Budget FY23: In search of a credible fiscal framework

The national budget for FY2022-23 (FY23) is going to be placed before the National Parliament in the backdrop of a number of unprecedented challenges that reflect Bangladesh's macroeconomic management in the prevailing context. The country is still in the phase of recovery from the Covid-induced adverse implications that visited the economy over the past two years. The prices of essential items have been on the rise, both because of imported inflation and various domestic factors. All components of the external balances - trade, current account and overall - have been experiencing significant pressure, with rising foreign borrowings and anticipated growing pressure on future debt servicing liabilities. The government is also to take cognisance of its election pledges, which has been demonstrated in recent times by way of policy statements as regards introduction of universal pension scheme, formulation of draft anti-discrimination law, introduction of child budget and implementation of the national social security strategy adopted earlier.

The budget will also need to take cognisance of the ramifications of Bangladesh's dual graduation- LDC graduation with the need to make transition to skills and productivity-based competitiveness, and the middle-income graduation with the transition to more stringent, non-grant, non-concessional terms of borrowings. The budget will also need to be aligned with the aspirations expressed in the government's Vision 2041 with the ambition of meeting SDG targets by 2030 and graduating to an upper middle-income country by 2031 and a high-income country by 2041.

Taking cognisance of the aforesaid immediate, short and medium-term challenges confronting macroeconomic management, Centre for Policy Dialogue's (CPD) FY23 budget proposals focus on three areas: (a) fiscal framework issues which deal with the stance FY23 budget should take in view of the emerging challenges; (b) sectoral and issue-specific budgetary proposals to deal with rising prices and bloating subsidy bill; and (c) the medium-term issues of sustainable Covid recovery, enhanced social welfare and sustainable dual transition.

CREDIBLE FISCAL FRAMEWORK: The FY2023 budget comes at a time when the overall macroeconomic stability in Bangladesh is under considerable pressure due to the high prices of essentials, deteriorating current account balance on account of higher growth of import payments and negative growth of remittance inflow and a depreciating Bangladeshi taka. Higher commodity prices in the global market and the conflict in Ukraine have added to this pressure. Hence, the budget for FY23 must break free from its formulaic mould and should be adjusted accordingly to tackle the pressure emanating from both domestic and external fronts. Indeed, the fiscal framework for the next national budget must be accompanied by clearly stated assumptions of the government related to future trends in international prices.

Over the last decade, the budgetary target setting in Bangladesh has emerged primarily as a numbers game - with each year's targets surpassing the previous year's - notwithstanding the extent of actual attainment. As can be seen from the figure, targets for public expenditure have remained consistently unmet and generally hovered around the 80-85 per cent mark as a share of the total allocation. While revenue mobilisation recorded a sudden improvement in FY2021, it is largely thanks to the withdrawal of funds from state-owned enterprises, which had accumulated surplus of varying amounts- a feat unlikely to be repeated. [The 5G spectrum auction on March 31, 2022 fetched nearly Tk 106.00 billion which will provide some boost in the revenue mobilisation for FY22. Also, the higher import payments owing to rising prices at the global level entail enhanced revenue mobilisation.] Consequent to Covid19, the budget deficit in FY20 exceeded the programmatic target, in the backdrop of insubstantial growth in revenue earnings. In FY21, the deficit was significantly below the target, as the business-as-usual scenario resumed, with the expenditure shortfall surpassing the revenue shortfall. The latest available data from Ministry of Finance (MoF) show that the government has a budget surplus to the tune of Tk. 11.30 billion during the first six months of FY22 (excluding grants). This is not desirable at a time when the economy is just about to turn around from the shocks induced by the Covid-19 pandemic, and there is a need for ensuring implementation of expenditure targets.

In case of budget implementation, the significant difference between programmatic targets and actual attainments can be attributed to: (a) unrealistic target setting at the time of budget formulation; (b) lack of institutional capacity; and (c) external factors (e.g., COVID-19) beyond the control of implementing agencies. Taking these factors as well as the trade-off between inflation and growth into cognisance, the national budget for FY2023 should be formulated in a way that will be able to meet the needs of the time. A fiscal contraction, through running a budget surplus, can help control inflation by lowering aggregate demand. However, it is quite likely to stifle growth and undermine the recovery of jobs. A budget deficit can increase growth by boosting aggregate demand while also putting upward pressure on inflation. Overheating the economy can have an ultimately negative effect, intensifying stagflation (i.e., a period of high inflation with low or negative economic growth) and increasing average unemployment over time.

RECOMMENDATIONS: In view of the above discussion, the following recommendations are placed for consideration of policymakers in formulating the budget for FY23:

• Instead of setting lofty targets that has a high risk of missing the annual marks by the end of the fiscal year by a large margin, fiscal targets should be set in a realistic manner that takes into account current macroeconomic trends. This is true for all components (and subcomponents) of the fiscal framework, including revenue mobilisation, public expenditure, budget deficit and financing of the deficit.

• In the FY22 budget, the personal income tax (PIT) structure has generally remained unchanged from the one introduced in the FY21 budget. CPD had argued that reducing the highest tax rate (from 30 per cent to 25 per cent) was against the cause of promoting tax justice. The highest tax rate should be reinstated at 30 per cent for top earners in the FY2023 budget.

• In the FY22 budget, corporate income tax (CIT) has been decreased for publicly traded companies (22.5 per cent from 25 per cent), non-publicly traded companies (30 per cent from 32.5 per cent), one-person companies (25 per cent from 32.5 per cent), association of persons (30 per cent from 32.5 per cent). However, to ensure uniformity, the tax rate for one-person companies should be set at 30 per cent, in line with the non-publicly traded companies' rates.

