This budget should shift the focus from channeling resources from the conventional sectors like physical infrastructure and energy to social sectors like health, education, social protection while not losing focus from employment generation.
There is no denying the fact that, amidst the crisis of Covid-19, the challenges of the upcoming budget of 2020-21 is unprecedented. The dual challenges to revive the economy and protect the livelihoods of millions on one hand and to save the lives and secure the health of its citizens on the other hand has made the task more complex. Against this backdrop, budget 2020-21 must not follow the business as usual framework and is required to go beyond conventional norms while setting the priorities right. In particular, this budget should shift the focus from channeling resources from the conventional sectors like physical infrastructure and energy to social sectors like health, education, social protection while not losing focus from employment generation.
With less than one percent of GDP being allocated to health sector, Bangladesh have one of the highest (66%) out of pocket spending on health expenditure. However, given the limited capacity of health sector, in addition to raising health expenditure to GDP ratio to at least 2.5% from less than 1%, policy directions are needed for capacity building. Expansion of infrastructural facilities along with training of health professionals, securing necessary medical equipment, expansion of testing/screening facilities are important. However, while focusing on immediate service delivery we must not lose sight of the provision of non-Covid-19 facilities and should consistently increase health expenditure while maintaining quality in upcoming years as well.
The next priority should be that of social safety net given this pandemic. If we exclude pension and school stipend programmes, the country spends around 1.56% of GDP in social safety net (while including these two components it stands around 2.54% of GDP), which is inadequate even if we do not consider the strain on livelihood due to Covid-19. Given the crisis of Covid-19, we require a massive expansion of social safety net programmes under budgetary allocations and need to raise it to around 5% of GDP. In this connection, it is extremely important to incorporate the 'new poor'- those who have fallen below the poverty line due to economic shock of Covid-19. Based on the data of Household Income and Expenditure Survey 2016, preliminary findings have shown that, after Covid-19, head count poverty rate could rise to as high as 35.6% from the present 20% (author's own estimates from an ongoing research). Given the new poverty scenario, it is crucial that the government make a list backed with NID which includes both groups of people. Identification is crucial in this context and self claimant system can be introduced. In case of the type of safety net measures, in addition to the conventional methods, a mixture of cash and kind transfer scheme have already been initiated-the effectiveness of such incentives depends critically on ensuring transparency in the distribution process. From this budget, the government should also take immediate interventions to operationalise National Social Safety Net Strategy (NSSS), which is a comprehensive measure of providing safety net coverage to a larger proportion of population.
With disrupted international trade and domestic supply chain, importance of agriculture sector is higher than ever before. For the last five years, the proportion of agriculture budget to total allocation has reduced and as of 2018-19, it stood at around only 5-6%. With relatively lesser health risk involved in agriculture, timely steps taken by the government has taken care of the shortages of agriculture labourers during harvesting. It is important that, in this budget, the government allocate resources and provide directions for smooth operation of the supply chain and for stabilising the price level and to this end, increasing the allocation to at least 10% of budget should be considered. In addition, greater emphasis should be given on mechanisation, expansion of storage capacity, strengthening local level marketing mechanisms and facilitating e-commerce. In order to support the farmers as well as the residents at coastal areas from the loss due to cyclone Amphan, special allocation is needed as well. In the stimulus package announced by the government, 5,000 crore taka has been allotted to the farmers for loan with 4% interest rate. As suggested by South Asian Network on Economic Modelling (Sanem), this can be considered to be provided at even zero interest rate.
Irrespective of Covid-19 crisis, human capital development should be the priority for long-term development of the country. In this context, the emphasis should be in enhancing the quality of education at all levels while focusing on improving analytical and creative skills of the children at primary and secondary stage and linking education to knowledge creation while generating employment at tertiary level. Budgetary allocation must be raised from the existing 2.1% of GDP to its double i.e. to 4.5% of GDP while focusing on training of teaching staffs, curriculum development, securing practical equipment, modernising computer and science labs, quality control at private institutions etc. Covid-19 in this context has highlighted the importance of digitalisation of education. Against the backdrop of Covid-19 and with a view to prepare our students for future challenges of employment, greater emphasis is needed to increase budget in ICT education as well.
