M. Shamsul Haque
The budget for Fy 2012 has been announced. Many commentators have called it overly ambitious in terms of size and implementation problems. It is 28% higher than the budget of 2011. MCCI raised doubts about revenue collection targets, especially domestic borrowing to the extent of 16% of the budget. Raising that much of debt from banks will make it harder for the private sector to obtain funds for investment. FBCCI resented the 5% income tax on the growing poultry industry, as it will raise prices of food items besides rising prices of imported edible oil. The budget deficit is expected to be about 5% of GDP.
Finance minster himself recognized that the coming year will be a year of uncertainty. Lets try to understand the nature and magnitudes of the uncertainties. On the revenue side the probability of failure in collecting both tax and non- tax revenues of such high magnitude is quite high. Suppose it falls short of the targets by 10% that will amount to Tk. 12,000 crore. If the expenditures are committed to their targets then budget deficits will rise by that amount. Where from the money will be raised over and above the amount of bank borrowing already planned. If financing is not forthcoming then it will lead to cut in ADP reducing investment targets and reduce GDP growth rate pro-rata.
The budget amount for the first time is raised to 18% of GDP. We have seen in previous years that GOB failed to spend the budgeted amounts of 15-16% of GDP for lack of capability in the public sector. There is nothing in the budget announcement that this year some new systems will be introduced to implement development projects on time and within limits of budgeted amounts. Failure to meet ADP targets even if money is collected again will reduce GDP growth rate.
The budget announcement assumed inflation at 7% pa. It is true in import dependent economy sources of prices increases are to some extent outside the country. Hence uncertainty from the social turbulence in the mid eastern countries may result in rising fuel prices creating pressure of FX reserves and price rises in BD. As it happened in 2008/9 food prices may also rise creating similar impact on FX reserve and rise in the domestic market prices. This will push increased number of people under poverty line and require subsidy in food supply to vulnerable groups and fuel costs to farmers. That will raise demand for more money than what has been provided in the budget. In a seemingly politically volatile situation GOB will have to take such support as top priority. Unemployed and the vulnerable people may prove to be fertile source of unrest in the country. Some estimates have been made by some economist on the economic consequences of the youth uprising and change in Egypt in falling GDP and flight of capital amounting to $30bn over the last two months following the change in regime there. This year Egypt’s economy will contract by 2.5% and that of Yemen’s by 4% wrote Nial Ferguson of Harvard university in the News Week June13-20 2011. Rising inflation and slowing GDP growth rate will cause similar impact among the unemployed in BD and put all budget estimates to falter adversely. The MOF alone is not expected to handle this kind of events. It is the top leaders of the party in power to anticipate such eventualities right now and move to calm the situation. There were no opposition parties in the Arab Spring uprising. Given the presence of a strong opposition party resisting governments move to change the CTG system and the proposed outlandish budget things can get worse in BD causing extreme hardship for the people. Keeping inflation rate close to 5% should be targeted for that reason by all means.
The most dangerous thing would be the addition of higher amount of public debt to the stock of existing debt that amounts to 50% of the GDP already. It should be noted that GDP is an annual flow of incomes or expenditure but public debt is a combination of stock of existing plus addition each year. Interest payments on existing public debt accounts for 15-16% of budgeted expenditure. If GDP growth rate slows then interest payments on public debt will reach about 20% of GDP while govt expenses on salaries to public servants amounting to55% of budget. Since over 80% of the borrowing is from local sources and with much higher interest rates, 12%+, it reduces government’s ability to undertake newer expenditures, such as implementation of the new education policy for which no money is budgeted this year. What was the purpose then to frame a good policy if we can not even start the changes in the education system underlined in the policy after a year of passing it in the parliament. Rising public debt will create further fixity in public expenditure and gradually reduce flexibility to move in new direction for the nation to adopt more science and technology to support faster GDP growth rates as envisioned for 2021 by the government.
Then there is the issue of reducing worsening income inequality in BD. The huge amount of interest payment by the government actually benefits the richer sections, as the poor do not lend to the GoB. Rising public debt with high interest charges is shifting more and more financial power in the hands of the rich in BD and given the rising political instability similar flight of capital may ensue resulting in falling value of taka in FX market with unintended consequences on import prices and inflation. The danger from higher rate of inflation in FY 2012 and the political instability are more plausible considering all the above facts.
Deficit financing has been a problem for many western countries in Europe: Ireland, Portugal and Greece all faced with the choices to cut budget deficit either buy cutting public expenditure or raising taxes from the richer sections. Even in USA Congressman Paul Ryan(R) proposed drastic cut in public expenditure affecting mostly the poor matching the conservative ideology; where as President Barack Obama is trying to cut some public entitlement and raise taxes on those with incomes above $250,000. Quoting Winston Churchill, Prof. Nial Ferguson indicated that Americans would finally make the right choice to reduce over $12.0 trillion public debt mostly funded by China and Japan. A developing country such as BD do not have such choices but to reduce non productive public expenditure now and raise taxes on the rich and finance smaller deficits from domestic borrowing and foreign aid and loans, not exceeding perhaps 3% of GDP. The danger of large fiscal imbalances now will result in unsustainable fiscal fixity and threaten national security in the coming years if not next year. Budget size need be kept within 15-16% higher than previous year for that purpose and increase expenditure management more efficiently in the public sector.
Prof of finance and VC NUB
