Takeaway from FY25 budget

Except reduction in the rate of duty on chocolate there is a very little in the draft budget for the fiscal year 2024-2025 (FY25) that can be said to be a surprise. It was a foregone conclusion that the proposed budget for next fiscal would follow in the footsteps of the previous ones in many important respects because of the compulsions of continuity. The most salient of these is the formulation of a deficit budget, public expenditures exceeding revenues earned by the government from various sources. There being no quick fix or serious plan to extricate budget from the chronic practice of fiscal profligacy , the only question relevant to ask is how big is the deficit and what is the strategy of bridging this gap ? The answers to both are important in the context of the most important issue of near double digit inflation that has stared policymakers in the face for the preceding twelve months. In fact, this is the single most intractable challenge on whose successful resolution the success or failure of the present budget will depend. The assurance that headline inflation now hovering around 10 per cent will be brought down to 6.75 per cent by the end of FY25 stands at the moment more as the triumph of hope over experience. Needless to say, concrete steps and a clear-cut strategy alone can make this goal a reality and not pious wish because, as the proverb says, if wishes were horses baggers would ride.

There are proposals in the budget on taxes and duties raised and lowered, about non-revenue financing of the deficits and public expenditures under non-development heads that give enough indication about the feasibility or otherwise of achieving the target set for bringing down inflation to 6.75 per cent by the end of the next fiscal, that is within a year. Of course, to tamp down inflation budget is not the only instrument that is pressed into service and that monetary policy also has a role in this. But monetary policy, apart from being subservient to the ministry of finance, remains stymied in a financial sector that is long saddled with a burden of non-performing loans (NPLs). When the financial sector including the central bank is required to bankroll the government to help it tide over the deficit, the limitation of monetary policy, particularly with regard to containing inflation becomes apparent. With these introductory remarks the proposed budget may now be parsed to see to what extent the challenges of deficit financing and high inflation have been addressed in the draft budget proposals.

DEFICIT FINANCING: The annual budget for FY25 has been proposed at Tk 7.97 trillion out of which Tk 5.4 trillion is expected to be financed by aggregate earnings of Tk 5.4 trillion, to be pooled from taxes and non-tax sources, leaving a deficit of Tk 2.56 trillion. According to the budget proposal, Tk 1.3 trillion will be borrowed from banks while Tk 234 billion (or Tk 0.23 trillion) will come from non-bank sources. Foreign credit from bi-lateral and multi-lateral sources have been estimated to be Tk 907 billion (or Tk.0.90 trillion) and a total of Tk 44 billion is expected to materialise as grant from external sources. Compared to these figures the deficit in the budget for the current fiscal ( FY24) has been revised at Tk 2.36 trillion which shows the deficit in the proposed budget has risen by Tk 190 billion ( or around Tk 0.20 trillion).

However, what is more significant in this increase in the size of the deficit is the amount proposed to be borrowed from bank and non-bank sources. Whereas in the current fiscal bank and non-bank borrowings have been Tk 1.55 trillion and Tk 6.9 billion respectively, the corresponding figures in the proposed budget are Tk 1.37 trillion and Tk 234 billion. The figures indicate a reduction in bank borrowing by the government by Tk 0.20 trillion to finance the deficit and a greater reliance on non-bank borrowing i.e. through sale of savings certificate. Though this increases government liability for debt servicing in future, the shift in financing the deficit definitely shows a concrete strategy to squeeze supply of Broad Money in the economy that would result from bank borrowing, particularly from banks. Granted, the increased target of Tk 234 billion in non-bank borrowing is way too ambitious given the revised figure for the current fiscal at Tk 6.9 billion, the target may be reached with the allure of a slightly higher interest rate. If the holders of black money are allowed to purchase savings certificate as one of the legitimate means of investment under the 'amnesty' declared, the response to the policy of non-bank borrowing may be significant. By both reducing use of bank-borrowing and attracting money in circulation or stashed away as private savings, the proposal promises to make a dent on the inflationary situation. Nothing like this has been done before to restructure public borrowing and tap into private savings (both white and black) with a view to reducing the impact on inflation and as such critics with conditioned-reflex at tearing away whatever proposal is made for deficit financing should hold their breath and give the new strategy to work out in the coming months. The new finance minister, though unfamiliar with the world of fiscal policy making, has shown an astuteness at a time of critical juncture for the economy that deserves commendation.

