Budget under the microscope

The Finance Minister presents the budget to parliament. PHOTO: STAR

The finance minister made a U-turn from his previous position against corrupted government and non-government officials, politicians, businessmen, smugglers, loan defaulters, etc. There is no consistency at all between the money laundering law of Bangladesh Bank and the budgetary provision of whitening black money.

The black money holders are no longer required to reveal sources of their income and can whiten black money up to June 30, 2006 by paying only a 7.5 percent income tax. The finance minister took the sole responsibility for the authorisation of the scheme that officially encouraged corruption through the budget. Although the finance minister admits that he can be blamed for introducing the unfair money whitening scheme, he protects himself saying that he was under pressure (political, business, or electoral?) from certain corners.

Further, he defends the tax-amnesty to the black money holders on the ground of the overall social and economic situation of the country. This is probably the most ridiculous explanation and illogical exoneration ever uttered by a finance minister to apparently protect the smugglers, corrupted officials, politicians, and businessmen. The National Board of Revenue (NBR) is expecting to generate an additional revenue worth of Tk. 4-5 billion in next year from the money-whitening scheme.

The politicisation and patronisation of black money will bring more corruption and probably more funding for the political parties in the next general election. Instead of combating the corrupt, the finance minister rather encourages them to carry out more corruption. Everyone knows the sources and channels of black money. Is it too difficult for the finance minister or government to bring corrupt people to justice? The answer probably is yes, because then the government runs the risk of putting more than 90 percent of the administration and politicians in jail.

All agree that the existing laws are inadequate to curb corruption and financial irregularities in Bangladesh. Most agree that the corruption can only be eradicated with strong political will, support, and commitment. Some have also expressed their resentment about the image crisis of Bangladesh as the most corrupt nation in the world. A few have asked the finance minister to compute the total amount of black money and the percentage that will be whitened.

One of the leading economists Professor Abul Barakat estimated that 75 percent of Tk. 2000 billion foreign loans and grants Bangladesh has received since 1971 is simply embezzled (on average more than Tk. 44 billion a year). He also showed that the annual transactions of bribe money in Bangladesh is equivalent to Tk. 160 billion (of which Tk. 15 million of bribe money alone is transacted daily at Chittagong Port) and annual flow of black money is nearly Tk. 700 billion. If NBR expects to generate Tk. 4-5 billion as tax-revenue from money whitening scheme, then it seems that less than 10 percent of the total flows of black money will be whitened. The question remains about the status of the rest of the black money that will not be whitened.

Corruption in Bangladesh can be considered a vicious circle. Corruption, black money, and terrorism go hand in hand. It is hard to believe that someone can become an MP in Bangladesh without spending millions of black money in the national election. It becomes more difficult to believe that someone can be the head of an autonomous, semi-autonomous, or government sector without his/her political affiliation and/or patronisation of black economy. When a university lecturer or a civil service officer is appointed on the basis of his/her political affiliation, everyone can foresee the devastating future of the country. Thus, the people of Bangladesh should not be surprised when the finance minister officially recognises and patronises the black money holders.

The budget is not only a political agenda of a government but also a moral document as it reflects moral values and priorities of a country. What actually makes a good budget? The most important component of a good budget is to project and estimate accurate level of income and expenditure of the country. Unlike a personal or family budget, a national budget rather categorises its expenditure and cost sides first and then decides to earn accordingly. It does not necessarily imply that the government can make expenses whatever, wherever, and whenever it wishes. The government of a country possesses powerful legal and economic tools (such as fiscal and monetary policies) to generate income and stabilise the economy. The ultimate objective of a budget is to obtain and sustain a pre-targeted economic growth and stability.

The budget kept provisions for higher non-development expenditures and incremental government borrowing from banks (probably to meet the unproductive expenses to influence the results of next general election). This will simply put inflationary pressures on the economy in subsequent years. Inflation is an economy-wide rise in the general price level and measured by the Consumer Price Index (CPI). The CPI measures and compares the costs of the same commodity bundles for today and past years. There is no easy and clear answer for an economist to explain what exactly causes inflation. Although there are debates on the precise and exact definition of inflation, everyone agrees that inflation is a situation when too many Taka are chasing too few goods. Thus, increases in government expenditures in unproductive sectors (for election purposes) without any long run directions and vision will simply increase the general price level.

