Professional Documents
Culture Documents
SUBMITTED BY:
MD. SHOWEB
ID: 09303074
SESSION: 2008-2009
DEPARTMENT OF FINANCE AND BANKING
UNIVERSITY OF CHITTAGONG
AUGUST 2014
UNIVERSITY OF CHITTAGONG
1
Acknowledgement
At first I would like to thank to the almighty Allah, the merciful and the benevolent who has enabled me
to complete The report on A study on Budget deficit AND Its impact on the economy of
Bangladesh.
All the good things and successful passages are done through spirit and innate believes. Behind these
innate motives, some people are related directly or indirectly. We have touched with such extreme
personality who has given us the framework and motivation to make this effective assignment.
Especially, I would like to acknowledge my supervisor Tanvir M H Arif who taught, guided and instructed
us to make this report.
In writing this assignment I have drawn materials from a variety of sources. I owe a profound an
intellectual debt to various authors whose ideas and contributions have shaped my thinking on this
report.
At last, we remember all those people whose name are not mentioned here but lend us a hand directly
or indirectly in preparing this assignment.
Abstract
Government budget deficit is the difference between government revenues and expenditures.
Government has different sources of revenues. Major portion of government revenues comes
from direct and indirect taxes. Direct taxes come from income and profits of individuals and
institutions and indirect taxes come from import duty, supplementary duty and value added
tax. It can be put in different way. Direct taxes are the part of economic revenues and incomes
of individuals and institutions and indirect taxes are the part of economic transactions in the
form of buy, sale, export and import transactions. If government wants accelerate its revenues
to meet the growing public expenditures and to reduce the budget deficit without reducing the
expenditures of different influential sectors, much efforts should be made to increase economic
revenues and income as well as the economic transactions so that the government revenues
can meet the growing demand of the economy with the increase in revenues from income tax,
import duty, supplementary duty and value added tax. In this regard the concentration of the
report is on the management of deficit budget to minimize bad effects and maximize the
utilization of funds. Having budget deficit is not a problem at all. The problems lie with the
government inefficiency in the management of budget deficit. The evaluation of different
reasons behind deficit budget and the evaluation of different bad effects of deficit budget are
two crucial parts of our discussion. The impact of budget deficit on the different sectors of the
economy is addressed here with relevant information. It is further concentration point of the
report to find ways to improve the management performance of the government to achieve
different macroeconomic goals with the help of expansion of economic revenues and
transactions. The government revenues increase with the increase in economic revenues and
economic transactions. The key point of our discussion is government should not decrease the
public expenditures as the population is growing. The expenditures on different public sectors
have to be increased as the population is growing. But budget deficit should not grow to meet
the expenditures as budget deficit has some associated problems with it. For this reason
government has to concentrate on accelerating the revenue collection rapidly with the
expansion of economic revenues and economic transactions. For this reason government
should try to integrate different policies to achieve key macroeconomic goals.
Introduction
Bangladesh Government has been running on deficit budget since independence. It had gained
independence in December 1971 after a bloody-nine-month long war of liberation.
Consequently, the economic situation was unstable during the first 3years after independence.
The situation eased somewhat in the 2nd half of the decade when the work of restructuring a
war-ravaged economy had been completed.
In that time large fiscal deficits were evolved as the availability of resources was much less than
investment requirements. The government had no other choices but to resort deficit financing
to finance rehabilitation work.
Budget deficit is mandatory to fight the recession as it helps to stimulate the economy. But the
management of budget deficit is always crucial for a country like Bangladesh. Budget deficit is
not a problem if it is managed well. But how can the budget deficit be managed well? The
preparation of this report is to identify ways that will pave the way of managing the budget
deficit for the purpose of macroeconomic goal achievement or in other words that will pave the
way of minimizing the bad effects of budget deficit and maximizing the utilization of
government resources.
Here management means both the utilization of funds and combination of sources of funds. It
is seen that some projects have the problem of poor utilization and secondly sometimes
inefficient combination of sources of deficit budget is another problem that creates problem in
different economic sectors. Budget deficit can cause economic imbalance because of its
combination. It will be discussed in details in the respective chapter.
