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Austerity Budget 2024-25

Jahangir  Alam

Jahangir Alam

Sun, 9 Jun 24

With a commitment to building a happy, prosperous, advanced, and Smart Bangladesh, Finance Minister Abul Hasan Mahmood Ali has presented the new budget for the fiscal year 2024-25 in the parliament. This is his first budget, the 25th budget of the Awami League government, and the 54th budget of Bangladesh. It is also the 21st budget under Prime Minister Sheikh Hasina. The size of the budget has increased rapidly during this government's tenure. In the fiscal year 2009-10, the total budget was BDT 1,10,523 crore. After 15 years, in the fiscal year 2024-25, it has increased by 621.12% to BDT 7,97,000 crore. The proposed new budget is 4.62% higher than the original budget of the current fiscal year and 11.56% higher than the revised budget. The size of this budget is 14.20% of GDP. The original budget size for the current fiscal year was BDT 7,61,785 crore, which was 15.21% of GDP. The size of the first budget after independence was BDT 786 crore. The proposed new budget is 1,014 times higher than that budget.

In recent years, the budget has been expanding rapidly, but the challenge lies in its implementation. The primary reason for this is the risk in achieving the desired level of revenue collection. This year's budget is somewhat contractionary, with efforts made to practice austerity. In other years, the budget growth is assumed to be 12 to 15%, but this year it is only 4.6%. Considering an inflation rate of 9.5%, the budget growth would be negative. However, considering the global economic downturn and the country's high inflation, a tight budget proposal by reducing unnecessary expenditures was expected. If the quality of budget implementation can be ensured, the proposed budget will help curb the current high inflation through coordination with contractionary monetary policy.

The proposed budget estimates total revenue at BDT 5,41,000 crore, of which BDT 4,80,000 crore is expected to come from NBR sources. To achieve this target, NBR's revenue collection growth needs to be 13.58% of the revised target and 8.2% of the original target. Given the recent financial crisis and import control, achieving this growth will be very challenging. The increase in the scope and rate of taxes and VAT and the reduction in tax exemptions will put additional financial pressure on people, but they will have to bear this burden. Currently, our tax-GDP ratio is below 8%, the lowest in Asia. To continuously reduce budget deficits and reliance on domestic and foreign loans, the tax-GDP ratio needs to be increased to at least 20%.

The GDP growth target was set at 7.5% in the last budget, later revised down to 6.5%, and further revised to 5.8%. Preliminary figures show the achievement is much lower than the target. International organizations estimate growth to be between 5.5% and 6.7%. Next year's growth target is set at 6.75%. However, if the implementation rate and quality of the next budget are not satisfactory, achieving the growth target may not be possible. The proposed budget sets the inflation rate at 6.5%, but in reality, it may be higher. Currently, the inflation rate is close to 10%. It was 9.89% in May, 9.74% in April, and the average inflation rate for the last 12 months was 9.73%. The target was to keep inflation within 6% for the current fiscal year, but it was not achieved. The main reasons for this inflation are the rise in international commodity prices, slow production, dollar shortage, and energy crisis. Additionally, to meet the significant budget deficit, the government had to rely heavily on loans from the banking sector, making it difficult to control inflation.

In Bangladesh, the budget size is increasing every year, and high GDP growth is being achieved. However, employment is not increasing at the desired rate, and investment is not significantly rising. On the other hand, inequality among people is increasing, and the quality of government spending is decreasing. The budget size is mainly increasing in the broader sectors of agriculture, education, health, and social protection. The allocation growth rates in these sectors compared to last year are 8.31%, 6.74%, 8.12%, and 7.1%, respectively. The budget growth rates in other sectors are relatively low.

For the next fiscal year, the allocation for five agriculture-related ministries is BDT 47,332 crore, which is 5.94% of the total allocation. Of this, BDT 27,214 crore is allocated for the crop agriculture sector, which is 3.41% of the total allocation. The remaining 2.45% is allocated for the fisheries and livestock, forestry and environment, land, and water resources ministries. This is insufficient. Over the years, the share of the broader agriculture sector in the budget has decreased. In the fiscal year 2011-12, the share of the broader agriculture sector was 10.65% of the total budget, which has decreased to 5.7% in the fiscal year 2023-24. The allocation for the crop sector is very insufficient, and the reduction in subsidies is unreasonable. Compared to the revised budget of the current year, the allocation for the broader agricultural sector in the proposed new budget has decreased by 8,670 crore taka or 15.48 percent.

Analyzing sub-sector-wise, the allocation for the crop sector is BDT 2,098 crore or 8.35% higher than the original allocation of the previous year, but BDT 6,061 crore or 18.21% lower than the revised budget. The allocations for the fisheries and livestock, land, environment and forest, and water resources ministries have increased by 1.13%, 1.87%, 30%, and 9.27%, respectively, compared to the original budget of the previous year. However, compared to the revised budget, the allocations for the environment and forest, and water resources ministries have decreased by 1.84% and 23.35%, respectively. The allocation has decreased significantly.

