All our governments like to portray the passing of a “big” budget itself as an accomplishment. There was a time in our culture when we would say a person’s health has improved if they gained any weight. People know better now, and that goes for the budget too: We need to see if the weight gain is coming from muscle (productive sector) or from fat (unproductive sectors).
This year’s national budget shows both tendencies. Namely:
1. In the past one and a half decades, the government’s budget has increased almost seven folds and so too has the tax revenue. By comparison, the number of tax-payers has barely doubled. This disproportionate rise in tax revenue to tax base is a clear sign that more is being extracted from the few who do pay taxes already. And with this budget, things may be reaching a breaking point.
2. In addition to higher taxes, the private sector will also be hit hard by a ripple effect in loans: Bigger revenue means heavier government borrowing from banks, and thus higher interest rates for everyone. This will hurt not only those looking to set up industries and do business, but also consumers who wish to use credit, that is the biggest spenders.
3. The pressure on tax and credit are stemming from the government’s intention to spend more … way more. Let us see where the expenditures will be. This time, communication and power sectors dwarf others, and that is actually fine. Infrastructure is key to future and sustained growth and competitiveness.
Also, there is a big pay hike for government employees. This too is logical as we can never rein in corruption or attract better talents to public service without decent pay. Finally, there is a notable rise in defense spending.
While it is customary for our chatterati to carp about that, I personally think modernising our military is crucial. Taken separately all these expenses appear fine. The problem is that all these spending spikes are coming in the same year! They could and should have been sequenced more smartly over, say, the next three years.
4. It is also disappointing to see that the government is making no effort to cut back on wasteful expenses -- namely loss-making SOEs and excessive subsidies. Enterprises like Biman, the national airlines, are a relic of 70s era national egotism.
The national banks with their unending recapitalisations are not only a disgrace, but bordering on criminal. Just as risible are many sectors -- from jute to sugar mills -- where the government basically sustains corrupt cliques at public expense. One can argue for national control of strategically important assets like mines or railway, but why indulge the rest?
To increase expenditure in non-productive sectors by placing tax burden on the productive sectors is sadly regressive. We understand that bureaucrats have a big say, especially when it comes to the fine print, in devising our laws and our budget. But it is the politician’s job to keep the wily public servants in check.
Instead, this year the government has granted the civil servants a blank check, while extracting more from the tax-payers to fund the indulgence.
It may be too late, given the reality of how budgets are passed in our parliament, to do much or anything about the pay hikes or simultaneous increase in infrastructure and defense spending. But it is not too late at all to remove the most unfair taxes introduced in this budget, such as the 10% VAT on private education at all levels.
It is also not too late to start shutting down smaller offenders among the loss-making SOEs, even if we are not ready yet to move on big ones like Biman and the banks.
There was a time, not too long ago, when many of us, especially in the investing community, shouted ourselves hoarse with mantras like “roads, ports and power.” We are delighted to see the government make such infrastructure development a real priority, among many other progressive initiatives. But it was crucial that the development be smartly funded.
Similarly, it is fine to pay more to the civil servants we need. But we must at the same time end subsidies for SOEs whose cumulative losses could have built several Padma Bridges.
Make no mistake: A budget that taxes productive sectors at punishing rates, in part to indulge unproductive ones, is quite unlikely to deliver on the very growth it promises.