There exists a correlation between Deficit and Debt whereas deficit must be financed by
borrowing from external and internal resources to meet up the shortage. The further dealing of
the report is how the management of deficit and debt through borrowing from external and
internal sources could affect the economy of the country.
Deficit budget influences the overall economy in terms of Agriculture, power and energy,
infrastructure, healthcare, education and industries.
The principle objective of this report is to study the budget deficit and its impact on important
sectors that influence the economy substantially. Under this principle objective following
specific objectives have been covered.
1. To evaluate the reasons and bad effects of budget deficit.
2. To identify the effects on different sectors influencing the economy significantly.
3. To find ways for managing the budget deficit for the purpose of macroeconomic goal
achievement.
Literature Review
Budget deficit is a common terminology in our fiscal policy. It is termed as fiscal deficit as well.
Unnayan Onneshan (2013) a leading think tank of our country states that persistent fiscal
deficit is harmful for economic growth and affects the economy negatively. Because it leads to
high taxes, increase in price level (demand pull or cost push) and increase in the real interest
rate which creates crowding out effect for the private investor. And they further states that
when the government is not able to finance its deficit, it is forced to cut expenditure or raise
revenues. Both are harmful for an economy as cutting expenditure will create disorder in public
works and raising revenue will be harmful in materializing fiscal policy and in stabilizing the
economy. Increased public borrowing has compelled government to become dependent on
internal and external sources for financing. It has caused to result in over burden of debt. It has
been exerting significant pressure on macroeconomic stability of the country.
They opined that highest allocation for non-development expenditures have gone to interest
payment on both to the domestic and foreign sources. These unproductive expenditures
reduce the investment capacity of the government substantially and push the inflationary
pressure on the economy.
They further states that Deficit as a share of GDP is only 5 percent in 2014-15 and 4.6 percent in
FY 2013-14, which is not that much alarming. The actual matter in this regard, is the financial
management for this deficit as well as the utilization of the debt. According to them the per
capita debt burden of Bangladesh has been rapidly mounting since FY 2008-09 and stood at Tk.
3389.84 in FY 2012-13 from Tk. 2982.19 in FY 2011-12. In FY 2012-13, the rate of growth in per
capita GDP and the rate of growth in per capita debt burden stood at 11.6 percent and 13.7 per
cent respectively from 28.2 per cent and 13.8 per cent in FY 2011-12.
Similarly, total public borrowing has increased at an alarming rate in the last few years. As a
result, every citizen of the country is burdened with a debt of Tk. 3389.84 in FY 2012-13 from
Tk. 2982.19 in FY 2011-12.
Zebulun Kreiter and Tapas Kumar Paul (2010) put a study namely Deficit financing and inflation
in Bangladesh: A vector Autoregressive Analysis whereas they said the budget deficit is
sometimes responsible for increase in price level (demand pull or cost push). But in our country
the influence of controlling supply of money for the purpose of controlling inflation cannot be
justified as there are other reasons that influence the inflation rate significantly.
Prof. A.B. Mirza Azizul Islam (2014), former adviser to a caretaker government, opined high
domestic borrowing might hit the economy in terms of possible crowding-out effect and
inflationary pressure. Budget deficit should not be much dependent on domestic sectors
substantially as per his suggestions. There is a significant evidence that budget deficit can cause
inflation in terms of developing nations such as Bangladesh whereas the effects of budget
deficit are not significant in developed countries.
Table of Contents
Details
Page
1. Acknowledgement
2. Abstract
3. Introduction
5. Literature review
6. Chapter 1
9-12
7. Chapter 2
13-18
8. Chapter 3
19-32
9. Chapter 4
33-37
38
39-40
12. Appendices
41-47
Chapter 1
Reasons
Budget deficit
2009-2010
61000
62040
2010-2011
75600
79403
2011-2012
92370
94457
2012-2013
1,12,259
1,08,614
Comment
Achieved
Achieved
Achieved
Failed
2013-2014
125000
90,704.50
For first ten
month
Failed
10
Sector
Subsidy
Agriculture
9,000
Export
2,850
Power
7,000
Petroleum
2,800
Food
1,803
Others
3,000
total
26,053
11
2009-10
9,534
2010-11
16,285
2011-12
28,814
2012-13
37,399
2013-14
2014-15
32,354(revised) 26,0539(proposed)
The PDB bought electricity from state-owned and private plants for an average price of Tk 4.52
per kilowatt-hour in the same period. Electricity from rental power plants cost Tk 9.50 per
kilowatt-hour.