INCOME TAX: The new budget proposal shows a restructuring of the personal and corporate income tax which may elicit mixed reactions from analysts. Personal income has been kept tax exempt up to Tk three and a half lakhs (or 0.35 million), as at present which will be welcomed by income earners in the lower bracket. Fixing 20 per cent tax for income from Tk 1.3 to Tk 1.8 million, 25 per cent tax for income between Tk 1.8 and Tk 3.3 million and 30 per cent above annual income of Tk 3.8 million appear very reasonable. But keeping the tax on net wealth above Tk 40 million unchanged at the present level of 10 per cent and net wealth worth above Tk 50 million unchanged at 35 per cent appear unjustified both from the point of view if equity and resource mobilisation. News about the increase in the number of multi-billionaires and trillionaires have become persistent and so has the criticism of growing inequality. The new budget proposal can be generous to the noveu riche only at the cost of foregoing revenue from this affluent source and exacerbating the inequitable distribution of income.

The same generosity as has been shown to the urban rich can be seen with regard to corporate rate tax which also involves the rich and the wealthy class. Corporate tax on publicly held companies has been raised to 22.5 per cent from the existing level of 20 per cent but the corporate entities can pay at the rate of 20 per cent if they comply with all conditions. So, in effect the corporate income tax payable by publicly-held companies remains unchanged. For non- publicly held companies, corporate tax has been proposed at 27.5 per cent but on condition of fulfilling requirements they can pay25 per cent which is lower than the current rate. Corporate tax at 25 per cent, whether for public or non-publicly held companies, cannot be justified, either on efficiency or incentivisation grounds. Nor is it desirable from the point of view of equity.

INFLATION MANAGEMENT: Since the major challenge facing the budget for the FY25 is reducing inflation with a view to making cost of living for poor and the lower income earners, imposition of taxes and duties on items of daily necessities and also those that help people to improve their standard of living are important indicators as to whether these help or hinder common man's struggle to survive and prosper. With food inflation soaring above 10 per cent it has become impossible even for middle class to maintain their standard of living. From this point of view the proposals to increase and decrease taxes and duties on food and non- food items in the basket of consumption of classes other than those in the upper income bracket call for close scrutiny. Perhaps the need to gauze the incidence of taxation on various income groups has never been more urgent than now.

Broadly speaking, the present budget proposal has not made any departure from reliance on indirect taxes like import, export duties and VAT on various items which impact the poor and middle-classes more adversely than the rich. The absence of designing a policy of imposing 'robust' progressive income taxes, including personal and corporate income taxes cannot be glossed over by mere restructuring of the income brackets according to their tax liabilities. It is in plain sight for everyone to see that the principle of progressive taxation has been carried up to a point and then kept frozen. It is not for nothing that critics find fault with the budget, saying it is a 'billionaires' budget'. If their number was negligible this preferential treatment would not have mattered. But according to the Swiss bank UBS estimate there were 1700 Bangladeshi billionaires in 2020 accounting for 10 per cent of GDP. Progressive tax at over the present ceiling of 30 per cent maximum would fetch substantial amount in tax revenue that the cash strapped government needs.

Keeping the overriding goal of the budget to address inflation, the draft proposal has provided for imports of food items like rice, wheat, maize, pulses, edible oil, onions, garlic potato, sugar and spices with payment of duty at source lowering the rate from 2 to 1 per cent. In the post-budget press conference the finance minister highlighted these tax exempted items as part of the strategy of the government to alleviate the sufferings of the poor and middle class consumers. This is a laudable step showing that the government is aware of the common man's woes caused by rising cost of living and is serious about alleviating these through fiscal policy. Analysts can lose sight of this fact if they continue to look at the glass only as half empty. It is unfortunate that intellectual and professional integrity has plumbed such depths that all that is said on a public issue like budget is either sky-high eulogy or downright denunciation.

Among food items supplementary duty on imported milk powder up to two and a half kilogram has been reduced by 20 per cent which is a move in the right direction. But is there any justification for reducing duty on imported clothes for men, women and children? Similarly, reductions of duty on dried fruit, tea and coffee appear to lack any rationale. The proposal to reduce duty on chocolate from 45 per cent to 25 per cent, in the other hand, is mind-boggling as well as ridiculous even though the amount involved for payment of imported chocolate may be negligible. If the VAT on Metro rail ticket is raised by 15 per cent, as it has been proposed in the draft budget, it will not go down well with the commuters who are mostly from middle class and below. The proposal to increase duty by 10 per cent on 200 items of specialised hospitals will immediately be reflected on costs of medical treatment on patients straining the budget if their families. No item on medical treatment should be subjected to tax and duty on revenue consideration.