During this crisis situation, in addition to providing health facilities and ensuring food supply, it is critical to revive the economy through job creation. With the slowing down of economy, stimulating private sector investment might take some time, thus the government in this budget should one hand provide incentives to encourage the private investors and on the other to encourage job creation through small scale enterprises. As for the latter, a separate fund for micro and small scale entrepreneurs should be allocated which will provide credit at low rate of interest with flexible terms and condition for at least one year. Within this facility, special provision of funds for female entrepreneurs and youths should be made as well. In order to facilitate the new entrepreneurs or the existing ones without proper documentation for availing such funds, self-claim system, sector/area specific listing can be initiated and group-based lending can be encouraged. In 2019-20 budget, a provision of 100 crore taka for the youths as startup capital was given, which should be increased to at least 250 crore taka in the coming budget. In addition, in order to encourage small scale self-employment activities, tax rebates at different stages of business activities and on import costs of raw materials should be considered. Besides, the government can also consider keeping the small businesses below a threshold level of profit margin (e.g. 5 lakh taka) out of the tax net so that they can reinvest the profit next year. As for the export oriented businesses, primary objective of the government should be to provide incentive for greater diversification and to encourage new entrepreneurs.
In the context of Bangladesh, though in recent years the budget deficit is kept at 5% of GDP, this year the government may need to consider a rise of deficit to even 8%. In this context, the key is to effectively design the financing mechanisms. This year the main source of funding should be the external sources and the government has already sought 4.5 billion USD from the development partners. If possible, the government may re-consider the possibility of availing the temporary debt service suspension facility of G20 countries. In addition to securing loans from the development partners as part of foreign financing, this year despite of negative consequences on overall macro management and private investment, the government needs to secure bulk of its resources from bank and non-bank sources. In order to accommodate the additional expenditure due to Covid-19, it is extremely important to cut down unnecessary expenses in both annual development programmes as well as in operating expenses. With limited scope of revenue mobilisation, maintaining austerity measures and setting priorities in selecting new projects and cutting down non-essential administrative expenses e.g. expenses for training, travelling, hospitality, bonus, etc. can ease the financing requirement. It should be kept in mind that, the government can also utilise the unused cash incentives for RMG (1% incentive) and remittances (2% incentive) announced in FY20 budget and can utilise it in the upcoming budget.
As for revenue mobilisation, with an extremely low tax base, Covid-19 has further limited the scope. Despite the widely accepted importance of direct taxes, this year given the pandemic, the government might focus mostly on indirect taxation, e.g. VAT and customs. In the pre-budget discussion of the government, a revenue collection target of Tk3.95 lakh crore has been set where around 70% of the revenue target of NBR is expected to come from VAT, import duty and other indirect taxes. Given the complexity of tax collection due to this pandemic, it is desirable that the upcoming budget continues the VAT structure proposed in FY20 budget while emphasising on automation of the system. From a micro point of view, in order to facilitate online based business activities, tax-VAT rebates should be considered. It is essential that the government reduces taxes on both raw materials and finished medical products in the budget considering treatment of both Covid and non-Covid patients. In a different note, tobacco taxation should be modified to discourage tobacco consumption and in this regard, reducing the number of slabs can help reduce plausible tax evasion. One avenue for revenue mobilisation could be through well thought wealth and property taxation, which can also help take care of income inequity. Regarding the tax free income threshold, with already low tax base, it would not be wise to make significant changes. The government can however consider the feasibility of changing the general threshold from 2.5 lakh to 3.0 lakh and for women and senior citizens from 3.0 lakh to 3.5 lakh while keeping the income tax slabs at 10, 15 and 20 percent respectively. Finally, with a view to efficiently utilise the limited resources, it is essential that the government introduces an effective monitoring and evaluation mechanism of annual budget and based on its findings make necessary steps for better implementation.
Dr Sayema Haque Bidisha is a professor in the Department of Economics of the University of Dhaka