12
Chapter 2
Evaluation of bad
effects of budget
deficit
13
14
Inflation
Demand pull
Can be controlled
through money
supply
Cost push
15
Increasing
international price
level of food and
non-food items
Reasons of inflation in
Bangladesh
3. Labor
16
2.3 Interest rate Increase due to budget deficit or wrong monetary policy:
Interest rate may increase due to budget deficit. But it is seen in our country that interest rate
high due to wrong monetary policy of the Central Bank. Central bank wants to control inflation
by controlling money supply. As a result central bank follows Contractionary monetary policy.
Because of Contractionary monetary policy the interest rate or the cost of capital is much
higher. Actually the reasons behind the increase in inflation rate are different which is discussed
earlier. So controlling money supply for the purpose of restricting inflation rate at the desired
level is not working in favor of our economy as it creates difficulty in disbursement of private
sector credit. So it is actually government failure to identify the real reasons of inflation as a
result the interest rate prevails at an extreme level.
Removing lending
interest rate cap
Contractionary policy
Low growth of
Investment
Supply shock
Rising
inflationary
pressure
17
Government is pursuing a tight monetary policy assuming that the country is facing inflation
because of demand pull nature of inflation. In reality the inflation is cost push and there are
other problems associated with like as supply shock. Tight monetary policy cannot be a suitable
policy for our country from the perspective of economic expansion. Without economic
expansion government cannot have a sufficient amount of tax to meet the expenditures and
thus it will lead to larger budget deficit. On the other side private sector investment cannot
grow at the expected level due to the increase in interest rate which will lead to the low
production or in other words low GDP growth rate. Low production will add fuel to the existing
level of inflation which is presented by the above chart.
18
Chapter 3
Evaluating the effects
of deficit budget on
different sectors
influencing the
economy significantly
19
3.1 Education:
21
22
Research.
Improving the standard of education.
Improving the course curriculum.
Increasing the pay scale of the teachers.
Training for the teachers.
23
3.2Health care:
Year
Health budget(in
percentage
of
total allocation)
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
6.2%
5.9%
5.1%
4.8%
4.6%
4.45%
Source: thedailystar.net
3.2.1 Child mortality and maternal mortality:
Despite some success on the sector, government allocation for the sector is not sufficient with
respect to the population of our country. Government has become successful in
implementation of decreasing child mortality rate from 88 to 65 per one thousand and been
awarded MDG2010 award because of its achievement. Maternal mortality rate has been
decreased to 1.94 (per thousand live births). But government has to continue development
programs for the expansion of health care and to reach the mass people if it wants to increase
the quality of human resources.
24
25
Year
3.3 Agriculture:
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
Contribution of agriculture
sector to the GDP (%)
16.33
16.78
17.38
18.01
20.29
19.01
20.00
2009-10
2010-11
2011-12
Percentage of
nondevelopment
expenditure
85%
84%
85%
26
3.3.2 Largest sector that accounts for more than 40 percent of labor force:
This sector is accounted for more than 40 percent of total labor force. This sector significantly
influences the economy as the major portion of the labor force is employed in this sector. If
government can provide sufficient facilities to the farmers there would be more outcome that
could benefit the economy as a whole. Government should try to make sufficient expenditures
so that the sector could grow farther and the people employed in this sector can contribute
more to the economy. Without aiding the sector with more budgetary allocation the economy
as a whole cannot perform well and the government cannot achieve the macroeconomic goals
like GDP growth rate.
27
28
3.4 Power:
To attain a sustainable growth of GDP government need to make sure that there is sufficient
supply of power. Without consistency in power generation there is no way to reach the desired
outcome of the nation as a whole. Power generation capacity has been increased at 10,341
megawatt and the sector has improved quite sharply. But the problem is the growth is not
sufficient to meet the existing demand and to facilitate the growth of the country. To support
the macroeconomic goals of the country there must be more allocation for the generation of
power.