In the last budget, the subsidy amount for the crop sector for the fiscal year 2023-24 was BDT 17,533 crore. With the addition of BDT 8,111 crore, the revised budget set it at BDT 25,644 crore. In the new budget, the subsidy amount for agriculture is set at BDT 17,261 crore, which is BDT 272 crore less than the original budget of the previous year and BDT 8,383 crore less than the revised budget. The increase in diesel prices and agricultural machinery prices in the international market will increase production costs, making the reduction in subsidies undesirable, which will disrupt agricultural production and affect food security. Compared to the revised budget of the current year, the allocation for the broader agricultural sector in the proposed new budget has decreased by 8,670 crore taka or 15.48 percent.

The operational expenditure of the Ministry of Food has decreased, but development expenditure has increased. The total allocation for this sector is BDT 6,638 crore, an increase of BDT 622 crore. Currently, the storage capacity of food warehouses in the country is very low, 21.86 metric tons. It has been pledged to increase it to 2.9 million metric tons in the new fiscal year. The target is to increase the government-level food grain storage capacity to 3.7 million metric tons by 2025. Currently, the production of food grains in the country is 46.7 million metric tons. At least 10% of this, or 4.87 million metric tons of storage capacity, needs to be constructed soon.

Another important productive sector of the economy is the industrial sector. The allocation for five ministries in this sector has increased by 1.9%, amounting to an increase of BDT 107 crore. The total proposed allocation is BDT 5,694 crore. The allocation for the industrial and economic services sector (comprising the ministries of commerce, labor, industry, foreign employment, and textiles and jute) is 0.71% of the total budget.

The agriculture and industrial sectors are significantly supported by the health and education sectors, which are directly related to human development. The shares of these two sectors in the total budget are 5.2% and 13.9%, respectively. The total allocation for the health sector is BDT 41,048 crore and for the education sector is BDT 1,11,157 crore. If the allocation growth rates in agriculture, industry, health, and education sectors are higher than in other service and support sectors, GDP growth can be accelerated.

The allocation for the social security sector has increased by only BDT 2,862 crore, which is not sufficient. The proposed budget allocates BDT 43,208 crore for social security and welfare sectors. The revised budget had BDT 40,348 crore, with an allocation growth rate of 7.09%. This allocation is provided collectively for five ministries (Social Welfare, Women and Children, Food, Disaster Management, and Liberation War). In this regard, the monthly allowance for the elderly is BDT 600, and the allowance for widows and destitute women is BDT 550. The amount of these allowances should be at least BDT 1,000.

A positive aspect of the budget is the introduction and emphasis on a pension system for everyone. The country is progressing, and we plan to transition from a middle-income country to a high-income country in the future. Ensuring that the benefits of economic development reach everyone and reducing inequality through the implementation of a universal pension system is reassuring. The intention to include newly recruited government employees under this scheme is reasonable. However, steps should be taken to increase public support and participation in this system.

The budget proposes reducing source tax on the supply of 30 essential goods and food grains, which could help curb high inflation to some extent. On the other hand, it suggests increasing taxes and duties on foreign compressors and other materials used in the production of locally made refrigerators and air conditioners. This will increase expenses for the upper and middle classes. The proposal to raise taxes and duties on cigarettes and imported fish is commendable. However, the proposal to increase supplementary duty on mobile sets and duties on the import of medical equipment needs reconsideration.

The proposed budget keeps the tax-free income limit for individuals unchanged at BDT 3,50,000. The tax-free income limit for women and taxpayers aged 65 years and above is set at BDT 4,00,000. The tax rate for incomes up to BDT 38,50,000 is 25%, while for higher incomes, it has been increased to 30%. Previously, the highest tax rate was 30%, which was reduced to 25% during the COVID-19 period. Given the current situation, increasing it back to 30% is logical.

To meet our budget deficit, the government's total debt stood at BDT 16,59,334 crore by the end of December 2023. Of this, BDT 9,53,814 crore was sourced locally and BDT 7,05,520 crore was sourced externally. To reduce this amount, tax collection, especially direct taxes, needs to be increased. The IMF has stated that the tax-GDP ratio in Bangladesh needs to be increased by 0.5% annually.

Only 36% of our total budget is spent on development, while the remaining 64% is spent on government operations. In the future, operational expenditure should be reduced and development expenditure increased. This will enhance the financial returns of allocated spending and ensure public welfare. In the first four years after independence, Bangabandhu's government ensured that more than half of the total budget allocation was spent on development. Since then, this proportion has continuously decreased. It needs to be increased in the future.

Author: Agricultural Economist; Director, Dhaka School of Economics and former Vice-Chancellor, University of Global Village.

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