All governments tend to increase the size of expenditure in the annual budget to show the citizens that the government is doing its best to improve the conditions of the people.
What stops them from going sky high is the capacity to raise revenues from the people.
The gap between estimated expenses and revenues is filled up by borrowing from the public. The cost of borrowing -- interest amount -- is shown separately in the revenue budget.
The Dhaka Tribune reported on April 30, 2017 that this year the size of the budget deficit and the interest burden will be alarmingly high.
The interest amount is likely to reach 30% of the revenue expenditure, while last fiscal year, it was under 15%.
This is due to borrowing huge amounts by selling government bonds at much higher rates of interest (11-13%), while bank loans were available at 8-10%.
It seems there was some deliberate negligence by the fiscal managers in the MOF.
This year the size of the budget deficit and the interest burden will be alarmingly high
Needless to say, the benefits of higher interest payments were received by the richer sections of the society, and that added further to income inequality in the country.
Bangladesh is, of course, not alone in this practice. Most developed countries also do the same kind of deficit financing.
The difference is that in those countries, interest rates were low -- close to zero and even negative.
Deficit financing has been studied by some economists in Western countries. They found a pattern of governments using the method to pass over the burden to the next government (if the current one is not re-elected), while they reaped the benefits of higher spending during their tenure.
The researchers observed a cycle that seems to be going on like a merry-go-round. That this practice cannot go on forever, as there is a limit to how much you can shift the burden on the future generation.
In Bangladesh, the IMF is known to set a limit of budget deficit of 5% of our GDP. In no way should the government exceed this limit.
Whatever the size of deficits in the budget for fiscal year 2018, the cost of borrowing should be minimised by borrowing from banks or borrowing in foreign exchange from the reserves, as it is being contemplated.
M Shamsul Haque is Professor of Finance, NUB.
