Fiscal Policy of Bangladesh

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Fiscal Policy of
Bangladesh
Jamshed uz Zaman
When budget is declared


Opposition Parties claim: Budget against
the poor;
Government Parties claim: Welfare
oriented budget.
Some declares hartal.
How to understand a budget
favors whom?


A budget may favor
• poor or rich class;
• Importers or exporters;
• Primary producers or manufacturers; etc.
Government claims that the budget is
surplus, but most often it is true. Govt.’s
claim it because
• Political popularity,
• People are afraid of inflation.
Is deficit budget always
unacceptable?

No. Deficit budget are prepared
• In deflationary situation,
• When resources fall short of needs,
• To help implementation of monetary
policy.

Deficit does not necessarily mean
imposition of new taxes.
Components of Budget

Revenue Budget
•
•
Revenue Receipts
Revenue Expenditure
Surplus/Deficit

Food Budget
• Food Aid
• Counterpart Fund
• Food Import
• VGD, FFW
• Subsidy
Surplus/Deficit

Capital Budget
• Receipts
• Payments
Surplus/Deficit

+
-
Development Program
•
•
Expenditure
Receipts
•
•
•
•
Revenue Surplus
New Tax Measures
Net Domestic Capital
Extra Budgetary Resource
•
•
Counterpart fund
Net food aid
•
•
•
•
Foreign Assistance
Foreign Direct Investment
Borrowing from the public
Borrowing from Banking
System
- Central Bank
- Commercial banks
Total Budget has to be deficit to
achieve the long term goals



We have to check whether the budget is
inflationary,
• ADP ► if helps productivity ► no inflation.
• ADP ► if does not helps productivity ► inflation.
We have to check dependence on foreign
assistance
• Is increasing or not
Whether there is long term goals
• Anti terrorism
• Anti drug abuse
• Law and order situation improvement
• Socio-economic development.
Tax/Revenue Ratio has to be
increased to finance the deficit
Tax/Revenue
86
Non-Tax/Revenue
84
82

25
20
15

80
78
10
5
74
0
19
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
07
76

Non tax revenue
are vulnerable
and not
dependable.
Tax revenue
ratio should be
increased.
But how? Our
tax base is very
low.
Whether newly imposed taxes
are always bad?

Not always bad

Are they against poor

Ratio of direct and indirect tax.
• Social
• Economic
• Religious
• Check Incidence
It is difficult to increase
Tax/GDP Share in a poor country
Tax/GDP Ratio in Bangladesh
Share of Revenue
in GDP 1987
9.5
9
Bangladesh
9.5
8.5
8
7.5
India
14.5
Pakistan
16.7
Indonesia
23.1
7
6.5
6
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
To increase Tax/GDP ratio





Fiscal Sector reform is necessary,
Tax administration should be modern,
Tax evasion and corruption have to be
stopped.
Sometimes new taxes are imposed.
DIRECT TAX should be increased to
help poverty alleviation.
Asian Developing countries have
much higher direct taxes over
revenue
Direct Tax in Total Revenue
Bangladesh
9
Pakistan
10
India
17
Singapore
27
Malaysia
34
Indonesia
58
Direct Tax to Total Tax. Increase in
this ratio does not prove budgets are
pro-poor
Direct tax toTotal tax
22
20
18
16
14
12
10
88
9
1
90
9
1
92
9
1
94
9
1
96
9
1
98
9
1
00
0
2
02
0
2
04
0
2
06
0
2
Revenue receipts are dependent
on external factor
Sources of Revenue: Percentage of Total
FY
2004
2005
2006
Import Duty
27
26
23
VAT (import)
17
18
17
SD (import)
6
6
5
50
51
45
Subtotal




Excise
1
0
0
VAT (local)
16
17
19
SD (local)
14
12
14
Subtotal
31
30
33
Income
18
19
21
1
1
1
100
100
100
Other
Grand Total

About 45-50 percent taxes
come from external sources
Economy is heavily
dependent on external
factor,
Receipts are vulnerable to
external factor,
Proportion of income tax
should immediately be
increased.
Fear of political hazard.
Those who should pay
higher income tax are very
powerful. They may even
topple a government.
Original Allocation vs. Actual
Expenditure
Original Allocation
30000
Actual Expenditure
25000
20000
15000
10000
5000
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
0
Dependence on Foreign
Assistance
Foreign Financing
Domestic Financing
90
80
70
60
50
40
30
20
10
0
5
6
7
8
9
0
1
2
3
4
5
6
9
9
9
9
9
0
0
0
0
0
0
0
19
19
19
19
19
20
20
20
20
20
20
20
Borrowing from the central bank is
inflationary which is against the poor
Public
Bangladesh Bank
Commercial Banks
150
100
50
0
1995
- 50
- 100
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
BB controls inflation through
controlling money supply. Most often
BB target





ΔM2 = ΔNDA + ΔNFA
ΔNDA = ΔCredit to Govt. + Δ Credit to
Public Sector + ΔCredit to private sector +
Δothers.
When ΔCredit to Govt.↑ credit to private↓
When ΔCredit to Govt.↑ ΔM2 ↑
When ΔM2 ↑ inflation ↑.
THERFORE better COORDINATON between
fiscal and monetary policy is necessary.
To Summarized issues relating
to Deficit Budget




Financed by foreign assistance is
dependence and uncertain,
Financing by public, not inflationary,
Borrowing from commercial banks not
inflationary.
Borrowing from Bangladesh Bank is
inflationary.
Characteristics of Fiscal System
in Bangladesh









Falling/Tax/GDP ratio,
Tax base is narrow,
Dominance of indirect tax,
Customs + VAT (import) 50% of total tax
Vulnerable to external fluctuations
Growth in Non-development expenditure
Heavy dependence on Foreign Aid
Dependence on Deficit Financing
No Far-sightedness.
These calls for a
FISCAL
SECTOR
REFORM
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