Abstract
Fiscal policy of
Bangladesh
basically comprises activities to ensure macroeconomic stability of the country. Fiscal policy of Bangladesh
is expansionary that causes large budget deficit. As a result, government of Bangladesh
follows reflationary fiscal stance- borrows money to overcome the budget
deficit. In the fiscal year 2009-2010, Bangladesh government estimated the
budget deficit of Tk. 343.58 billion of which Tk. 137.14 will come from
domestic sources and Tk. 173.25 will come from foreign sources. The main
reasons of budget deficit are tax avoidance of public and corruption in
government sector. However, present government is trying to
Introduction
1.1 Fiscal Policy: Fiscal Policy generally
refers to the use of taxation and government expenditure to regulate the
aggregate level of economic activity in a country. Fiscal policy is taken by
the government of a country.
1.2
Classification of
fiscal policy: Fiscal
policy has got two forms and by the help
of those forms the government regulates the fiscal activity in an economy.
.
1.2.1 Expansionary fiscal policy: A form
of fiscal policy in which an increase in government purchases, a decrease in
taxes, and an increase in transfer payments are used to correct the problems of
a business cycle contraction. The goal of expansionary fiscal policy is to
close a recessionary gap, stimulate the economy, and decrease the unemployment rate.
Expansionary fiscal policy is designed to stimulate the economy during or
anticipation of a business-cycle contraction. This is accomplished by
increasing aggregate expenditures and aggregate demand through an increase in
government spending or a decrease in taxes. Expansionary fiscal policy leads
to a larger government budget deficit or a smaller budget surplus. Expansionary fiscal policy is usually associated
with a budget deficit.
1.2.2 Contradictory fiscal policy: A form of fiscal policy in which a decrease in government
purchases, an increase in taxes, and a decrease in transfer payments are used
to correct the inflationary problems of a business-cycle expansion. The goal of contradictory fiscal policy is to close an inflationary gap, restrain the economy,
and decrease the inflation rate. Contradictory fiscal policy is designed to
restrain the economy during or anticipation of an inflation-inducing
business-cycle expansion. This is accomplished by decreasing aggregate
expenditures and aggregate demand through a decrease in government spending or
an increase in taxes. Contradictory fiscal policy leads to a smaller
government budget deficit or a larger budget surplus.
Fiscal policy in Bangladesh
Fiscal
policy in Bangladesh
basically comprises activities, which the country carries out to obtain and use
resources to provide services while ensuring optimum efficiency of the economic
units. The policy influences the behavior of economic forces through public
finance. Major objectives of the fiscal policy of Bangladesh are to ensure
macroeconomic stability of the country, promote economic growth, and develop a
mechanism for equitable distribution of income. The main tools to achieve these
objectives are variation in public revenue, variation in public expenditure,
and management of public debt. These are reflected in the budgetary operations
of the government, prepared and implemented on year-on-year basis.
History of Bangladesh
fiscal policy
In the initial
years of independence, the government of Bangladesh had to spend a large
amount of its resources in reconstruction and rehabilitation work. It had
negative public savings and limited private investment. Despite large inflows
of foreign aid, the increasingly
large financing gap became the main concern of the government. The situation
was further aggravated by frequent internal and external shocks. Under the
circumstances, government fiscal policies during 1970s and 1980s were largely
oriented at rehabilitating the war-torn economy as well as stabilizing it from
various shocks. This had gradually leaded to weak fiscal structure and poor
fiscal management. The tax structure was such that any increase in taxes due to
built-in consequences of economic growth was virtually not possible. This was
because of the fact that despite a moderate growth of the economy, income distribution was skewed, and had
been pushing more and more people below the poverty
line each year. As such, the proportion of population
with taxable surplus went down overtime. More than 80% of the total tax revenue
came from indirect taxes, amongst which taxes on imports contributed about 60%.
Since most imports were in the government sector and basic need-oriented, it
was hardly possible to increase import duty. Despite higher production costs,
prices of most public goods could not be rationalized due to socio - economic
reasons. As such, these were kept lower, which resulted in inadequate cost
recovery.
