The simple math

A national budget is different from a family budget, in that, the government fixes its expenditure first and then goes for hunting the sources of income, whereas a family gets its income and then determines the items of expenses. There is another difference: if a person earns Tk. 100, he usually spends less than that, say, Tk. 80, ensuring a saving of Tk. 20 for rainy days or retired life. The government does the opposite: if the government spends Tk. 100 for example, it earns Tk. 73.  Thus, three-fourths of the government's total spending is supported by our earnings, making a fiscal deficit of Tk. 27.

If we focus on our fiscal capacity, using the above example, all taxes contribute to Tk. 62 and non-taxes provide Tk. 9, making a total of Tk. 71, registering a shortfall of only Tk. 2 which will be met by foreign grants. This indicates that our dependence on foreign grants has come to almost an insignificant amount.  Unlike the situations in the 1970s and 1980s, Bangladesh now depends little on foreign grants. There will also come a time when the income side of the budget will be entirely based on domestic resources and taxes in particular.  

We, however, have foreign dependence in another way in the name of foreign financing, which is not unusual.  Rather, it is beneficial because of the very low cost of financing.  As we have noticed a fiscal deficit of Tk. 27 (= 100 - 73), we manage Tk. 8 from foreign financing and Tk. 19 from domestic financing, such as bank and non-bank borrowings and national savings certificates. The ratio between domestic and foreign financing stands now to be 70:30, which was 65:35 a few years ago.  This apparent improvement is not an unmixed blessing.  

While in the income part (Tk. 73), we need to increase our relative domestic contribution and need to improve domestic resource mobilisation as much as possible. Domestic contribution should be minimised when it comes to deficit financing (Tk. 27), because domestic financing is expensive. It is equivalent to taking loans by the fiscal authority and the government must ensure the lowest possible cost of financing, regardless of their sources.  Otherwise, the government will keep on increasing the future burden of interest payments which will again take a toll on taxpayers' money, impinging on the government's capacity to spend for development.  

For example, borrowing Tk. 100 through a domestic channel of saving certificates will cost Tk. 12 as an interest payment while the liability can be as low as Tk. 2, if through foreign channels.  That will release extra Tk. 10 which can be used for development projects to promote growth.  As it stands now, the government has to pay Tk. 334 billion as domestic interests and only Tk. 17 billion as foreign interests. Domestic financing is 2.3 times bigger than foreign financing, but the interest liability for the domestic portion is almost 20 times larger than that for the foreign counterpart.  Hence, our pattern of financing should be revised in order to reduce the future burden of the budget. 

We spend our Tk. 100 (the whole budget) in a composition of 65:35 (current vs. development expenditure).  Tk. 65 will be spent for current and revenue expenses such as paying the workforce and the rest Tk. 35 for development projects.  The budget document terms this Tk. 65 as non-developmental spending, creating some curiosity. I don't know how consumption spending can be strictly termed as 'non-developmental', while consumption raises output and growth. And growth, in turn, is the principal contributor to development. I would request the Ministry of Finance to give a softer term of this item to avoid the strong negative notion against the word 'development.' 

This 65:35 composition is not discouraging for a growing economy like Bangladesh, but the frustration arises when we cannot use the whole allocation for our development budget.  The revenue capacity is now 12 percent of the GDP, while the spending size makes 17 percent of our national output, signaling a budget deficit to be equivalent to 5 percent of the GDP. Unfortunately, we cannot spend the whole amount dedicated for development purposes. Since FY 2009, the average budget deficit went up to around 3.6 percent only, suggesting a stark underutilisation of resources and a deficient implementation power of the government machinery.  Hence, improving our capacity through investing in education, quality knowledge, technology, and infrastructure will be of crucial importance.

The author is Chief Economist of Bangladesh Bank.