• In view of the emerging challenges of LDC graduation, with the need to make a transition to skills and productivity-based competitiveness, a thorough re-examination of the export incentive structure should be undertaken.

• There should be a medium-term plan and timeline as regards phasing out the various tax exemptions provided in view of the pandemic. Particularly the large industries should be brought under a planned phasing out process.

• For the forthcoming FY23 budget, a feasible completion timeline for reforms that are currently in the works (e.g., the Customs Act and the Direct Tax Act) should be chalked out so that the implementation process can begin at the soonest and in earnest.

• In order to increase the number of actual taxpayers, the NBR, using their e-TIN database, should identify and pursue individuals and business entities that are registered in the system but do not submit tax returns and who are registered and submit returns but do not effectively pay taxes. A mechanism should be set up to contact the relevant entities via phone calls, SMSs or emails to follow up on their return submissions or tax payments.

• NBR should launch a comprehensive online payment system for VAT, income tax and customs together with an interface with iBAS++ and ensure harmonisation and taxpayer data sharing across various wings of the NBR as has been envisaged in the PFM Action Plan 2018-23 at the earliest.

• Tax evasion should be curbed by all means to generate resources for the priority sectors. To this end, the NBR should promote electronic-based measures, including e-TDS, e-filing and cross-checking transaction data from multiple sources. Closer interaction with the Anti-Corruption Commission (ACC) should be ensured.

• Steps should be taken for speedy disposal of tax-related cases, pending with tax tribunals and with the courts.

• The existing provisions (e.g., clauses related to special tax treatment for investments in building/apartment, BIFF bond and economic zone or hi-tech parks) for legalising undisclosed income discourages honest taxpayers while the tax evaders are encouraged. Such provision should not be continued from the next fiscal year. To tackle the problem of undisclosed income, a Benami Property Bill may be introduced, as was suggested earlier by the CPD.

• Available evidence from international sources suggests that the major part of the illicit financial flows (IFF) was on account of trade-related mis-invoicing. Transfer Pricing Cell (TPC) should work closely with Bangladesh Financial Intelligence Unit (BFIU) and Customs Intelligence and Investigation Directorate (CIID) to curb trade-based money laundering (TBML). To carry out its responsibilities in an effective manner, TPC should be adequately endowed with the required financial, technical and human resource, and forensic investigation capacities in the upcoming budget.

• CPD reiterates its earlier proposals urging the NBR to initiate wealth and property tax in Bangladesh. Also, an inheritance tax, informed by global best practices, may be introduced. Besides mobilising additional revenue, such initiatives could also provide an opportunity to build a more equitable society, particularly in view of the proposed anti-equity law placed before the parliament.

• In view of Bangladesh's LDC graduation in 2026, the NBR needs to urgently conceptualise and implement a medium-term strategy for increasing revenue collection from alternative sources that will be able to substitute for the potential decline in revenue from import tariffs in the post-LDC graduation period.

• The government should lay out the plans for finalisation and enforcement of the reforms in the area of revenue mobilisation, including direct tax, customs, and VAT. The 'PFM Action Plan 2018-2023 to implement The PFM Reform Strategy 2016-2021' and National Strategy for Preventing Money Laundering and Combating Financing of Terrorism should be updated in view of the latest implementation progress.

• Priority for public expenditure should be set clearly. The COVID-19 recovery and rising prices of essentials should guide the design of the fiscal framework. To this end, food production, social safety net programmes (including the public works programmes), subsidies for agriculture, energy and power sectors, and health and education sectors should receive adequate attention.

• More budgetary allocations should be earmarked for rising demands for subsidies and social safety net programmes. The subsidies can act as a buffer to temporarily halt the pass-through of rising global prices to the domestic economy. Earlier government measures to cut down 'unnecessary and luxury' public expenditure (e.g., government vehicle purchase, foreign trips) should be reinstated.

• In view of containing the budget deficit, the Annual Development Programme (ADP) for FY23 should be carefully formulated. Whilst finance for the ongoing projects should be made available in the ADP, caution should be exercised in considering new projects for inclusion in the ADP of FY23.

• Responsible government agencies should focus on public infrastructure projects that are closer to completion.

• More emphasis should be given to the utilisation of foreign aid. This will help the management of the budget deficit as well as the balance of payments.

• The government should set up an independent committee to evaluate the increasing financial requirements for the public infrastructure projects. Good governance for these projects must be ensured. To this end, the government should make all development project proformas (DPPs) publicly available for independent scrutiny. To this end, the government should also consider conducting a comprehensive public expenditure review at the earliest.

• The government will also need to formulate a medium-term debt management strategy in view of the changed composition of loans availed by the government. The changing scenario of the foreign loan regime in view of Bangladesh's development needs, available resources for the country, payment frequency, and the implication of the dual graduation should be taken into cognisance to this end.

Dr Fahmida Khatun is Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman is Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem is Research Director, CPD; and Towfiqul Islam Khan is Senior Research Fellow, CPD. [email protected]

Research support is provided by Muntaseer Kamal ,Syed Yusuf Saadat, Abdullah Fahad, Abu Saleh Md. Shamim Alam Shibly, Tamim Ahmed, Kashfia Ashraf, Md Asiful Islam, Afrin Mahbub and Nishat Tasnim Mahin. They are with CPD.