In this regard there should be integrated approaches to be followed. 53 projects are included in
ADP and 11.6 percent of total ADP is allocated for power generation. Allocation of this sector
has been increased by 16.7 percent mainly due to rise in development expenditure. There are
some points to be remembered.
29
year
2013-14
2012-13
2011-12
2010-11
Installed
capacity
(Megawatt)
10241
8525
8100
6639
Maximum
generation
(Megawatt)
6970
6675
6066
4890
30
3.4.6 Low allocation causing problems for the exploration of new sources of
energy:
Low allocation is causing problems for the exploration of new sources of energy. If government
put much concentration on exploration of natural resources so as to maximize the power
generation to meet the demand of huge population. Without utilizing the present resources the
supply of power cannot be increased significantly and the power crisis cannot be met. Power
crisis is the crucial issue for the government right now as it is causing to slow the economic
growth and economic expansion. To accelerate the economic growth and economic expansion
the generation of power should be increased to meet the huge demand.
31
3.5 Subsidy:
Budget deficit is growing beyond the ability of the government to finance. Government is trying
to reduce the budget deficit and in this regard the allocation for subsidy is decreasing day by
day. Subsidy reduction is responsible for the increase in oil price and power price. To reduce the
burden of subsidy government adjusting the power and oil price substantially which adds fuel
to the current level of inflation. Subsidy reduction causes serious difficulty at the different
sectors as it puts burden on the shoulders of the mass people and makes it harder to maintain
the living standard as a major portion of the people living below the poverty line. As a result the
cost of production and transportation is increasing alarmingly which cannot be met by the
people living below the poverty line. Subsidy reduction has some bad effects associated with it.
32
Chapter 4
To find ways for
managing budget
deficit for the purpose
of macroeconomic
goal achievement
33
34
Economic transactions
(Indirect taxes are
Import duty,
supplementary duty,
VAT etc.)
Government
revenues
(Major sources are
direct tax and
indirect tax)
Economic revenues
(Direct tax on income
and profits)
Government
revenues
Economic
revenues
And
Economic
transactions
Economic
revenues
Government
revenues
And
Economic
transactions
35
Financial policy
(For implementing
economic policy)
Economic policy
Monetary policy
Integration
Among all the policies
Research
Economic expansion
(Innovative products and
services)
36
Economic policies mean the actions that influence the economy. Economic policies evolved
from economic condition of a country. For example our economic condition requires more
expenditure on infrastructure development, education, power, healthcare, employment
generation as our economy is developing one and a number of people of our country are living
under the poverty line. So the government has to make a lot of expenditure to improve the
infrastructure such as building new roads, bridges. Government has to give subsidy on different
prioritized sector like agriculture, education, power health care.
Financial policy of government is a tool to implement different economic policy. As it is
mentioned earlier the government spends on different sector for infrastructure development,
education power, healthcare, employment generation actually government spend on the
sectors because of its economic policy. For example our economy is in need of infrastructure
development. As a result government spends more on infrastructure development every year.
Government wants to have a GDP growth rate of 7.3 percent in 2014-2015. To achieve this rate
public sector investment has to grow significantly. But with existing monetary policy it is not
possible to grow at the desired level as the monetary policy is based on the assumption that
inflation is caused by money supply and because of this wrong assumption private sector
investors have to pay more interest which is helpful for the private sector investors.
Because of wrong monetary policy the private sector investment is not growing at the desired
level. To grow at the desired level government must make the monetary policy expansionary.
The integration between these policies is the only way to have a growth rate at the desired
level. If there is significant growth in private sector investment than there will be generation of
revenues and profit from those investments and government will have sufficient tax revenue
from those profits generated by investors.
To find the ways of integration and to expand the economic activities government must spend
more on research projects. Research can help to grow the economy with innovative products
and services. On the other side with the help of research government can find the ways of
integration of different economic, financial and monetary policy.
