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The proposed budget for the fiscal year 2025-26, amounting to Tk 7.9 trillion, marks a significant shift in Bangladesh's fiscal objectives: moving away from grand development narratives towards pragmatic restraint and people-centric welfare. While rolling out the budget on Monday, Finance Adviser Salehuddin Ahmed conspicuously refrained from announcing ambitious development projects or lofty GDP growth targets. Instead, his focus was squarely on ensuring human development through greater access to public healthcare and quality education, expanding social safety net coverage, and providing fund for innovative entrepreneurs and so on, aimed at building a welfare state in line with the vision of the July Uprising.
However, amid resource constraints and poor revenue collection, the finance adviser had to carefully calibrate a smaller budget, marking the first time a budget proposal has been lower than the previous year's. The proposed outlay is Tk 70 billion less than the current fiscal year's original allocation of Tk 7.97 trillion. While not a drastic cut, the reduction signals an austerity measure in response to a subdued economic outlook marked by high inflation, slack investment growth, liquidity crisis in banks and above all political uncertainty. The government aims to reduce fiscal deficit to around 3.6 per cent of GDP, the lowest level in over a decade, signaling its intent to restore fiscal discipline by reducing budget deficit and boosting domestic revenue collection. The challenge, however, lies in ensuring that this policy of fiscal restraint does not undermine investment in critical sectors such as health, education and job creation.
Meanwhile, financing this smaller budget will be a daunting challenge unless revenue collection improves significantly. The budget sets a revenue target of Tk 5.64 trillion, equivalent to 9 per cent of the gross domestic product (GDP). Of this amount, Tk 4.99 trillion is expected to be mobilised through the National Board of Revenue (NBR), while the remaining Tk 650 billion is projected to come from non-tax revenue sources.
However, a critical question is how will the government achieve the ambitious revenue collection target of Tk 5.64 trillion? Historically, revenue collection has consistently fallen short of targets, with the highest amount collected being Tk 3.75 trillion in FY23. Given the current slowdown in business activity and investment, along with rising unemployment, experts argue that the government's revenue goal is overly ambitious, and likely unattainable under current conditions.
If revenue collection falls short, the budget deficit will widen, which will force the government to increase borrowing from both domestic and foreign sources. The deficit is currently projected at Tk 2.26 trillion, with Tk 1.25 trillion expected from domestic sources and Tk 1.01 trillion from external sources. At this level, the deficit is considered manageable. However, if the shortfall in revenue leads to a higher deficit, the government may be compelled to rely more heavily on commercial bank borrowing, potentially crowding out private investment and pushing up borrowing costs. With treasury bills already offering interest rates of 11-12 per cent, banks are increasingly inclined to invest in government securities rather than lending to private borrowers. So, how will the private sector get adequate access to credit if the government taps deeper into the banking sector? Many suggest the government to take foreign loans at concessional interest rates. However, the country's external debt has already exceeded $100 billion, and the finance adviser has allocated a staggering Tk 1.22 trillion in the budget for interest payments on both domestic and foreign loans. Therefore, reducing government operational expenditure and boosting revenue collection are crucial for achieving sound fiscal management.
Ultimately, it all comes down to how the government will achieve the budget's ambitious revenue growth target of 27.98 per cent for the next fiscal year, especially given its persistent failure to meet revenue targets in the past. Meeting this target will be a significant challenge. However, many argue that the target itself is logical, pointing out that Bangladesh's revenue collection remains far too low relative to the size and growth of its economy. The country's public sector is among the lowest revenue-generating in the world. The country's tax-to-GDP ratio, a key indicator of revenue efficiency, stands at just 7.4 per cent, the lowest not only in South Asia but also among most global economies. In comparison, Nepal and India boast of tax-to-GDP ratios of 23.4 per cent and 20 per cent, respectively. Experts argue that, given the size of Bangladesh's GDP, the tax-to-GDP ratio should be at least 17 per cent. However, this target has remained out of reach due to widespread corruption and inefficiency within the revenue department. In addition, the prevalence of tax evasion remains alarmingly high among the people and businesses.
In a recent interview, the Finance Adviser cited a case in which a taxpayer owed Tk 1 billion in taxes but managed to get away with paying only Tk 100 million as tax-allegedly by bribing a tax commissioner with Tk 600 million and pocketing the remaining Tk 300 million. This is not an isolated incident; similar cases are widespread across the country. Retail VAT evasion, along with tax avoidance in the informal businesses and e-commerce sector, also contributes significantly to revenue losses. It is estimated that over 30 million businesses operate in the country, yet fewer than 2 per cent are registered for VAT. Corruption is also rampant in customs operations. According to one estimate, trade mispricings alone cost Bangladesh approximately $8.27 billion annually between 2009 and 2018. These issues underscore the urgent need for procedural reforms, stronger oversight, and greater accountability within the revenue department.
Recognising these challenges, the government recently took the bold step to dissolve the NBR and create two new entities: the Revenue Policy Division, responsible for tax law formulation and policy, and the Revenue Management Division, tasked with revenue collection and enforcement. This reform aims to enhance accountability, efficiency, and transparency. However, progress in implementing this vital reform measure has been stalled in the face of protests from NBR employees, who have a vested interest in retaining control over both policy formulation and enforcement functions.
Hence, the government's ability to achieve its revenue target depends on implementing the reforms, cracking down on corruption, broadening the tax base and strengthening administrative capacity. Bangladesh's economy stands at a critical crossroads. Success in overcoming revenue challenges will determine not only the country's economic stability but also the realisation of a more equitable and welfare-oriented society.