Circling the Square What is the golden ratio for Budget 21? – The Financial Express

Debapriya Bhattacharya | Published: May 28, 2020 21:56:58 | Updated: May 28, 2020 22:04:59

As announcement of the national budget for the fiscal year 2020-21 (FY21) draws close, my transcendental thought process goes haywire trying to figure out how this document is going to square the circle!

Our childhood learning of Euclidian geometry reminds us that the Greek geometers in the 4th century BC developed three-dimensional thinking. One of the problems that Hippocrates of Chios posed was, "can you construct a square having the same area as a given circle" with a finite number of steps and with only two instruments? Since then, this proposition has often been used as a metaphor for trying to do the impossible. The great poet Dante compares squaring the circle to his own inability to comprehend Paradise. However, subsequent advancement of mathematics, fueled among others by the illustrious Srinivasa Ramanujan, did find an approach to it through derivation of a "Golden Ratio." More on this later.

It is a severe understatement when one says that formulating the Bangladesh's budget for the next one year-while the stressed economy is reeling under growing, yet uncertain, devastating impact of the Covid-19 (C19) pandemic-will be a "challenging" exercise. For me, it is the closest to the mentioned impossibility theorem!

To my mind, the upcoming budget will have to "circle a square," i.e. reverse of squaring a circle. Through a circular causation, it will have to link up at least four linear segments of the task at hand. Let me first lay out the "four angles" of the square that I have in my mind.

FIRST, HOW TO LINK SHORT-TERM PERSPECTIVES TO MID-TERM RECOVERY?: The government has decided to stick to the routine and go for the annual budget as a regular event. This may be interpreted as a political signal indicating that everything is under control, and no need to deviate from the "business as usual" practice. However, this is being done when there is no reliable projection regarding how the pandemic curve with all its consequences will play out in the coming weeks. This creates the problem of not having a dependable benchmark based on a robust assessment of the damages done to different parts of the economy and the different segments of the society by the still unfolding scourge. Thus, the year-closing projected readings of macroeconomic variables for the Budget21 will remain under suspicion.

It is well-recognised by now that for Bangladesh economy to recover and rebound from the debilitating impact of C19 will take a couple of years, to say the least. So, the mid-term macroeconomic framework for upcoming three years, which usually accompanies the annual budget, will be on extremely shaky grounds because of the above.

Moreover, under normal circumstances, the budget for FY21 would have been the first year of the Eighth Five Year Plan (8FYP, 2021-25) of the country. Arguably, the 8FYP now has to be fundamentally rearticulated in view of the damages done by the pandemic, which is yet to be estimated comprehensively. Thus, we are yet to have any clue regarding the preparedness of the 8FYP document to provide operative guidance to the upcoming national budget.

Finally, the country has aligned itself with the global agenda (2015-30) espousing the Sustainable Development Goals (SDGs) with the explicit commitment to "leave no one behind." It is obvious, the ongoing pandemic is hurting the traditionally left behind groups and communities in Bangladesh more than the others. One wonders, how the budget for FY21 will bond with SDGs priorities for Bangladesh during the United Nations' Decade of Action (2020-30).

In the absence of a realistic assessment of the impact of the pandemic, without a credible three-year macroeconomic framework and with an incomplete five-year planning exercise, the annual budget will be seriously handicapped in linking short-term emergency measures with mid-term rebound and recovery strategy, with an eye on those who are left behind. It is to be seen how the best of the intentions of the budget-framers take us beyond rhetoric in this regard.

SECOND, WHAT ARE THE GROWTH-EQUITY TRADE-OFFS TO BE MADE?: It is no secret that the economic growth story is bitingly embedded in the development narrative of Bangladesh. In the recent past, however, independent sources have raised issues regarding the serious lack of consistency between GDP growth figures and related performance indicators of the economy.

It has now been empirically established that, parallel to robust GDP growth over the last decade, economic inequalities have not only deepened, but have also accelerated. In fact, income inequality has grown faster than consumption inequality, and asset inequality has grown faster than income inequality. The rate of poverty reduction has also slowed down in the elapsed decade. Indeed, Bangladesh has the dubious distinction of being the country, where rich is being produced faster than anywhere else in the world. Concurrently we have been labelled as a country which is "least committed" to reducing the rich-poor gap.

The C19 pandemic is definitely going to accentuate the pre-existing structural disparities within the country, but also create new vulnerabilities for certain groups of people. For example, the lower segment of the middle class as well as a large part of those employed in the informal sectors are emerging in the country as the nouveau-pauvre.

In view of the above, Budget21 will be scrutinised against the extent to which it can overcome economic growth paranoia to give way to distributive fiscal policies. As is known, in developing economies like ours, fiscal policies are more potent than monetary policies; while within the former, public expenditures are more powerful than the taxation measures. Till date, the government has front-loaded its C19-related stimulus packages with monetary policy measures; the upcoming budget will provide the government an exclusive opportunity to undertake inclusive fiscal measures as well.

Currently, there is limited flexibility to reorder priorities within the revenue as well as the development budget components. At the margin, some additional funds may be allocated to certain sectors such as health and agriculture. Yet a number of innovative and redistributive fiscal measures could have been designed, such as allocation of the estimated savings, on account of fuel import at very low global price, to the health sector. In fact, the substantial subsidy kitty (more than Tk. 30,000 crore) has to be revisited taking note of the current priorities. It would be quite reasonable to expect that the huge subsidy given to the rental power plants, largely a patronage distribution, is to be redirected towards expanding the safety net programmes based on cash transfers to the newly unemployed.