37
Conclusion:
From the above discussion the conclusion we can make is that Government should try to
reduce the budget deficit without reducing the public expenditure as the reduction will
definitely hamper the economic revenues and transactions negatively. In addition to this the
interest rate burden that has been put on the shoulder of the investors should be removed so
that they can invest more which will help to expand the private sector investment as the
private sector investment is the key to increase the government revenue with the help of
increased economic transactions and revenues.
Recommendation:
Modernization of taxing policy is the single factor that can influence the economy and
revenue collection significantly.
To reduce the budget deficit government must try to expand the economic activities as
expansion of economic activities can pave the way of sufficient revenue collection.
Coal based power plant should be built to reduce over-dependency on gas based power
plants that can reduce the burden of budget deficit substantially.
Direct tax collection is low and it is not the major part of government revenues rather VAT
dominates the total revenue collection as percentage of total revenues.
People put different financial papers for loan and tax purposes. This is one of the reasons
for which direct tax collection is low in our country.
Economic expansion can be possible through research as research facilitates exploration of
new and innovative products and services.
There should be more allocation for exploration of new sources of power to accelerate
economic growth so that the economic expansion can aid the government with increased
revenue.
Uniform code for every institution should be introduced so that the organizations and
persons cannot put different statements at different places as uniform code can aid to
accelerate the direct tax collection substantially.
Over-dependency on VAT should be replaced by direct tax collection through NBR as direct
tax collection should be the key source of revenue collection.
Interest rate should be lowered to accelerate the economic growth as economic expansion
can help to accelerate the revenue collection of government.
The reasons behind inflation should be evaluated intermittently as there are different
reasons behind inflation.
38
Bibliography:
1. Sadia Afrin (2013). Fiscal deficits and Inflation: The case of Bangladesh
Available at: http://www.bb.org.bd/pub/research/workingpaper/wp1303.pdf (Accessed 19
June)
2. Zebulun Kreiter and Tapas Kumar Paul (2010). Deficit financing and inflation in Bangladesh:
A vector Autoregressive Analysis.
Available at: http://mpra.ub.uni-muenchen.de/45981/1/MPRA_paper_45981.pdf (Accessed 19
June)
3. Unnayan Onneshan (2013). Dynamics Of deficit And Debt: Bangladesh Economic Update.
Available at:
http://www.unnayan.org/reports/meu/August_13/MEU%20on%20Deficit%20and%20Debt.pdf
(Accessed 20 June)
4. Bangladesh GDP Annual Growth rate (2014)
Available at: http://www.tradingeconomics.com/bangladesh/gdp-growth-annual (Accessed 13
July)
5. The bdnws24.com, Reazul Bashar (2014). No signs of escaping rental trap
Available at: http://bdnews24.com/economy/2014/02/13/no-signs-of-escaping-rental-
trap(Accessed14july)
6. Unnayan Onneshan (2014). LONG ON TARGETS, SHORT ON REALITIES: A Rapid Assessment of
National Budget 2014-15.
Available at: http://www.unnayan.org/reports/Budget/Budget_FY_2014-15/Budget_FY_2014-
39
(Accessed 16July)
9. Budget speech 2013-14
Available at: http://www.mof.gov.bd/en/budget/13_14/budget_speech/speech_en.pdf
(Accessed 16 July)
10. Budget speech 2012-13
Available at: http://www.mof.gov.bd/en/budget/12_13/budget_speech/speech_en.pdf
(Accessed 16 July)
11. Budget Speech 2011-12
Available at: www.mof.gov.bd/en/budget/11_12/budget_speech/speech_en.pdf (Accessed 16
July)
12. Centre for Policy Dialogue (2014). An Analysis of the National Budget for FY 2015.
Available at: http://cpd.org.bd/wp-content/uploads/2014/06/CPD-An-Analysis-of-the-NationalBudget-for-FY2015_Final_June.pdf (Accessed 16 July)
13. Unnayan Onneshan (2014). Recent Trends of Growth in Agriculture, Industry and Power
Available at:
http://unnayan.org/reports/meu/MEU_March_2014/Final%20MEU%28Edited%29_29%20Marc
h14.pdf (Accessed 16 July)
14. Islamic Development Bank Group (2013). Country Economic Work: Diagnostic Analysis of
Bangladesh Economy.
