Spotlight

Budget FY2020 – PROMISED LAND OR DOOMSDAY CONSPIRACY?

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The national budget for the upcoming fiscal year, the much coveted FY2020, was presented to the Parliament on June 13, 2019, by our new Finance Minister. Like every year and every budget, much was expected and a lot was debated, and the budget size did not disappoint at a whopping BDT 5231.9 billion. However, what is concerning is the extremely precarious stage in which it leaves the economy in FY19, and carries forward with the rampage of the last fiscal. As seen in Chart 1 below, when considering the figures with which we start off every fiscal, the budget targets for expenditure and revenue, it forms a deceptively smooth trajectory, giving one the impression of same for the upcoming year.
The media shouts in bold headlines, the growth in the budget size and wonders unerringly every year, whether it is too ambitious. From a policy perspective and owing to the size of the nation, its development challenges and it macroeconomic goals, the budget has till date never been ‘too big’, albeit almost always ‘overambitious’ in recent times, Chart-2 shows the growth in budget expenditure and revenue target. Every year the budget is revised down due to lags in revenue collection, and eventually the actual budgetary expenditure is nowhere near the so-called large budget we were so daunted by. The main issue here being that the government non-development expenditure is never slashed drastically, it involves the operational/recurring costs of running the government, hence salaries have to be paid, stationary has to be bought etc. It is the development expenditure- the Annual Development Program (ADP) – budget which gets reduced to cover the revenue shortfall. Due to our poor tax collection efforts, under manned tax collection authorities, archaic collection system and low tax base, our revenue performance has been extremely dismal this outgoing year, which will be discussed in the next section. As shown in Table 1 below, the non-development expenditure was revised down by 1.6% in FY19 while it was 7.3% in FY18 and in contrast, when considering ADP the revised budget was 3.2% lower in FY18 and 3.5% lower in FY19. ADP utilization has also been an issue, with only approximately 50% of the budget being utilized till Q3 and the remaining 45-50% being hurriedly utilized in the last quarter of the fiscal year. While ministries always explain this as the risk of having ‘unutilized funds’ which would translate to lower budgetary allocation in the next fiscal year, however, perhaps it is high time we take a closer look at the quality of the expenditure and impact on development rather than valuing the process in terms of monetary units only.

DISMAL REVENUE PERFORMANCE AND VERY TOUGH TARGETS
The National Board of Revenue has recorded the lowest revenue collection in the Seventh Five Year period (FY16-FY20) in FY19 as per Chart-4 below. Except for the anomalous FY15, the NBR revenue shortfall has been the highest this fiscal year over the last decade. This is extremely worrying since a well-functioning revenue mobilization system is essential for the crucial financing of the development of a nation. Additionally, substantial revenue allows for a better functioning government which is able to serve the population better and also a more financial secure nation in terms of dependence on external finance.

Chart 1: EXPENDITURE AND REVENUE TARGETS IN THE NATIONAL

 

Chart 2:
EXPENDITURE AND REVENUE GROWTH
TARGETS IN NATIONAL BUDGET


The NBR revenue growth and based on the projection for FY19, the total NBR revenue will most probably grow by 7.2% in FY19 falling sharply from 19% and 11.6% in FY17 and FY18 respectively. Alarmingly, when looking at the revenue target in the national budget for FY19 and FY20, in comparison to actual collections in preceding year, the NBR was expected to increase revenue collection by 43.5% in FY19 and 44% is expected in FY20. This is an overly hefty target, when there are no massive reforms or upheaval of the existing tax collection system which could attest to achievement or even reaching close to the targeted growth.
The Finance Minister declared that the revenue target has been set keeping in mind the set of revenue mobilization reforms the main being the implementation of the delayed VAT Act 2012. While this may seem like cause for relief, the budget has revealed 4 slabs/rates of VAT vertically in the manufacturing process- import stage 15%, manufacturing 10%, wholesale 7.5% and retail 5% and also varying rates horizontally for different products. This makes the Bangladesh VAT system the most complex VAT system in the world and completely dismantles the beauty of the VAT system, which essentially ensured “tax neutrality”. Additionally, only manufacturers opting for 15% VAT can ask for rebate, while all others in the 3 slabs cannot, thereby in a way, trying to coercively nudge producers towards the 15% rate. This essentially means that a manufacturer opting for 15% VAT, and outsourcing a component of the production process will incur 10% VAT again, and adding the wholesale and retail parts, they may incur up to 37.5% tax incidence. This essentially will discourage outsourcing by large manufacturers and hence slow down/ cut away the Micro, Small and Medium Enterprises (MSMEs) from the economy. Complex and varying tax rates are also empirically difficult to administer and leaves room for tax evasion or tax shifting by taxpayers. While this maybe the grand plan which will increase revenue by over 40% according to the government, the analysis of the system shows a strong possibility of declines in revenue and also massive and unwelcome changes to the production structure of the economy.

