total expenditure of about Tk 8 trillion, over Tk 1.25 trillion has been allocated for repayment of interest on loans.

Analysts say that with the current fiscal management, government borrowing is inevitable.

But by collecting revenue more efficiently, the government wouldn’t have to borrow as much.

Alternatively, due to the current unfavorable investment climate, savings certificates could be used instead of a bank loan.

Bidisha, a teacher at Dhaka University, believes that if the government improves its tax collection capacity, it will have more resources for important sectors.

She advocated including more wealthy people in the tax net.

“Income tax returns should be mandatory. Many people at the district and upazila level have increased their capacity and should be brought under the income tax regime with incentives,” she said.

“We need to identify the super-rich and make sure they pay taxes commensurate with their wealth.”

KEY POINTS

• Economists believe that reducing spending on non-essential projects and minimizing revenue leakages could significantly alleviate the growing gap between income and expenditure.
• In particular, they propose reforms such as better management of tax exemptions, which currently lead to significant losses in customs revenues
• They suggest recalibrating spending priorities to ensure funds are directed to sectors that benefit society, without wasteful spending.
• It calls for incentives to boost exports and increase incoming remittances, as well as measures to bring wealthier people into the tax net, ensuring a fairer distribution of taxes.
• Experts believe that these comprehensive fiscal adjustments and strategic revenue increases should stabilize the economy by managing fiscal pressures more effectively.

REFORMS

Economic analyst Ahsan H Mansur believes that the government cannot allocate funds to important sectors due to increasing unnecessary expenditure.

To solve this problem, he suggests reforms.

“The government should reduce spending by implementing administrative reforms. There is no need to create so many ministries. Maintaining offices such as the Ministry of Textiles and Jute leads to significant expenditure. They should be phased out gradually. Likewise, having a large workforce and fleet of vehicles for each ministry is unnecessary.”

“What is the purpose of the jute ministry? Why is it maintained?” he asked.

A large part of the budget is allocated to the salaries and allowances of public officials and employees. The government also spends significant amounts of money on subsidies.

Mansur, executive director of the think tank Policy Research Institute (PRI), believes that subsidies in some sectors are unnecessary.

“There are significant areas where the government is overspending; We provide subsidies worth billions to non-essential industries such as textiles, jute and sugar.

“We also subsidize remittances, which is also unnecessary. They receive fair prices. The government must take decisive action in these areas.”

He also noted that state spending on pensions is growing rapidly.

Foreign exchange reserves now stand at $18.72 billion, according to the latest data from Bangladesh Bank, according to the sixth edition of the IMF’s Balance of Payments and International Investment Position Manual, or BPM6.

Reserves have gradually declined over the past two years due to rising imports in the face of weakening exports and remittances.

In response to the economic challenges arising from the Covid-19 pandemic and in the wake of the Russia-Ukraine war, the government cut spending to prevent a crisis.

To save dollars, import costs were also reduced.

The government continues to pursue policies aimed at reducing the cost of living.

Economists question the effectiveness of these measures in reducing budget spending pressure.

Mansur said: “Government spending should be reduced. There is no need for excessive use of cars or group trips abroad. We need to focus on these areas. We have not been able to reduce bad loans in the banking sector and we cannot take this matter any further.”

Referring to the Government’s commitment to austerity when announcing the current Budget, Bidisha commented: “Some progress has been made, but efforts need to continue to increase spending in key areas by making savings in many other areas. Excessive waste still occurs in many sectors. “

Meanwhile, Bidisha, research director at the South Asian Network on Economic Modeling (SANEM), said: “Investing in the health and education sectors will bring long-term benefits. India’s significant economic success today is due to its significant investment in education.”

Despite calls at national and international level to increase spending on the education and health sectors, some of the funds are returned every year due to inability to spend them.

Professor Bidisha asked whether fundamental problems in these sectors lead to this.

She called for cutting unnecessary spending, discouraging the import of non-essential goods and stopping borrowing.

She also suggested introducing incentives to increase self-employment, noting that pressure on large industries could negatively impact employment.

“As large sectors face challenges, we should promote small self-employment jobs. The budget should support small and medium-sized industries through tax breaks, short-term loans and county programs. Tax cuts in some areas would benefit the mid- and lower-income occupation sectors.”

Calling for incentives to diversify exports, Bidisha said: “We need policies to encourage the creation of new sectors and increase investment in labour-intensive industries. This could create more jobs for ordinary people.”