Available at:
http://www.isdb.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IDB/CM/P
ublications/Parnership_Strategies/Bangladesh_EcoWork_April13.pdf (Accessed 16 July)
15. Centre for Policy Dialogue (2014). Bangladesh Economy In Fiscal Year 2014.
Available at: http://cpd.org.bd/wp-content/uploads/2013/10/Bangladesh-Economy-in-FY2014.pdf
(Accessed 18 July)
40
Appendices
Table 1
Total revenue, expenditure and budget deficit
Financial years
FY98-99
FY99-00
FY00-01
FY01-02
FY02-03
FY03-04
FY04-05
FY05-06
FY06-07
FY07-08
FY08-09
FY09-10
FY10-11
FY11-12
FY12-13
FY13-14
FY14-15
Total Revenue
19767
20074
24342
24893
31120
35400
39200
44868
49472
59479
64568
75905
92993
114693
128128
156671
182954
Total
Expenditure
29779
34464
37399
40757
42075
47184
53903
59030
66836
90696
89194
102977
128249
152428
174013
216222
250506
Budget Deficit
10012(actual)
14390(actual)
13057(actual)
15864(actual)
10955(actual)
11784(actual)
14703(actual)
14162(actual)
17364(actual)
31217(actual)
24626(actual)
27072(actual)
35256(actual)
37735(actual)
45875(actual)
59551(revised)
67552(proposed)
41
Table 2
Year
GDP
growth
rate
GDP In
Billion$
2004
6.27
2005
5.96
2006
6.63
2007
6.43
2008
6.19
2009
5.74
2010
6.07
2011
6.71
2012
6.32
2013
6.01
56.56
60.28
61.9
68.42
79.55
89.36
100.36
111.91
116.03
129.86
Table 3
RATIO OF GDP TO REVENUE AND % OF TAX TO GDP
particulars
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
GDP at
current
price(in
crore taka)
370710
415730
467500
535415
613111
685009
787590
Revenue
39200
44868
52542
60539
69382
79461
95188
Tax
31950
36175
42915
48012
56789
63955
79052
Revenue as
% of GDP
10.57
10.79
11.24
11.31
11.32
11.60
12.09
8.62
8.70
9.18
8.96
9.26
9.33
10.04
81.50
80.62
81.67
79.30
81.85
86.77
83.05
Tax as % of
GDP
Tax as a %
of revenue
42
Table -4
THE CONTRIBUTION OF DIRECT AND INDIRECT TAX
particulars
2005 -06
2006 -07
2007 -08
2008 -09
2009 -10
2010 -11
Total revenue
44868
52542
60539
69382
79461
95188
Tax revenue
36175
42915
48012
65789
63955
79052
%of tax to
revenue
80.63
81.68
89.31
81.85
80.48
83.05
Direct tax
7344
8915
11500
13604
17220
23541
% of direct tax to
total tax
20.30
20.77
23.95
23.95
26.92
29.78
Indirect tax
28831
34000
36512
43185
46735
55511
% of indirect tax to
total tax
89.30
89.23
76.05
76.05
73.08
70.21
43
Table-5
PERCENTAGE OF INCOME TAX TO TOTAL TAX
Particular
Income Tax
Tax revenue
Revenue
receipts
%of income
tax to total tax
% of income
tax to revenue
2005-06
6960
36175
44868
2006-07
8500
42915
52542
2007-08
11005
48012
60539
2008-09
13054
56789
69382
2009-10
16560
63955
79460
2010-11
22105
79052
95188
19.24
19.81
22.92
22.92
25.89
27.96
15.51
16.18
18.17
18.81
20.84
23.22
Table -6
PERCENTAGE OF VAT TO TOTAL TAX REVENUE
Particular
Total revenue
Tax revenue
Vat
%of vat to total
revenue
% of vat to total tax
2004-05
39200
31950
10605
O50-06
44868
36175
12398
06-07
52500
42915
14729
08-09
69382
56789
20249
09-10
79461
63955
22795
27.06
27.63
28.03
29.18
28.51
33.19
34.27
34.32
35.65
35.64
44
Chart 1
45
Chart 2
46
Chart 3