The Finance Minister (FM) Mr. A M A Muhith presented the next fiscal year's budget to the parliament on June 01, 2017. He claimed it to be the biggest and the best of all the budgets he has presented so far. These are indisputable claims; the latter is his subjective evaluation of his own budget performance over the years, while the former can be made every year by every Finance Minister in every growing country. In such a country gross domestic product (GDP) grows steadily and with it the budget also grows more or less proportionately. Inflation also raises the nominal budget size without any increase in real terms. The nominal budget of fiscal year (FY) 2016-17 was nearly three and half times the nominal budget of FY 2008-09, but in real terms the increase was much less than double. The budget as a proportion of GDP is generally regarded a better measure of its size.
In terms of this measure the 2017-18 budget proposed by the FM is very much in line with the trend he has already established. He inherited a budget that was 14.2 per cent of GDP in size (see Table below). He increased this size incrementally every subsequent year to lift it to 17.4 per cent of GDP in 2016-17. The budget of 2017-18 was pushed up further to 18.0 per cent of the expected GDP. He can certainly claim the four trillion-taka 2017-18 budget to be the biggest ever.
However, there is always a gap between the total budget expenditure the FM proposes and that actually spent. Actual government spending in FY 2008-09 was 89.4 per cent of the original budget. FM raised the implementation ratio to a very commendable 97.1 per cent by FY 2010-11. But since then actual spending fell sharply and stood at only 76.3 per cent of the original budget in 2015-16. The implementation ratio is not likely to change much in 2016-17. The government has succeeded in spending less than 44 per cent of the current budget during the first nine months. The implementation performance of the development budget is even worse. These discrepancies are suggestive of the mismatch between aspiration and capacity.
The realised budget expenditure was only 12.7 per cent of GDP in 2008-09. The FM increased it steadily to 14.5 per cent of GDP by 2012-13. During this period the gap between the proposed budget expenditure and the realised expenditure did not exceed much more than 1.5 per cent of GDP. But since then the budget implementation performance of the government worsened markedly. The realised budget fell steadily to 13 per cent of GDP by 2015-16, which was barely above the 2008-09 performance. The gap between the proposed and realised budget since 2012-13 increased sharply to over 4.0 per cent of GDP. It may be noted that the realised budget spending in 2015-16 in real terms was only 58 per cent greater than that in 2008-09.
These numbers suggest that the realised budget is actually quite small in size (and getting smaller). Curiously the FM himself acknowledges this fact in his budget speech. He states: "In terms of GDP, size of our government expenditure is one of the smallest in the world. In 2016, the emerging and developing economies of the world spent around 30.8 per cent of GDP on an average as government expenditure whereas ours was barely 13.5 per cent." (p. 33)
However, the point is not how much more the others are spending, but whether our government has the capacity to properly spend even this small amount. The record clearly shows that it does not. Years of neglect of human capital and subversion of institutions, and a corresponding worsening of governance in every sector of the economy have led to a situation where few projects can be implemented properly or timely. The inroad of naked partisan politics that actively discriminates against competence has helped to make the situation grimmer. It is suspected that much of the meagre budget expenditure that is actually made is also wasted in various leakages. It was an unusually damning statement by a person of no less a stature than that of the Chief Justice that 60 per cent of project expenditure is lost in corruption. This only indicates the depth of the frustration of the people of the country, which found expression in his voice. The government will be unwise to disregard it as just an idiosyncratic opinion of the Chief Justice.
The budget has given the highest increment (68 per cent) to allocations to infrastructure (Power and Road Transport and Highways divisions). The abject state of infrastructure of the economy is a great hindrance to economic development as it increases costs of production, and thereby reduces international competitiveness of domestic industries. Hence, the FM's higher budget allocations for infrastructure are appropriate in principle. However, it is also the case that the infrastructure sectors are susceptible to massive governance-related problems and cost overruns. Unless the government can rein in the unbridled corrupt practices and raise efficiency significantly, not only will the cost and completion time of the infrastructure projects will increase, but also much of the money shown spent will disappear in the black hole of corruption.