Similarly, within the tax measures, with a view to increasing disposable income in the hands of the low-paid wage-earners, the minimum taxable income level needs to be enhanced from Tk. 2.5 lakh to Tk. 3.5 lakh, while the minimum personal income tax may be lowered to 5.0 per cent, with the highest rate being 15.0 percent (instead of 10.0 and 20.0 per cent, respectively). From revenue perspectives, there is little rationale for decreasing the corporate tax rates, particularly for the commercial schedule banks. One will observe with great vigilance that the pandemic-related adversities are not used as an excuse to provide discriminating and discretionary tax benefit to unearned and undeclared monies. Rather one would welcome radical measures to expand the tax base and plug the illegal financial outflows.

At the same time, due to the subsidence of the exports and remittance incomes, it would be a win-win strategy if the upcoming budget extends helpful supports to the domestic market-oriented productions and services with a view to having employment-oriented productivity growth. This approach would call for a comparative review of the effective rate of protection accorded to different industrial activities in the country.

Indeed, to what extent the budget is promoting inclusive distribution of fiscal resources can become transparent, if the finance minister in his speech explicitly mentions the empirical outcomes of his fiscal measures and who benefit from them. This was, in fact, the general practice during the tenures of the late lamented Shah AMS Kibria and Saifur Rahman.

THIRD, HOW DO YOU DESIGN A CREDIBLE FINANCING PLAN?: It is by now well-agreed that Bangladesh will have to push into more resources into the economy to cushion the impending slump triggered by C19 within the country as well as globally. The central bank has already initiated a number of policy and procedural measures to increase liquidity in the economy. It is now turn of the national budget to coalesce a set of budgetary measures to give substance to the counter-cyclical macroeconomic stance. This macroeconomic stance will critically hinge on the ability to announce a credible fiscal framework for the next fiscal year. Regrettably, the country's record in this regard, particularly in the area of resource mobilisation, is not very inspiring.

The finance ministry has always preferred to project its revenue target based on the revised budget figures of the outgoing year (instead of realistically projected actual collection). This resulted into imposing unrealistic collection figure on the National Board of Revenue (NBR). In order to balance the expenditure side, including the Annual Development Programme (ADP), the revenue targets (along with that of the non-NBR collections) are often enhanced further. This has led to secular increase of the gap between actual off-take by the NBR and its annual target. It has been estimated that such shortfall in the outgoing fiscal year would be around Tk. 100,000, which is more than a quarter of its target. Incapability to use external aid, particularly project loan, aggravated the resource situation. Knowing full well about the water in the target, the fiscal planners may have regularly banked on the possibility that the full bundle of public expenditures will not be delivered, thus demand on resources will remain manageable. Accordingly, the fiscal deficit figure till date has remained modest-at around 5.0 per cent of the GDP.

The second order problem of the fiscal framework lies in the targets set for financing of the programmed deficit. Shortfall in foreign aid utilisation resulted into heavy borrowing from the domestic sources-earlier through sale of costly National Saving Deposit (NSD) certificates, and now from the liquidity-starved fragile banking sector. In the outgoing fiscal year (till February 2020), the government has resorted to borrowing from the banking sector to the extent of about 200 percent of its net budget deficit (as against a target of about 55.0 per cent).

It may be safely assumed that the budget deficit figure for FY21 will be higher than the trend rate. A large part of the incremental deficit has to be underwritten by accessing new sources of external finance, including budgetary support. However, if that derived estimate is not based on reliable income-expenditure figures, then the whole fiscal framework will suffer from credibility gap, subsequently weakening the strength of other policy pronouncements.

FOURTH, WHAT ARE THE MEASURES FOR ENHANCING THE DELIVERY CAPACITY?: Capacity deficit affecting full and faithful implementation of its fiscal commitments had been the Achilles' heel of Bangladesh's budgetary programmes. Chronic delivery problems, underpinning the public financial management system, also undermined the quality of spending of the government's outlays. Years of neglect in undertaking structural reforms in the areas ranging from tax administration, ADP management, debt and capital markets to local government, public administration and deployment of social accountability tools has inhibited scope of the government to deliver its declared commitments. The C19 pandemic has brutally exposed these institutional weaknesses, as the government struggled to provide health and livelihood sustenance to its citizens. Learning from the gruelling experience, will the government initiate a series of reform measures to deal with C19 and thereafter more competently?

Accordingly, Budget21 has to come with a well-thought-out implementation plan, desirably with a set of time-bound interventions indicating the authorities responsible for them. Understandably, the suggested approach has to build on a "whole of the government," if not a "whole of the society" exercise, by including the non-government development organisations in dealing with the pandemic aftermath. A run-of-the-mill posture will hardly generate confidence in deliverability of the annual budget, even with its perceived drawbacks.

THE GOLDEN RATIO: So, will the Budget21 be able to capture the space located within the four stated angles with a dynamic causation? Great minds over the centuries have deduced that one may not fully capture the exact space of a circle in a square, but may come very close to it. In order to do that, one would need to know the "Golden Ratio"-usually portrayed by the Greek alphabet phi-of the task in hand. The Egyptians deployed the Golden Ratio while building the Pyramid, Da Vinci adopted it while painting Mona Lisa.

What would constitute the Golden Ratio of Bangladesh's Budget21? To my mind, the two wedges to define that ratio will be empirical robustness of the fiscal framework and reform disposition of the implementation plan. These two may unleash a virtuous causation by circling four corners of the square-embodying the core challenges of the upcoming national budget.

Dr Debapriya Bhattacharya is a Distinguished Fellow at the Centre for Policy Dialogue (CPD). deb.bhattacharya@cpd.org.bd

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Circling the Square What is the golden ratio for Budget 21? - The Financial Express