No employment generation scheme is proposed in the budget except for some of the so-called poverty reduction programmes which have been extended to attract poor people (or poor voters?). The finance minister considers it as a development (or election?) budget because different social security programmes for the poor and distressed people have been proposed. However, an allocation of Tk. 46 billion for poverty reduction and employment generation does not contain any details of how and for whom the money will be spent. The agricultural subsidy has been doubled. Interest rate is reduced for some of the agricultural credit. The education and technology sectors got the highest allocation. The economic growth rate is expected to be approximately 6 percent. Unfortunately there are no major surprises in fiscal policy. So it's not clear how the government will raise additional incomes to match additional expenditures allocated for development budget.

The additional tax on Subscriber Identity Module (SIM) card (although reduced from the proposed Tk 1,200 to Tk. 900) is expected to undermine investment in mobile phone industry. Five mobile phone operators in Bangladesh currently have 5.4 million subscribers. It was expected that the subscription would increase to 10 million by the end of 2005 and 20 million by the end of 2006. According to a recent data of the UN telecoms watchdog, only 2 among 100 people have access to telecom facility in Bangladesh.

However, 140 million people have made Bangladesh a colossal market for telecommunication business. Several new telecom companies are supposed to expand facilities in Bangladesh in near future. The introduction of Voice over IP (VoIP) and submarine cable connection to global information super highway will reduce not only Bangladesh's reliance on satellite-based telecom but also the costs of telecom services. However, instead of combating corruption and smuggling, the government has taken a telecom policy that will be injurious to the future infrastructural development of this service sector.

The budget has raised the ceiling of zero tax on income to Tk. 120,000 from Tk. 100,000. An increase in ceiling of tax-exempt income may help individual to combat part of the income that they will squander due to (expected) escalating inflation. However, the minimum payable tax has been raised to Tk. 1,800 from its current level of Tk. 1,500. The highest income tax rate (25 percent) is imposed on individuals who legally earn Tk. 1.02 millions or more. Ironically, the black money holders will pay only a 7.5 percent tax as opposed to a 10-25 percent tax imposed on income above Tk. 120,000. Unfortunately, these tax-incentives will be effective from next fiscal year except for the one bestowed to the black money holders.

There were also some good proposals among the worst. Tax holidays for some 18 sectors have been extended to the end of fiscal year 2007-08 provided they invest 10 percent of their profit each year in the share markets. The other authoritative fiscal measures are the following: a 10 percent tax on interest or profit of fixed deposits in non-banking and deposit-collecting financial institutions; 0.25 percent tax on export earnings of knitwear and readymade garments exporters; 10 percent tax reduction for computer software business up to June 30, 2008, etc.

A reduction of rebate (from 2 percent to 1 percent) for banks burdened with defaulted loans is expected to generate additional revenue of Tk. 2.5 billion per year.

The budget conveyed some positive news to the capital markets. The government has brought the stock dealers and brokers under taxation by imposing 0.15 percent tax on the transaction value of shares. The budget also proposes to withdraw 10 percent dividend distribution tax on listed companies so that they can offer and distribute more dividends to shareholders. However, imposing 10 percent advance income tax on investors' dividend income offsets the gain from this withdrawal. But the prevailing 20 percent advance income tax on interest receipts of government securities and bonds was reduced to 10 percent. The government is also considering offloading the its shares from various agencies to the private sectors. The tax rate for listed company remains at 30 percent. Tax on non-listed companies (except banks and financial institutions for which the corporate tax rate remains 45 percent) has been increased from 37.5 percent to 40 percent. The corporate tax differential between listed and non-listed companies has been raised by 10 percent to expand the capital markets. However, this will be applicable from 2006-07 fiscal year. The government has been encouraging companies to go public to establish a more transparent capital market (but unfortunately using the black money of the corrupt people)!

It is high time to speak indubitably that the passed budget lacks moral vision. It has no categorical directions regarding equitable income distribution and long-run development. The budget asks for sacrifices mostly from the middle income and poor people. The moral outrage comes from the fact that the priorities set in the national budget appear to be the priorities of those who have become rich by corruption. The benefits of most of the priorities set in the budget will go directly to the corrupted politicians and the trickle down effect will give some temporary relief to poor voters.

Ironically, it is the vast majority of people (i.e. middle income people) who will bear the economic, social, and psychological burden of the budgetary imbalances.

The author is a Senior Lecturer of Finance at Auckland University of Technology, New Zealand.