PHYSICAL AND SOCIAL INFRASTRUCTURE DEVELOPMENT AND ALLOCATIONS IN FY2020

 

The physical infrastructure allocations continued to decline as a share of total expenditure in FY20B to 31.5% which was 31.9% and 35% respectively in FY19RB and FY18 as shown in Chart 5 below. The decline is perpetrated by the consistently declining allocation to Power and Energy Sector as well as Agriculture and Rural Development. The increased allocation to agriculture should also be considered with the BDT 90 billion subsidy provided to be provided to farmers in FY20. Communication infrastructure, one of the major bottlenecks of the economic development slightly as a share of total expenditure however it still hovered in the 10-11% range while the needs of the economy grows more and more urgent.
The budgetary allocation for social infrastructure-a direct transfer for the welfare of the population consisting of Education, Health and Food and Social Security- also declined, albeit marginally from 27.9% of total expenditure in FY19RB to 27.4% in FY20 budget allocation as shown in Chart 6 below. The share of Education sector in the total expenditure or budget has been on the decline consistently during the Seventh Plan period shown in the chart, declining from 14.3% of total expenditure in FY16 to 10.3% in FY20 budget. The health sector continues to stagnate and also decline marginally, having fallen from 4.8% of total expenditure in FY16 at the dawn of the 7th Plan to 3.8% of total expenditure in FY20, the penultimate year. Food and social security mimics the trend, with only 2.7% of total expenditure in FY20 budget from 3% in FY16. This unfortunately translates to declines in human development and welfare conditions in the country, which will pose development challenges in the future with us facing a ‘demographic burden’ rather than the envisioned ‘demographic dividend’ from our burgeoning youth population.
In Chart 7 below, we can see the sectoral allocation by major sectors as a percentage of the GDP. We can see that the social and physical infrastructure allocations have increased marginally in FY20, while Education, Health, Power and Energy mostly stagnate or declined. The 7FYP period clearly massively underperformed in improving the quality of life and access to basic and rightful services for the population. This clearly indicates that as Bangladesh approaches its 50th birthday, the people have lower reasons to rejoice; Table 3 and Chart 8 below further strengthens this argument by portraying the per capita expenditure on health, education and public order and safety in the 7th Plan period.

WAY FORWARD AND CONCLUSION


The government is finally forging ahead with the VAT law, a major part of which is ensuring automation of the process which is in the cards. This along with the enactment of the VAT law, which may not be exactly as expected but permutation and combination may eventually result in a VAT structure which caters to our country and its varying needs.


The budget has included a considerable allocation for research and technology development, which is promising towards a tech-based focus of the country and perhaps equip us better for the Fourth Industrial Revolution which we are already immersing in, albeit haphazardly now but hopefully in a concise manner as we adapt to the new advances.
Appreciably, mega projects, special economic zones, public health improvements are all up and coming, there is much to look forward to in next decade or so. Bangladesh will take on and achieve the SDGs, they will tackle the issues and the nation shall move forward with the rigor and promise of the next bi-century.
This budget marks the end of an era, and the beginning of the next, with the changes and reshuffling, a new business mind with a whole new perspective, a lot of may happen many of which will forge glad tidings for the country. At the wee end of an election year, one that can be termed as ‘peaceful’, without delving too much into it, a new government with some fresh minds and faces have taken up the task take the country forward. While the perspective and vision of these new leaders are expectedly bigger and brighter, there is hence good reason to hold the reigns and wait as the dust settles and this chaos brings a new order for the country in the new age and global order.
In conclusion, the upcoming fiscal year may give one cause for trepidation and we must revisit the budget and reevaluate our development goals as set out in the SDGs, Delta Plan etc. so that the population can become healthy and skilled, not simply economically empowered, as is indicated by our strong GDP growth. Poverty, climate change and health issues are major red flags that are raised and moving on this trajectory is a path to lower wellbeing. It would be an earnest request to the new Finance Minister to direct the nation well and ensure starting its 50th anniversary with a hopeful, capable and satisfied population.

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