Towards an austerity-driven revised FY26 budget

As far as a new fiscal year's budget is concerned, it was a tradition that its size would be bigger than that of the previous fiscal year. But the interim government seems to have departed from that norm by reducing the size of FY26's budget compared with the FY25's reflecting a move towards fiscal consolidation and austerity measures. This policy of restricting expenditures has been further confirmed through a recent directive reportedly issued by the finance ministry to the effect that expenditures under the revised budget for FY2025-26 must not cross the ceiling as set in the proposed budget for FY26. Or in other words, no further allocations in the revised budget will be made for both short-term operational expenditures under the revenue head and the long-term capital expenditures under development head. So, all the departments under the ministry concerned would be required to set their priorities afresh in line with the budgetary constraints and cut back on non-essential items such as foreign travel or purchase of cars or land unless under special considerations with the nod of approval from a competent authority.

The ministries and departments concerned would, as required by the finance ministry directive, have to submit their revised budget proposals. Obviously, the measure aims to manage fiscal deficit against the backdrop of revenue earnings by the National Board of Revenue (NBR) falling short of the targets. Unsurprisingly, incomes from customs revenue, too, have fallen short of projected amounts due to the ongoing curbs on imports that began in mid-2022 during the autocracy in the face of dwindling foreign currency reserves. Notably, the crisis marked by persistent inflation and significant drop in the value of taka against US dollar was further compounded by rising levels of imports necessitating import control measures.

But the restrictions did not end but saw further tightening under the interim government led by Dr Muhammad Yunus. Even in August, 2024, when the interim government was just in office, it announced closure of three land ports leading to reduction in incomes from land customs. In another move as late as September last, the interim government further restricted import by imposing a mandatory 100 per cent margin on Letters of Credit (LCs) on import of certain products in order to prevent further depreciation of taka.

So, under such circumstances, any increased earning in terms of customs revenue cannot be expected. Admittedly, import control, especially on capital machinery, has seriously impacted industrial and commercial activities which would as projected keep the economic growth below 5.0 per cent in FY26. That implies a significant fall in revenue earnings from customs. Add to that the reduction in income due to various tariff exemptions on imports. In the face of challenges like reduced earnings on multiple fronts including poor mobilisation of internal revenue and falling foreign aid and with added pressure from various subsidy burdens, the fiscal space of the budget has contracted significantly requiring the government's directives on expenditure control. Under the circumstances, the government borrowings from both domestic and external sources would remain constrained limiting its spending further. However, it is reassuring to learn that allocations in certain critical sectors including health, education and social safety nets will not be affected by the spending cuts. Against this backdrop, to enhance revenue earnings, the government needs to take various short- and long-term measures to enhance revenue receipts. While carrying out the massive spending cuts, the government should also be able to find innovative ways to save funds from different sectors.