3.1 Taxation Policy of Bangladesh Government: Taxation one of the major sources of
public revenue to meet a country's revenue and development expenditures with a
view to accomplishing some economic and social objectives, such as
redistribution of income, price stabilization and discouraging harmful
consumption. It supplements other sources of public finance such as issuance of
currency notes and coins, charging for public goods and services and
borrowings. Bangladesh
inherited a system of taxation from its past British and Pakistani rulers. According
to Article 152(1) of the Constitution of Bangladesh, taxation includes the
imposition of any tax, rate, duty or impost, whether general, local or special,
and tax shall be construed accordingly. To develop manpower for efficient tax
administration, the government runs two training academies - BCS (Tax) Academy at
Dhaka for direct tax training and
Customs, Excise and Value Added Tax Training Academy
at Chittagong
for indirect tax training. The national
board of revenue (NBR) is the apex tax authority of Bangladesh and
it collects around 93% of total taxes or 76% of total public revenues. The NBR
portion of total taxes includes customs
duty, value added tax
(VAT), supplementary duty (SD), excise
duty, income tax, foreign travel tax, electricity duty, wealth tax ,
turnover tax (TT), air ticket tax, advertisement tax, gift tax and
miscellaneous insignificant taxes. Public revenue also comes from non-tax
receipts such as surplus of sector corporations, financial institutions,
railways, postal department, telegraph and telephone, judicial stamp, etc, and
these non-tax revenues represent around 19% of total revenues.
3.1.1
Tax structure of our country:
3.1.1.1 Direct Tax: Direct tax includes income tax, gift tax, land development tax, non-judicial stamp,
registration, immovable property tax, etc. Since direct taxes represent only
about 19% of total taxes. Of the direct taxes, around 69% come from income tax,
19% from non-judicial stamp, 5.7% from land revenue, 5.6% from registration and
balance from gift tax and other direct taxes.
3.1.1.2 Indirect Tax: Indirect tax includes customs duty,
excise duty, motor vehicle tax, VAT, SD, foreign travel tax, TT, electricity
duty, advertisement tax, etc. Tax-structure is heavily dependent on indirect
taxes. . Indirect taxes (representing 81% of total taxes), on the other hand,
are mainly import-dependent. Around 67% of indirect taxes are collected at
import stage by customs authorities as customs duty (38.0% of indirect tax or
30.7% of total tax), VAT (24.3% of indirect tax or 19.6% of total tax), and SD
(4.7% of indirect tax or 3.8% of total tax). Balance of indirect taxes
(representing around 26.64% of total taxes) include taxes collected on domestic
production, consumption or transactions such as VAT (11.4%), SD (11.6%), excise
duty (1.5%), foreign travel tax (0.7%), electricity duty (0.6%), motor vehicle
tax (0.7%), TT (0.03%), air ticket tax
(0.01%) and advertisement tax (0.001%).
3.2 Bangladesh
Government Expenditure: Bangladesh
government expenditure includes both the purchase of final goods and services,
or gross domestic product, and transfer payments. Bangladesh government expenditures
are used by the government sector to undertake key functions, such as national
defense and education etc. These expenditures are financed with a combination
of taxes and borrowing.
3.2.1 List of some major expenditure of our country: According to
the total allocation of expenditure of national budget of Bangladesh
under the fiscal policy are listed below.
ü
Subsidies
6 percent.
ü
Education
and IT 12 percent.
ü
Interest
payment 14 percent.
ü
Social
security and welfare 7 percent.
ü
Defense 5
percent.
ü
Health 6
percent.
ü
Agriculture
5 percent.
ü
Public
administration 14 percent.
ü
Local
government and rural development 5 percent.
ü
Transportation
and communication 6 percent.
ü
Public
and security 7 percent.
ü
Housing 1
percent.
ü
Industrial
and Economic state 1 percent.
ü
Energy
and power 4 percent.
ü
Culture
and religious affairs 1 percent.
ü
Pension 3
percent.
