Bracing for budget of self-preservation

In 2019, when AHM Mustafa Kamal took charge as the finance minister, the Bangladesh economy was taxiing for take-off for its long-haul flight to the developed country club.

Four years later, it failed to fly into the air, as Kamal refrained from opening the throttle to increase the engine power needed for the economy to take off.

For the Bangladesh economy, the throttle is the tax revenue collection, which would enable the government to make the expenditure needed to level up GDP growth in an equitable manner.

As per the original flight schedule, the budget for fiscal 2023-24 would have been the one priming the Bangladesh economy for cruise control in the post LDC-world.

But Kamal's bolting for the auto-pilot mode from the onset has left the economy ill-positioned to withstand the adverse conditions of the global coronavirus pandemic and the Ukraine war -- even while on the runway.

Subsequently, the budget that he is set to unveil today, his fifth as the finance minister, has become one of survival amid spiralling inflation, depleting reserves, rising poverty and slowing economic activities.

And whether he manages to succeed in barely that is also in question given the narrow fiscal space, which got narrower during his term.

When he took charge, Bangladesh's tax-GDP ratio was in the neighbourhood of 10 percent. Now, it is about 7.5 percent is the lowest in South Asia, and on average, almost 5 percent less than lower middle-income countries, according to a study by the International Growth Centre.

It is for this reason that he did not go for an expansionary budget amid the pandemic, when most countries in the world were going for one to prevent a hard landing of their economies from the worst global economic and public health crisis in recent memory.

And it is for this reason, he is unable to provide the funds needed to extend adequate cash support to the poor and the low-income people to cushion themselves from the vagaries of inflation, which averaged 8.85 percent in the first ten months of the fiscal year and way above the budgetary target of 5.6 percent.

What he can manage at best is a token amount that would not be of much help to this demographic amid the high prices of essentials.

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Budget set to pass on June 26

This would unravel the decades of gains made in poverty alleviation -- and would be stepping back in time. Already there are signs of this happening, as disclosed by a recent survey of the Bangladesh Institute of Development Studies: in 2022, 51 percent of Dhaka's total poor were new.

In other words, had Kamal managed to ramp up the government's revenue base in line with the economic progress, the Bangladesh economy would not be staggering from the blows of the Ukraine war more than a year on, when much of the world has learnt to live with it.

Neither would it have to desperately seek budget support from development partners nor would it need to borrow heavily from banks and the Bangladesh Bank, which is fuelling inflation further.

It really seems like a losing battle, one that could have been managed with grace had Kamal worked on boosting the tax morale of the citizens during his time in office.

As of April, less than 2 percent of the population pays tax, which is more than 6 percent in neighbouring India.

Tax morale is the intrinsic motivation to pay taxes and voluntary compliance of taxpayers is a vital aspect of the tax system. It depends on the citizens' trust in the government and their satisfaction with the quality of public services received.

Corruption, especially extreme levels of corruption, can significantly erode people's trust in the system leading to tax evasion. On the other hand, corruption in tax administration can also create opportunities to evade taxes.

Therefore, corruption can be both a reason and a tool for tax evasion. And Kamal failed to work on either.

Cost overruns in projects are always accommodated and low-priority projects were given funding. In 2022, Bangladesh was the 12th most corrupt country in the world second-most corrupt country in South Asia, according to Transparency International's Global Corruption Perception Index.

In the four years, he could neither make much headway in automating the tax administration, which would have addressed corruption in the National Board of Revenue nor expand the capacity of the organisation to be able to expand the tax net meaningfully.

Neither did he show any resolve in pushing for VAT and income tax laws befitting an economy in the 21st century, which would have made evasion costlier.

Studies show that people evade paying taxes payment when the cost of evasion is smaller than the benefits from it. Taxes are evaded because paying the bribe along with the small chance of getting caught are much less costly than paying the requisite level of tax.

Similarly, the tax collectors may find it more rewarding to get paid by the taxpayers than waiting to be rewarded by the authorities for recording and collecting the correct tax payments.

Kamal continued to extend tax exemption to industries, which is not only costing the state in missed revenues but is also failing to get businesses to prepare for the competitive post-LDC world.

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Budget set to pass on June 26

The narrow fiscal space also means the government was found wanting in social spending, again leaving it ill-prepared to face the challenges of graduation from the least-developed country bracket.

Which is why, today's budget holds much significance: it would be a test of the current government and Kamal's resolve and sincerity in lassoing the economy back from heading back into the hangar.

Already, the International Monetary Fund has provided guidelines on what needs doing in the upcoming fiscal year's budget in terms of revenue mobilisation, social spending, development spending and deficit financing.

It remains to be seen whether the government heeds the good advice or reverts to type.