Management of fiscal deficit
Wednesday, 9 June 2010
The present government will announce tomorrow (Thursday) its second national budget, for the next fiscal year (FY), 2010-2011. Following the announcement of the budget for the next fiscal, there will be laudatory words in the superlatives in support of the proposed budget as much as uncharitable criticism of it, by different quarters with their nature of reaction largely depending on their respective position on either side of the political divide. This has long been the practice in this country, not much unlike the case in other developing countries. The national budget does, in essence, reflect what the government does, how it functions to deliver public services and to accomplish its stated goals and objectives for promoting people's well-being and moving the nation forward in terms of socio-economic development through its efforts for mobilization as well as allocation of resources. Some fiscal literacy, coupled with some strong common sense as far as the felt-needs of the people are concerned, are necessary for making any enlightened response to the budgetary proposals.
Having noted this, it should be stated here that making of a budget, that too for a resource-scarce country like Bangladesh, is a challenging task. One of the difficult choices, while formulating it, relates to the means for meeting the budget deficit. This choice has a strong bearing on the macro-economic situation. In this context, available indications suggest that the government would opt for borrowing largely from banking sources in the upcoming fiscal to meet its deficit. The amount of such borrowings would be much higher next fiscal than the level of the outgoing FY when the actual borrowing from the banking sources would be much lower than what was originally projected. But this does not necessarily mean that the overall level of government's borrowing from domestic - both banking and non-banking - sources will decline during this fiscal. Rather, the real picture is different. Government borrowing from non-banking sources, particularly through sales of high interest-bearing national savings certificates, has recorded a marked surge during the current fiscal. This has largely been because of higher demand for such savings certificates by those who have surplus funds, in a situation where the rate of interest on bank deposits has been substantially lowered for effecting cuts in lending rate and also where there were no safe avenues other than that of savings certificates for those having disposable income for investment.
The swelling public debt, because of sales of more national savings certificates, has inflated the bill for domestic debt servicing. Meanwhile, the declining flow of concessionary external loans and inadequate generation of domestic resources through tax and non-tax measures have otherwise been constraining government's efforts to raise both the volume and quality of public expenditure. Domestic public borrowing is unavoidable for most governments in developing countries to meet their budget deficit because of some strong need for expanding public expenditure in a well-targeted manner, along with efforts to raise the quality of such spending. But such borrowing must not be considered any substitute for revenue collection.
The raising of tax revenues is, however, the most daunting task of the government. The taxation system in Bangladesh is otherwise highly exemption-ridden. Also, a sizeable part of its economy remains still outside the tax net. Increasing the tax burden is not the answer, under the given circumstances, to the problem of very low tax:gross domestic product (GDP) ratio in Bangladesh. The effort should rather be made for widening the net without enhancing the rate. Better enforcement of tax regime in a transparent and accountable manner and increased efficiency of tax administration can help achieve a lot for beefing up tax revenue. If that can be done, it will then be possible to limit government's public borrowing to a manageable size. That will provide some strong cushion to the government for its budgetary resources management at relative ease.
Having noted this, it should be stated here that making of a budget, that too for a resource-scarce country like Bangladesh, is a challenging task. One of the difficult choices, while formulating it, relates to the means for meeting the budget deficit. This choice has a strong bearing on the macro-economic situation. In this context, available indications suggest that the government would opt for borrowing largely from banking sources in the upcoming fiscal to meet its deficit. The amount of such borrowings would be much higher next fiscal than the level of the outgoing FY when the actual borrowing from the banking sources would be much lower than what was originally projected. But this does not necessarily mean that the overall level of government's borrowing from domestic - both banking and non-banking - sources will decline during this fiscal. Rather, the real picture is different. Government borrowing from non-banking sources, particularly through sales of high interest-bearing national savings certificates, has recorded a marked surge during the current fiscal. This has largely been because of higher demand for such savings certificates by those who have surplus funds, in a situation where the rate of interest on bank deposits has been substantially lowered for effecting cuts in lending rate and also where there were no safe avenues other than that of savings certificates for those having disposable income for investment.
The swelling public debt, because of sales of more national savings certificates, has inflated the bill for domestic debt servicing. Meanwhile, the declining flow of concessionary external loans and inadequate generation of domestic resources through tax and non-tax measures have otherwise been constraining government's efforts to raise both the volume and quality of public expenditure. Domestic public borrowing is unavoidable for most governments in developing countries to meet their budget deficit because of some strong need for expanding public expenditure in a well-targeted manner, along with efforts to raise the quality of such spending. But such borrowing must not be considered any substitute for revenue collection.
The raising of tax revenues is, however, the most daunting task of the government. The taxation system in Bangladesh is otherwise highly exemption-ridden. Also, a sizeable part of its economy remains still outside the tax net. Increasing the tax burden is not the answer, under the given circumstances, to the problem of very low tax:gross domestic product (GDP) ratio in Bangladesh. The effort should rather be made for widening the net without enhancing the rate. Better enforcement of tax regime in a transparent and accountable manner and increased efficiency of tax administration can help achieve a lot for beefing up tax revenue. If that can be done, it will then be possible to limit government's public borrowing to a manageable size. That will provide some strong cushion to the government for its budgetary resources management at relative ease.