SOCIAL SAFETY NET: The proposed budget has sought, as a continuing policy of the government, to bring more people within various safety net programmes. With this end in view it has proposed to add around 10 lakh beneficiaries under the social security net. This includes 5 lakh people with disability, 2 lakh elderly and 2 lakh widows. The new target also includes 90,802 persons who are disadvantaged and 5,749 individuals belonging to third gender . Overall, the allocation for social security will rise by Tk 97.54 billion to a total of Tk 1360.26 billion in the next fiscal but most of the increased allocation will go for payment of pensions of government employees. For the sake of clarity and gaining proper objective on the impact of safety net programmes on the poor and their economic status, it is necessary to distinguish between pensions and social security payment.

Surprisingly, allocations for open market sales ( OMS) programme of Trading Corporation of Bangladesh ( TCB) have been reduced to Tk 20.04 billion in the budget, compared to Tk 54.92 billion in the current revised budget. This is contrary to what the ministry of commerce had announced recently about plans to increase the sale of essential food items at subsidised rates through TCB outlets. It seems objection by the International Monetary Fund (IMF) against subsidised sales of food (or any item or service) may have played a role here. Public food distribution system should constitute an important plank in any strategy to counter the adverse effects of inflation on the poor and the middle-class. The government cannot abandon this important programme under pressure from any donor or lender.

After a hiatus of two years, the government has again allowed owners of black money to whiten their money after payment of tax at 15 per cent. As in the past, this proposal has raised a chorus of condemnation from the sanctimonious-minded on the ground of being unethical. But is the alternative of letting the black money holders alone bring any financial benefit to government in the form of tax or compel the hoarders to declare their ill gotten wealth? There cannot be anything unethical if the black money owners are made to pay a tax at a higher rate than the maximum fixed for individual tax payers (30 per cent). Any amount that accrues to the government in tax revenue will be helpful in reducing budget deficit. The decision taken in this regard is sound and is based on prudent fiscal policy.

The second critical challenge facing the economy is depleted foreign exchange reserves. Though the budget can address this problem only indirectly through use of tax incentives for exporters and wage earners and disincentives for importing less essential items, the proposed budget has acknoeledged this as a challenge. In the draft budget a target for maintaining foreign exchange reserves at $37.5 billion within the next fiscal has been fixed but no detail has been given about the ways and means of attaining this. An equally important matter missing from the draft budget is the amount of foreign exchange in dollars that have to be paid in debt servicing during the next fiscal. A separate statement on the estimated accrual to the reserves through exports, wage earners remittance, loans and grants from bi-lateral and multi-lateral sources should have been prepared and shown against outflows in terms of imports, public and private use of dollar and debt repayment falling due in the next fiscal. An inter-ministerial committee with a representative from Bangladesh Bank should be formed to monitor the foreign exchange reserves closely, including movement in exchange rate. A budget is not prepared only to estimate the revenue earnings to meet expected expenditures of the recurrent kind. The budget is also expected to have a development budget which in the case if Bangladesh has come to be known since long as the Annual Development Plan (ADP). The ADP contains a list of development projects with estimates of money (in local currency and foreign exchange) shown against each over the project's time span. Though the development projects are mainly expected to contribute to GDP growth year on year, together with private sector and consumer expenditure, the co-relation between ADP projects and GDP has never been worked out. Under the circumstances estimate of annual GDP growth has been mostly a guess work. In a welcome departure from grandiloquent estimate at around 8 per cent, the present budget proposal has fixed a more realistic target of 6.75 per cent increase in GDP at the end of the next fiscal.

END NOTE: The focus of this write-up has been on analysing the size of the deficit budget and how it has been proposed to be financed with a view of concluding what impact it might or might not have on inflation. Allied to this have been the implications of various propsals for increase or decrease of taxes and duties for the prevailing inflationary situation. Foreign exchange reserves that have exercised the minds of many and hogged headlines also have been discussed as well the GDP projection, hitherto cherished as a fetish in all previous budgets.

The discussion on the main challenges that the budget has to address i.e. inflation and growth, cannot be complete without looking at the size and break-up of public expenditures. Here the picture presented by the draft budget is a continuation of the past, that is, rising expenditures in non-productive sectors like public administration ( civil service Tk 589.25 billion) public order and safety ( police Tk 335.19 billion), defence (Tk 342.05 billion). Granted, expenditures under the head 'defence' is unavoidable on security ground, but why cannot expenditures on public service and pubic order be frozen except for increment in salary? Must new vehicles be purchased every year and new posts created to accommodate individual officers? If public expenditures could be held in check, there would be significant reduction in the budget deficit. Given the imperative of reducing the high inflationary figure, the proposed budget should have been the spring board for belt-tightening in the public sector. The time for a leaner and fitter government is now.

To sum up, the budget presented by the new finance minister is a departure from the beaten track in some respects, raising hope, while it falls short of expectations in some important respects, giving rise to disappointment. It is not a perfect world and one cannot have all of one's wishes fulfilled, after all!

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