A large budget for achieving higher GDP growth

Press reports that the size of the budget for the upcoming fiscal year (FY 2014-15), as hinted by the Finance Minister, might be around Tk 2490 billion (249,000 crore) have drawn sharp reaction from a section of economists. These economists, with a former adviser to the last caretaker government among them, consider that such a budget would be too large, unrealistic, and ambitious. They say that the government has failed to achieve its expenditure and revenue targets in the outgoing fiscal year, and hence a much smaller budget would be appropriate for the next FY.  
The government's weak revenue performance in the first half of the present fiscal year has apparently prompted these economists to lower down the revenue target, assuming that revenue collection would be difficult to enhance in the upcoming fiscal year. They should have understood that the poor record of revenue collection and development projects in the outgoing FY was essentially due to the unusual political situation, and, as such, it was improper to use this as a pretext for lowering down the revenue and expenditure targets for the next fiscal year.
In my view, the need for a reasonably large budget is inescapable, and I consider the suggested Tk 2490 billion (249,000 crore) rather small, and not at all ambitious, given the present economic situation of the country. There should hardly be any difference of opinion among people that in order to accelerate the pace of economic growth, the country would need huge public investments to finance the ongoing as well as the new infrastructure development projects, and also rehabilitate and restore the physical infrastructure destroyed during the days of political turmoil last year.
This article argues in favour of an expansionary budget and for setting a higher target of GDP (gross domestic product) growth in the upcoming fiscal year. It also shows that there are enormous opportunities for generating huge revenues from domestic sources that will be necessary to finance the large increase in public spending. If only there is a strong political will, the government will be able to exploit these opportunities and raise enough domestic resources to meet its development expenditure, and the dependence on external resources will decline correspondingly.
Why is a large budget necessary? Bangladesh is historically a low-expenditure country in terms of share in GDP. The total expenditure and revenue targets in FY `15 budget, as indicated by the Finance Minister, will respectively be 18.7 per cent and 13.7 per cent of GDP. These ratios are lower than in most other low-income countries, including our South Asian neighbours, and are quite achievable if the administrative machinery responsible for project implementation and revenue collection is properly geared up.  
A large budget is necessary to achieve higher GDP growth and the Vision-21 objective. There is a reason to be apprehensive that the Tk 2490 billion (249,000 crore) outlay as well as the 7.3 per cent GDP growth target, hinted by the Finance Minister for the next fiscal year, might make the Vision-21 objective difficult to achieve. This is particularly because the actual annual GDP growth in the last four years of the Sixth Five Year Plan (SFYP) period was well below the planned annual targets, and hence it will now require double-digit annual growth for Bangladesh to become a middle-income country by 2021.
The economy is like a bicycle. It does not flip to its side as long as it keeps moving. What it means for Bangladesh is that its economy might falter should it fail to accelerate from the observed 6.0 per cent growth during the past four years and achieve still faster rates of growth in the years till 2021 to become a middle-income country. Only a large-size budget could make that possible. This is an issue the Finance Minister will need to keep in mind when formulating the budget and fixing the growth target for the next fiscal year.
The growth target for FY` 15 should not be lower than the SFYP target. The SFYP had set the GDP growth target for FY `15 at 8.0 per cent. If the Finance Minister has actually decided to set a lower growth target of 7.3 per cent, it might have been due to his concerns over the present unstable political situation and the pessimistic forecasts by research organisations on the country's growth outlook in the short term.
There are, however, some encouraging developments, which indicate that a much higher growth than 7.3 per cent is quite attainable. The economy has done well so far in this outgoing fiscal year, despite large costs exacted by the political turmoil. If political stability is sustained, investor-confidence will improve, and private investment will pick up. With increased public investment in infrastructure, human capital accumulation, and structural reforms to revamp the climate for domestic and foreign investment, economic growth will regain its momentum.
The external environment is also turning favourable in the near and the medium terms with the recovery in the country's major trade partners. Foreign aid situation is also likely to improve. After five long years, the World Bank (WB) looks likely to extend budget support to Bangladesh next year, which demonstrates the multilateral donor's renewed faith in the resilience of the Bangladesh economy.  
Apart from budget support, the World Bank has also expressed its interest in investing in the country's infrastructure. Japan, too, has indicated the country's readiness to invest in public sector development projects. The Finance Minister may, therefore, give a second thought to fixing the growth target for the next FY.
SOME POTENT REASONS BEHIND A LARGE BUDGET: According to World Bank's latest Economic Update, Bangladesh would need to grow by 7-8 per cent every year to reach the minimum middle-income country threshold by 2021. To achieve that, the rate of GDP growth will, however, call for large government spending to improve the country's physical infrastructure, remove the persistent crisis in power and energy sectors, and support growth in agriculture, industry and services sectors. There is, therefore, hardly any alternative to a large-size budget in the next fiscal year.  
HUMAN RESOURCE DEVELOPMENT BEYOND PHYSICAL INFRASTRUCTURE: Public spending should be significantly increased for human resources development, which is a crucial determinant of economic growth and poverty alleviation. Bangladesh has made significant achievements in areas of education and health in the past thirty years, but certain elements for a strong human capital base are missing.
