Budget for recession and recovery

Published in the Daily Star (15 June 2009)

budget for recession

Incidentally when the manifestos for National Election 2008 were being prepared, the world economy was already in recession and the election promises were linked with the recovery. This must have facilitated the budget to address the recession and election promises in chorus and with success.

The budget admits the challenges ahead forecasting a 5.5% GDP growth, but it also aims to change that conservative scenario by promoting investment, decentralisation and infrastructural development. The finance minister has received a mixed (though largely positive) response for various proposals. This article however underscores few uncertainties surrounding the budget proposals.

 

The policy paradox

Bangladesh’s economy has been an orphan without a long-term perspective plan, more like a vessel without a compass. The poverty reduction strategy paper (PRSP) failed to fill the gap of a medium or long-term plan, without which the development promises of annual budgets can easily get off course.

The finance minister has proposed that the PRSP will be pulled out by 2011, and be replaced by a five-year midterm plan for 2010-2015 and a long-term perspective plan for 2010-2021.

The minister also announced that the five-year plan will influence the annual budget objectives, while the current PRSP will affect the budget for the intervening period. While this will surely end the disappointing “policy-paradox,” this transition period, however, may affect this year’s budget proposals. Since both the new PRSP and the FYP is under preparation, how will this budget, which has already been announced, follow those yet to come as perspective plans?

Recycling black money
The finance minister made a moral compromise by offering a three-year amnesty to “recycle” (I have reservation calling it ‘whitening’) black money into the mainstream economy without any question. The decision came as a desperate attempt to stop capital flight and promote domestic investment.

In a time of global recession, such decisions could merit some justification if it was at all an effective approach. But earlier instances were hardy successful in stopping capital flight. While this is a huge disappointment for the real tax payers, the major problem of this year’s proposal is its duration. In the past, there was an uncertainty about the duration of the scheme. But now that the scheme is surely for the next three years, regular tax payers will be encouraged to evade 25% regular income tax during the next few years, and resort to the minimum 10% penalty under this scheme.

The operations of Central Intelligence Cell (of the National Board of Revenue) and Anti-Money Laundering Department (of the Bangladesh Bank) should be strengthened to press on the tax evaders, to recycle their money instantly and discourage future tax evasion.

Are we all Keynesians now?
At a time of recession, Keynes suggested an economic policy to increase the aggregate demand (e.g. through consumption, investment, and government purchases). No wonder big economies around the world are announcing big budgets and taking unprecedented investment programs. Bangladesh’s national budget for FY2009-10 seems to have targeted the Keynesian need for investment.

Admittedly, Bangladesh is a passive victim of the global recession and cannot blindly follow the steps of developed economies. However, the Keynes model can create an opportunity for Bangladesh to finally decentralise the economy.

In the proposed annual development program of Tk.305 billion, 22.1% has been allocated to the local government, 14% for the power-energy and 15.7% for communication (including roads, highways and waterways).

In addition, an Infrastructure Investment Fund of Tk.21 billion and an employment generation program for the hardcore poor have been announced. These programs can be used in building infrastructures at the local level, which in turn may assist decentralising the economy.

The double-trouble
The proposed budget has a twin-risk both in its earnings (i.e. deficit financing) and in its expenditure (for development program) plans.

William Vickrey, a Canadian professor of economics and Nobel Laureate, argued: “Budget deficits do not in themselves produce inflation, nor does a balanced budget assure a stable price level.” The budget aims to finance two-third of its Tk.340 billion deficits through foreign financing. Securing that money might become uncertain amid the global economic downturn. And poor management of deficit financing may endanger the whole purpose of a Keynesian budget by increasing inflation and reducing private investment.

Some expenditure programs, based on block allocations, also create uncertainties. The government should remain cautious about these allocations for social safety net programs, which often remains unused or gets wasted in corruption. In the words of Benjamin Franklin: “Beware of these little expenses; a small leak can sink a great ship.”

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