It is believed that the payoff to the society is the highest when investment is made in the development of human capital and institutions. This is especially true of counties that are in the demographic dividend phase of their demographic transition. Economic growth can be considerably accelerated in this phase if adequate investment is made in human capital (see Demographic Dividend: An Opportunity to Accelerate Growth, this paper, November 22, 2016). Unfortunately the FM does not seem to fully subscribe to this strategy. He has significantly reduced the budget allocations for the three key ministries responsible for developing human capital, viz. ministry of primary and mass education, ministry of education and ministry of health. All of them had their budget allocations reduced substantially such that their total allocation declined from 19.5 per cent currently to 15.3 per cent in the 2017-18 budget. There was also a similar reduction in the allocations of these ministries in the annual development budget.
It is pertinent to mention that Bangladesh has one of the lowest public spending rates in human capital among the countries of the world. Its public spending on education is only about 2.0 per cent of GDP and much less in health. The total spending of Bangladesh on education and health is less than half of the spending of the least developed countries as a group. We cannot hope to accelerate the budget implementation rate or the economic growth rate with the existing pitiable state of human capital. High growth rates estimated by Bangladesh Bureau of Statistics (BBS) are illusory that do not benefit the ordinary people.
Several reports prepared by international organisations, as well as local writings, suggest that there has been insufficient growth in employment during the past several years. This is especially true of the educated youth whose unemployment rate might exceed 40 per cent. It speaks ill of our society that even after the travails of 10-17 years of formal education a large section of our youth cannot find employment, not to speak of decent employment. The plight of the ordinary people can be gauzed from the media reports of the cruel fate suffered by thousands during and after their perilous journey in search of jobs in other countries.
These findings are consistent with some data released recently by the BBS. The real wages of labour have declined during the last few years in all three sectors, agriculture, industry and service, of the economy (see 'Economic growth, employment and wage', this paper, April 23, 2017). This suggests a worsening of the labour market situation of the labour force - evidently not enough jobs were created to employ them. The high growth strategy of the current variety has not delivered; it has only led to an immiserisation of a large number of the ordinary working people. With private investment stagnating there is not much hope for a quick turn around on employment. There is a limit up to which public investment can productively substitute for private investment. Beyond this the productivity of both will decline. There is hardly any direction in the budget how the issue of stagnancy of investment and employment would be addressed.
Nor is there any indication what will be done to put the financial sector in order. Although small in terms of its contribution to GDP, it is the life blood of the economy and business. Major economic crises in the world economy have been often preceded by financial crises. There is a growing fear that this sector has gone rogue and sick. The FM's budget trick of robbing taxpayers to pay scamsters and defaulters in the guise of recapitalisation of sick financial institutions may only succeed to whet their appetite rather than curing the disease. It runs the danger of increasing moral hazards in this sector that will delay or subvert genuine financial reforms.
The budget has definite plans of how the revenues will be collected to fund the budget expenditures. The FM has gambled big on a uniform 15 per cent VAT (Value Addition Tax) on all final goods and services. The resistance by the business community has already forced him to promise many exemptions. This can only increase the opacity and discretion in the implementation of the tax, and thus make business more difficult. What is certain is that it will eventually raise the consumer prices by the full extent of the new tax.
The benefits of the budget are highly skewed. A small number of people gain enormously from the budget spending. Government largesse falls on them like manna from heaven in the form of subsidies for their products and tariffs on competing products, inflated cost of public projects, extended tax holidays and rebates, and generous budget allocations to offset the consequences of wilful default and defalcation of funds from financial institutions, and lack of preventive action against corrupt practices in the execution of budgeted programmes. They have grown super rich within a short period at the expense of the ordinary people who have to bear the brunt of the government's higher revenue requirements in order to meet these costs. Even the small amounts they save in their bank accounts from their modest incomes after paying taxes do not escape excision by the FM. In fact, the FM proposes to further increase excise duty on deposits.
The growth of this enormously rich group of people on the one hand and the millions of disgruntled unemployed youth, on the other, are as dangerous a mix as fuel and fire. Unless some action is taken to engage the youth in productive activities the social fabric of the country will come under great stress. There are some ominous signs of the youth leaning toward extremism, which feeds on desperation. The situation is made more volatile by the fact that the current government is not widely believed to be representative, and a large section of the population is disaffected. It is possible that splinter groups among both the beneficiaries and the victims of the current political dispensation may encourage or resort to irregular means, rather than a free and fair election, to retain or attain state power. If this transpires, the consequent political turmoil will impinge on the economy very adversely. Hopefully sanity will prevail and a peaceful environment in the country will prevail for the budget to show some good results.
The writer is Professor, Department of Economics, University of Dhaka.