The FY 27 budget is penned to be Bangladesh's largest since independence and it is built on an ambitious promise: A welfare state. The uncomfortable reality is that without the fiscal and institutional foundations to support it, that promise could leave the poor worse off than before.
Bangladesh is experiencing increasing inequality and is simultaneously going through economic distress. Bangladesh should embrace the welfare state vision, but only through a phased, targeted approach. Universal coverage, without the revenue base and governance to support it, might just create a trap.
By definition, a welfare state offers benefits to all its citizens. It does not discriminate between rich and poor when it comes to health, education, housing.
But when the state lacks the financial capability and institutional readiness to achieve universal coverage, the perils offset the benefit.
To understand, let us take the case of out-of-pocket (OOP) health expenditure in Bangladesh.
As per WHO, in 2021, OOP health expenditure in Bangladesh stood at a staggering 73% which is much higher than that of India (47.1%), Maldives (17%), Pakistan (57%), and Sri Lanka (43%).
Now, to reduce OOP health expenditure, the government will have to increase its own health expenditure and aim for universal health coverage.
Bangladesh Health Sector Commission Report in 2025 recommended increasing the allocation for health expenditure to 15% of the national budget or to 5% of the GDP. Currently it is just 5.30% of the total budget or 0.67% of the GDP.
The signal from the government is clear -- it wants to increase its expenditure. The budget for FY 27 is penned to be the largest ever at TK 9,30,000 crore, an increase of TK 1,40,000 crore from FY 26 (an increase of 17.7%. Where will this money come from?
The government plans to borrow TK 16,000 crore from foreign lenders; this will be an increase of 91% from FY 26. It envisions to generate revenue of TK 695,000 crores of which TK 604,000 crore is expected to come from National Board of Revenue (NBR) taxes.
Here is the caveat. Historically, Bangladesh never achieved its tax collection target. It peaked at 83% in FY23 but nose-dived to 70% in FY26.
To ensure a welfare state, the government will have to have sufficient, progressive, and equitable tax revenues and that has to be built before expanding the entitlements.
This means, earning comes first and before welfare.
When the government declares its ambition to create a welfare state, it creates expectations and speculations. And if the expectations and speculations are not managed well, they can erode economic growth.
Specifically, it can hit the private sector hard through increased tax burden. Private credit growth has hit an all time low at 4.75% in April 2026 and the private sector’s confidence to invest remains poor.
This is not the right time to increase the private sector’s tax burden. Beyond this, the private sector might also get crowded out if the government begins to offer services at lower prices or at subsidies.
Furthermore, the private sector too might become dependent on the government as the government becomes the primary buyer for the private sector’s service or goods. This erodes individual households’ willingness to buy directly from the private sector.
In such circumstances, the private sector eventually leaves the market. In a country which depends heavily on the large informal and formal private sector, the government cannot afford to disrupt it.
Now, if we assume that the government has been able to improve its revenue collection and has also achieved efficiency in fund distribution, it will have to ensure that the fund is managed well.
This requires institutional capability which is tied to good governance. If the government cannot stop corruption, it cannot stop leakage from social transfers.
Historically, 10-40% of the program budget has been leaked. The leakage is inadvertently tied to political patronage which intensifies corruption and reduces targeting efficiency.
The current government is new and the grassroot is “hungry.” The schemes may just trigger the hunger more and crowd in more vested groups.
Besides, targeting itself is a standalone challenge. The government has choices to make between rural and urban, low income and middle class. Even the most sophisticated programs with high targeting efficiency are questioned by the people. Given the limited resources, a phased or a laddered approach is a more viable path.
There are many global cases of failures that the government should learn from. In more recent times, in Brazil, the government expanded the Bolsa Família program, a flagship targeted cash transfer scheme, beyond its targeted design to near-universal coverage, large public sector wage increases, and generous pension expansion.
Soon the fiscal deficit reached 10% of GDP by 2015 and political scandals destroyed institutional trust. The targeted Bolsa Família survived but universal expansions did not.
Experience tells us that a targeted and progressive approach is much better than a universal approach for countries like Bangladesh that are grappling with fiscal challenges, institutional weaknesses, and political patronage.
Besides, the government should remember that establishing a welfare state is a journey; it is not a pitstop and it takes time. South Korea achieved universal health coverage in 1989 -- but only after 25 years of GDP growth (6-10% annually). It started with employer-based insurance in 1963 and expanded sector by sector.
What should be the course for the government?
First, I strongly recommend that the government uses a tiered or phased approach.
The government should focus on cash transfers under the family card scheme to targeted rural and urban poor households. It must simultaneously work on increasing its revenue and building its institutional capability while addressing the issue of political patronage.
Second, the government must leverage the capacity of the private sector and the NGOs to reduce its own expenditure burden.
For example, it should make the family card scheme time-bound under a cohort-based approach in which the targeted poor households are taken over by NGOs under microfinance and enterprise development schemes at the end of the tenure for cash stipend.
Third, it should focus on widening the tax base, reducing exemptions, and enforcing compliance to improve tax to GDP ratio. Only if NBR collection consistently exceeds 85% of its annual target should the government consider expanding coverage beyond targeted households.
South Korea took 25 years to build what its citizens now take for granted. Bangladesh can get there too. But only if it builds before it promises.
Md Rubaiyath Sarwar is Managing Director, Innovision Consulting.