Issues related to budget deficit
Budget
deficit means a shortfall of tax revenue
from government spending. If the tax revenue is T and government spending is G,
then we can define budget deficit as T-G<0 a="" and="" another="" are="" as="" bangladesh="" behind="" billion.="" billion="" borrowing="" budget="" bureaucrats="" by="" caretaker="" cause="" chief="" come="" corruption.="" corruption="" country="" deficit.="" deficit="" different="" domestic="" don="" during="" employees.="" estimated="" eventually="" example="" expected="" finance="" for="" foreign="" from="" fy09-10="" gave="" give="" go="" goes="" government="" has="" high="" important="" improvement="" in="" include="" inflation="" is="" jail="" late="" leader="" leads="" lots="" meet="" minister="" ministers="" ministry="" money="" more="" most="" of="" on="" opposition="" or="" our="" out="" p="" party="" people="" powerful="" present="" prime="" punishment.="" rate.="" reason="" reasons="" remains="" rest="" same="" saw="" sector="" some="" sources.="" sources="" spend="" stand="" still.="" t="" tax.="" tax="" that="" the="" then="" there="" therefore="" they="" time="" tk137.14="" tk173.25="" tk343.58="" to="" want="" we="" when="" which="" will="" with="" world="">
4.1 Inflation in Bangladesh: In economics, inflation is a rise in the general level of prices of goods and
services in an economy over a period of time. When the price level rises, each
unit of currency buys fewer goods and services; consequently, annual inflation
is also erosion in the purchasing power of money – a loss of real value in the
internal medium of exchange and unit of account in the economy. A chief measure
of price inflation is the inflation rate, the annualized percentage change in a
general price index (normally the Consumer Price Index) over time. Although the
present situation of inflation in Bangladesh is not very good, it is
better then the previous year. The present scenario of inflation in Bangladesh
is given below:
Year
|
Inflation
rate (consumer prices)
|
Rank
|
Percent
Change
|
Date of
Information
|
2003
|
3.10 %
|
117
|
2002 est.
|
|
2004
|
5.60 %
|
67
|
80.65 %
|
2003 est.
|
2005
|
6.00 %
|
160
|
7.14 %
|
2004 est.
|
2006
|
7.00 %
|
160
|
16.67 %
|
2005 est.
|
2007
|
7.20 %
|
163
|
2.86 %
|
2006 est.
|
2008
|
9.10 %
|
184
|
26.39 %
|
2007 est.
|
2009
|
8.90 %
|
137
|
-2.20 %
|
2008 est.
|
2010
|
5.10 %
|
142
|
-42.70 %
|
2009 est.
|
Stance of Bangladesh fiscal policy
The fiscal stance is a term that is used to describe whether
fiscal policy is being used to actively
expand demand and output in the economy (a reflationary or expansionary fiscal stance)
or conversely to take demand out of the circular flow (a deflationary fiscal stance).
A neutral fiscal stance might be shown if the government runs
with a balanced budget where government spending is equal to tax revenues. Adjusting
for where the economy is in the economic cycle, a neutral fiscal stance means
that policy has no impact on the level of economic activity.
A reflationary fiscal stance happens
when the government is running a large deficit budget (i.e. G>T). Loosening
the fiscal stance means the government borrows money to inject funds into the
economy so as to increase the level of aggregate demand and economic activity.
A deflationary fiscal stance happens
when the government runs a budget surplus (i.e. G
From budget scenario it is seen that government of Bangladesh is
running a large budget deficit (i.e. G>T). As a result, the government
borrows money to inject funds into the economy so as to increase the level of
aggregate demand and economic activity. So it can be said that the stance of Bangladesh
fiscal policy is reflationary.
The national income multiplier effect
The multiplier
effect or spending multiplier is
the idea that an initial amount of spending (usually by the government) leads
to increased consumption spending and so results in an
increase in national income greater than the initial amount
of spending. In other words, an initial change in aggregate
demand causes a change in aggregate output for the economy that is a
multiple of the initial change.
The change in government expenditure of Bangladesh 2010 is
influenced by a national income multiplier. If multiplier is 5 then income will
be 5 times of government expenditure. If income rises, then interest rate or
opportunity cost of holding money will fall. As a result, investment on
business and residence will increase. Because of increase in investment
aggregate demand will increase and be 5 times of government expenditure. Because
of unavailable information, national income multiplier is assumed 5.
Conclusion
Bangladesh
fiscal policy is expansionary which causes large budget deficit. For that,
government takes reflationary stance of fiscal policy. The reasons behind this
budget deficit are tax avoidance of citizens, corruption in government sector,
high inflation rate and global recession.
As a result, government should take all the necessary steps to remove
these negative aspects. Otherwise, Bangladesh economy will fall into
great danger.
Bibliography
http://bangladeshbudgetwatch.wordpress.com/2009/08/31/gdp-growth-target-may-be-raised
http://www.indexmundi.com › Bangladesh › Economy
http://www.bangladesh.gov.bd
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