The quality of education is very poor at all levels. The country spends a small amount of money on research and development (R&D). There are fewer scientists and engineers than in most other developing countries. R&D spending in Bangladesh is less than one-sixth of 1.0 per cent of GDP, while it is 0.2 per cent in Sri Lanka and Thailand, 0.6 per cent in Malaysia, 0.7 per cent in Pakistan, 0.8 per cent in India, and 1.5 per cent in China.
In the area of health, there is little awareness in government in promoting public health. For years, untreated industrial effluents and solid wastes are being dumped into rivers that end up in soil, water supply and the food chain. Hazardous chemicals and formalin are recklessly being used by producers and traders, for which reason fruits, vegetables and fishes are no longer safe in the country. One can hardly remember when one tasted a poison-free fruit last in this country.
The government is indifferent to protecting the health of the present and future workforce which is forced to eat hazardous foods and fall victim to incurable diseases. If a killer could receive capital punishment for a single murder, should a lesser punishment be given to those who are knowingly pushing millions of people toward sure deaths?
The most pressing need now is to eradicate the food adulteration menace once and for all. While the prevailing laws should be strictly enforced for the purpose, a Commission for Food Safety should be set up with offices across the country to ensure compliance with revamped food safety regulations. Accomplishing this task will call for a significant increase in public spending.
Improving the quality of education and health services and reaching them to the poor will not only help increase the rate of GDP growth, but also contribute to reducing inequalities in income distribution. Access to quality education and health services will enable the lower income people to have better-paying jobs and thus reduce the existing income inequality.
There are thus strong reasons why the government will need to significantly increase the allocation to education and health in the next budget. Currently Bangladesh spends only 2.4 per cent of GDP on education and 1.1 per cent of GDP on health, which should be at least doubled in the next budget and increased regularly every year thereafter. The size of the next budget should, therefore, be correspondingly larger.
A large budget is needed to enhance government intervention in poverty reduction. The budget size will need to be large to reduce poverty through active government intervention in favour of the poor. This will require improvements in income distribution through faster progress in building human capital for the poor (which has already been mentioned above), promotion of rural development, and social safety net (now called social protection) programmes.
RURAL DEVELOPMENT AND SOCIAL PROTECTION: Budgetary allocation for rural development is currently only 1.4 per cent of GDP, but keeping in view its importance in reducing income inequalities, the next budget should make an additional allocation of 1.0 per cent of GDP to this sector. Likewise, Bangladesh is currently putting nearly 2.0 per cent of its GDP on the prevailing programmes of social protection. In order to make the social protection system more effective, just an extra 1.0 per cent - over the current 2.0 per cent of GDP - will be needed to be distributed to lift all extreme poor out of poverty.
All told, increased public spending on human resources development, rural development and social protection as described above will call for additional public expenditure equivalent to about 4.0 to 5.0 per cent of GDP. When added to the required expenditures in infrastructure, power and other sectors, the size of the budget, in terms of share in GDP, would be significantly larger than what the estimates of pessimists would indicate.
RAISING RESOURCES FOR THE BUDGET: Expert opinion is unanimous that in order to achieving the status of a middle-income country, Bangladesh's GDP will need to grow consistently at the rate of 8.0 per cent per year until 2021. To achieve that growth rate, investment will need to be raised to about 32 per cent of GDP, which must also be matched by a similar increase in the savings rate. However, given the present state of private savings, the additional savings required to meet the higher investment needs must come in the form of public savings, i.e., by raising the total tax revenue.
Currently, the tax-GDP ratio in Bangladesh is just about 14 per cent, and anyone with elementary knowledge of public finance can easily estimate how much tax as proportion of GDP should be raised to achieve the desired 8.0 per cent GDP growth. Given that the current rate of private savings in Bangladesh's national income is 18 per cent, and the government's current expenditure as proportion of national income is 9.55 per cent, a straightforward calculation shows that the government will need to collect tax revenue worth 28.72 per cent of GDP. If the tax-GDP ratio can be raised to this level, there should not be any dearth of resources for financing the government's investment expenditure.
Algebraically, the required tax rate, t, is equal to {0.32 - s + a}/{1 - s} = 0.2872, where 0.32 is the required gross savings rate as proportion of GDP, s is the rate of private saving in GDP (0.18), and a is the government's current expenditure as share in GDP (0.0955).    
Doubling the tax-GDP ratio from the present 14 per cent to 28.7 per cent is, however, a gigantic task, but there are developing countries whose tax-GDP ratios are in the range of 25-30 per cent. Never in the past, did our governments ever try to touch those that have greater taxable capacity and greater ability to pay, with this failure resulting in large inequalities in income. With appropriate tax reforms, it should not be difficult for us to approach the 25-30 per cent range in the medium term if sincere attempts toward that end continue over 6-7 years, starting right from now. The country's think tanks may undertake studies to help the government in this regard.
The writer is a former Professor of Economics at the University
of Dhaka.
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