Financing the budget for 2013-14: the enhanced ‘state’ factor

Blog, Op-ed

This Op-ed was published in on 7th July 2013

Author: Md. Ashiq Iqbal

The honourable Finance Minister has just placed the budget for 2013-14 fiscal year before the parliament. An analysis of the budget can take different routes. One may approach it with a human rights perspective, one may try to analyze its potential sectoral impacts, one could also view it from a poverty alleviation angel and so on. However, the budget being a balance-sheet of the government’s income and expenditure accounts, probably the most basic approach is to analyze it from the perspective of its financial soundness, which is what this article intends to do.

The new budget shows an estimated expenditure of Tk 2,22,450 crore in the next fiscal year. This is nothing special given the fact that it is about Tk 31,000 crore more than the last year’s budget and we have seen similar increases before. At the same time, this increase in expenditure is not going to impact on budget deficit that much, as indicated by around Tk 2,000 crore increase in the overall deficit in the new budget. What this means is that we are anticipating a growth in income (revenue earnings) impressive enough to offset the increase in expenditure almost fully. The budget shows around 20% growth in income and 16% increase in expenditure. Again, this figure is nothing special as similar (and even higher) income growth has been achieved in the recent years. The budget for 2012-13 fiscal year also targeted 18% growth in income. However, one may ask how and why the government is expecting a trend growth in income when imports are falling and private investment is stagnating. As a note, revenue collection from imports still constitutes a significant share in total public income. From the revenue estimates in the new budget, the government is also not expecting import duties to contribute in its income growth. Only 0.4% of the additional revenue (compared to the budget for 2012-13) is expected to come from import duties with a minuscule growth of 0.7%. Then the question that arise is, are we expecting a structural shift in revenue earnings in the coming year? If so, in which direction? Who’s going to contribute? Indeed, as detailed revenue targets reveal, the budget expects an extraordinary shift.

The government’s income or revenue earnings come mostly from five heads – taxes on income and profit (income tax), VAT (on local business and at the import stage), import duties, supplementary duties and non-tax revenue sources (profit from different government services). As mentioned earlier, import is not going to contribute in the anticipated income growth. So is not the revenue earned from supplementary duties (only about 3%). Of the remaining three heads, non-tax revenue is going to contribute in a significant manner. While this head has been struggling in the recent past to post any growth at all (only 1% growth target was there in 2012-13 budget), the budget for the next year expects it to grow by about 15%! Therefore, over 12% of the additional revenue in 2013-14 fiscal year is expected to come from profits emanating from enhanced efficiency in public service delivery!

As for VAT, which is the single largest (about 30%) income source of the government, this revenue head is expected in the budget to contribute over 34% in the additional income next year. Two things about VAT collection are of importance here. Firstly, almost 40% of VAT comes at the import stage and we noted earlier that import is not expected to grow in the coming fiscal year. Therefore, it is likely that the growth (of over 23%) in VAT collection has been anticipated mostly at the local stage. Secondly, increase in VAT has been highly dependent on bringing untapped business activities within its coverage in the past and ample opportunities to do so remains. As such, the contribution expected out of VAT will again be dependent on the government’s performance in tapping more businesses.

The last remaining contributor is income tax. It is to be noted that revenues from income tax has been growing at an impressive pace during the recent years. But the new target of an almost 37% growth in this head will take it to a new height, contributing almost 47% of the additional income in 2013-14 fiscal year. At the same time, like VAT, growth in income tax will also be primarily depending on bringing in more tax-eligible people/companies in the tax net; here too, one needs to note that plenty of opportunities remain. However, being able to do so will once again hinge on the performance of the government and its mechanism which is, in this case, the NBR.

Bringing it altogether, to a significant part, 80% to 90% of the expected increase in income in 2013-14 will rely on improved governance efficiency! Now referring back to the concern of financial soundness of the budget, one could apprehend that there is a fair bit of risk factor involved. After all, improving governance efficiency has remained a central concern in the development discourse of the country. But risky or not, it is for sure that successful implementation of the budget will depend more on performance of the government rather than that of the economy.

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