Budget 2014-’ 15: High bets, big risks

Every year, a number of experts and economists in the country find the size of the national budget to be quite big, and thus unrealistic or impossible for full implementation. This year is also no exception as some have already termed the fiscal year (FY) 2014-15 budget a big one. There is no doubt that the budget worth Tk 2. 50 trillion or US$ 32.11 billion for the next fiscal year is the biggest ever in the country's history.
But enhancement of the annual budget size is a regular exercise and it has to be increased as the economy grows every year. Considering the average 6.25 per cent economic growth, as represented by the growth rate of the Gross Domestic Product (GDP) over the last one decade, it is clear that Bangladesh is moving forward with a steady pace, which, however, is below the desired level.        
In this connection, every year we have to find a bigger outlay of public expenditure, in the form of budget, compared to the previous years. The concern over a bigger budget is, however, mostly on the ground of resource misappropriation as alleged by some economists.
Nevertheless, Finance Minister AMA Muhith has continued the practice of bigger budgets. And it is not the size of the budget, but the level of bets he has actually taken in designing the national budget for FY`15, matters to a considerable degree.
As Finance Minister, Mr Muhith has the responsibility to push the economy as well as business activities forward. It appears that he wants to follow the Keynesian path, at least to some extent, by increasing public investment outlay by 32 per cent over the revised outlay of the outgoing fiscal year (FY`14). The Annual Development Programme (ADP) is worth Tk 803.15 billion for the next fiscal year, which is 6 per cent of the targeted GDP. On one side, it will drive aggregate demand, on the other, it will encourage the private sector to invest more. There are some fiscal incentives also to boost the private sector investment.
The stagnation in private investment has not been caused by a lack of investment. The political instability and violence during the last half of 2013 (or to put it more precisely, in the first half of FY`14) affected private investment. Although we have seen some sort of stability after the national election held on January 5, businessmen and entrepreneurs are yet to feel comfortable with the current situation. They still find the near future to be gloomy. Power and energy deficit, along with inadequate infrastructure, also hinders investment.
Thus, the Finance Minister's bet on private investment at the cost of public investment is high now.
But financing public expenditure requires higher collection of taxes. This time, the Finance Minister has stressed direct taxes, a welcome move indeed. He wants the National Board of Revenue (NBR) to collect almost 37 per cent of the total target worth Tk 1497.20 billion by way of income and profit taxes. And one of his bets here is bringing home-owners under tax net and collecting house rent through the banking channel. Imposing four-tier surcharges, ranging 10 per cent to 30 per cent, on property value over Tk 20 million and increasing the tax rate from 25 per cent to 30 per cent for the high-income-earning taxpayers having annual income of more than Tk 4.42 million are two other bets the Finance Minister has put in the next fiscal year.
While the move to bring house owners earning rental income under the tax net is a positive one, a major risk here is the possible harassment of rent payers by both house owners and tax officials. The traditional social relationship between the house owners and the renters or tenants is not a good one. In most of the cases, tenants have to accept any condition imposed by the house owners no matter what the law says. The legal structure is very weak regarding house rent in Dhaka city, as well as in other places of Bangladesh. The house owners may try to penalise tenants in many ways to reduce their tax burden.  Thus, collecting rent through banking channel and imposing source-tax on rental income require a careful guideline and efficient implementation mechanism on the part of the tax authorities. Effective coordination with other government bodies is also necessary. Or else, the nexus between dishonest house owners and unscrupulous tax officials will jeopardise the good tax measure. We are waiting to see how the Finance Minister will overcome this risk aimed at betterment of long-term tax discipline of the country.
In a similar vein, collection of super income tax at the rate of 30 per cent on individual annual income over Tk 4.42 million will be a troublesome exercise. Most of such super high earners are powerful people, and have the ability to influence tax officials. Some will definitely hide a part of their real income to avoid higher tax, while some will transfer a good portion of their income outside the country. The Global Financial Integrity (GFI), a Washington-based research organisation, estimates that annual average outflow of capital from Bangladesh through illegal channels is US$ 1.6 billion (or Tk 126.4 billion). This is equivalent to around half of the national budget for FY`15. Thus, a big challenge for the NBR is to catch the big fishes and extract the dues from them properly. Failure to do so will fuel revenue shortfalls, and pressure on the regular taxpayers will increase.
Keeping the individuals' income tax-free threshold at Tk 220,000 is a bet to bring more people under the tax net. The Finance Minister wants to keep the threshold for five years ignoring the erosion of real income due to inflation. The International Monetary Fund (IMF) has backed the idea, and it is to see for how many years such a bet could be continued.
The Finance Minister wants to borrow a sum as high as Tk 312.21 billion  in the next fiscal year from banking system, while he has to spend Tk 293.05 billion as interest payments against domestic borrowings. If we add the interest payments worth Tk 17.38 billion against foreign borrowings, it appears that almost all the bank borrowings will ultimately be spent for interest payments. The bet is to rely more on internal resources.
Designing the national budget is a critical exercise and it needs to be done in the context of the overall economy. The current situation of the economy is messy for several reasons. There is vulnerability of the financial sector, along with erosion of effectiveness of the state institutions, rise in unemployment, chaos in public transportation and deterioration in law and order etc. The budget does not suggest appropriate measures to face these challenges. If the Finance Minister does not address the existing problems, his bets in the budget might pose a 'big risk' for the economy. The people of the country have to pay a high price if the minister loses the betting.
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