Originally posted in The Daily Star on 3 June 2021
Debapriya Bhattacharya, a distinguished fellow of CPD, says on national budget in an interview
With the new national budget set to be announced today, The Daily Star caught up with Debapriya Bhattacharya, a distinguished fellow of the Centre for Policy Dialogue, for his take on potential policy changes, how to address the needs of the hour, and various solutions to the Covid-induced economic crisis. Below are the excerpts of the interview.
The Daily Star (DS): What is the context of the national budget that is being announced today? What should be the main focus of the budget?
Debapriya Bhattacharya: The last budget (for 2019-20) was placed during the first wave of the coronavirus pandemic and here we are, one year later, in the midst of the second wave of the pandemic. We are not sure whether there will be a third wave or not. Defying earlier assumptions, the new budget is being designed within continuing uncertain health and socio-economic prospects.
The faltering recovery from the impacts of the first wave was characterised by the restoration of employment through low skill and low income jobs while underemployment remains pervasive. Households are experiencing a consumption squeeze and growing indebtedness. A large number of them are falling below the poverty line, while inequality is deepening. There are also a number of negative fallouts in the health, education and social sectors. Accordingly, a recovery plan has to be embedded in the upcoming budget.
There exists an apparent stability in the macroeconomic situation. The inflation remains low, the exchange rate of Taka is stable, the fiscal deficit is moderate and the current account is exhibiting surplus. This macroeconomic stability has to be retained in the coming year, particularly in case of food price inflation.
We also need to be mindful that the new budget is being launched with a weak benchmark, possibly the weakest in the recent past. Most of the budgetary targets of the elapsing fiscal year have not been realised by a large margin. This is true for both resource and expenditure sides of the equation. Because of these fundamental underperformances, the budget deficit has remained below the target.
Finally, we are also facing an indeterminate global economic outlook. This concerns the flow of official development assistance, export revenue, foreign direct investment and remittance by migrant workers. The budget has to be mindful about the external economic issues.
DS: In that case, what should be the policy approach of the upcoming budget?
Bhattacharya: We need to have our diagnostic agreed upon first before we venture in elaborating a policy approach. The socio-economic impacts of the pandemic will be more protracted than immediate health emergencies.
There will be disproportionate impacts on the traditionally marginalised communities as well as on the low income and low middle-income people. All these will have detrimental consequences for consumption, income, savings and investment due to a fall in aggregate demand. Current circumstances demand special attention to protect the consumption of the poor/low-income households and employment promotion at the micro, small and medium enterprise (MSME) level.
Under the circumstances, we would need to press all four triggers of economic growth, namely (i) consumption, (ii) investment, (iii) government spending and (iv) net exports. Further, we would need a minimum of three years to have a robust recovery strategy. I am afraid a one-year budget framework in this case will not be helpful.
This strategy has to integrate recovery efforts with structural transformational needs such as labour productivity improvement. We may use the United Nations 2030 Agenda for Sustainable Development as the framework for defining this strategy in line with the Eighth Five Year Plan (2021-25) of the country.
DS: Many economists suggest expansionary plans and increased public spending. Would you please share your views?
Bhattacharya: Yes, we shall have to pursue a countercyclical expansionary fiscal policy stance to boost up aggregate demand. A number of factors are in our favour for undertaking such a fiscal approach. These include low inflation rate, manageable public debt ratio, high forex reserve and modest fiscal deficit.
There are of course constraining factors such as a stagnating (if not falling) tax-GDP ratio, low absorption of foreign assistance and inability to deliver public expenditure programmes. In fact, the quality of public expenditure remains highly suspect.
Last year, while recommending an expansionary fiscal stance we were worried about the available fiscal space. Although we are experiencing a stagnating tax/GDP ratio, a fall in the public expenditure/GDP ratio in 2020-21 remains to be the prime concern.
Regrettably, the ratio of both the revenue budget and Annual Development Programme (ADP) will record a fall in the outgoing year. The rate of implementation of the ADP had been only 42 per cent in the first nine months, an all-time low. In fact, the Health Services Division could not spend 75 per cent of the ADP allocation in 10 months of the outgoing fiscal year.
Low utilisation rate of the available concessional foreign assistance has imposed constraints on off-take of the public expenditure programme.
In this context, the defining issue is not only the amount of money we are being able to spend as the issue of how resultative or impactful these expenditures are no less important. Inordinate delays in project implementation, corrupt practices in procurement and absence of a result-based evaluation (and monitoring) arrangement are some of the reasons affecting the efficiency and effectiveness of the country’s public expenditure system. One wonders what the upcoming budget will propose to deal with these binding constraints.
DS: What are your suggestions for revenue measures and allocative priorities?
Bhattacharya: On the revenue side, my response is simple: no new taxes, no increasing of rates. Rather, increase tax collection by improving administrative efficiency, increasing tax net, plugging leakages and evasion, and harmonising unproductive exemptions and rebates. Enable tax and tariff structure in favour of domestic market-oriented labour-intensive industrial diversification.
We must stop giving counterproductive and unethical tax amnesty to black money launderers. Stop harassing regular tax payers and must not use tax cases for political purposes.
The revenue-GDP ratio has to rise incrementally by 0.5 to 1 per cent of the GDP annually, reaching at least 15 per cent by the end of the next 5 years. To this end, we need to broaden taxation of assets along with income.
On the expenditure side, allocation for the development budget has to increase faster than that of the revenue budget. Allocations for new mega projects have to be restrained rather than that for those which are close to completion.
Incremental allocation of 0.5 per cent of the GDP has to be made annually to public expenditures in the health sector for the ratio to be 3.5 per cent of the GDP by the end of the next 5 years.
Similarly, incremental allocation of 0.5 per cent of GDP annually has to be given for public expenditures on education for the ratio to be 4.5 per cent of the GDP by the end of next 5 years.
In view of the pandemic, the next budget has to have an increased allocation for direct cash transfer and food support amounting to 0.5 per cent of the GDP. Further, in view of the growing vulnerability of the low and low-middle income people, a universal social security scheme in the form of pensions and health insurance needs to be launched through the upcoming budget.
DS: Any parting thoughts?
Bhattacharya: The government’s Inability to implement public expenditure programmes has become the binding constraint in the country’s efforts to deal with the ongoing pandemic as well as to continue with regular developmental activities, including support to private sector investment.
The disadvantaged population of the country bears the disproportionate adverse impacts of such shortfalls in public development programmes.
This overwhelming constraint cannot be addressed exclusively through strengthened administrative monitoring. This will need wide-ranging structural and institutional reforms. To improve the quality of public expenditure, the involvement of stakeholders at different levels is required, particularly for assessing the impacts of development projects.
I hope that the national budget will be able to demonstrate innovation and courage in this regard as well as in the areas mentioned earlier.