Bangladesh needs sound strategies to make up the revenue shortfall in 2020-21
That the Covid-19 pandemic is as much an economic crisis as it is a health crisis is no longer news. According to the 2020-21 Budget, economic growth for 2019-20 was expected to clock at 5.2%, a full 3% points downward revision from what was expected in June 2019, and much slower than the 7.4% a year pace recorded in the five years to 2018-19.
There is, however, considerable difference of views about the timing and pace, and visually, the shape of the recovery. The budget forecasts a V-shaped recovery where the pandemic will have ended presently, and the economy will grow by over 8% in 2020-21 and 2021-22.
International organizations are less optimistic. For example, the World Bank expects an L-shaped recovery where the economy not only slowed sharply in 2019-20, but the slowdown persists into the next couple of years.
Back in April, the multilateral development bank expected real GDP growth of around 3% in 2019-20 and 2020-21, still not reaching 4% in 2021-22. Their latest forecasts are even more pessimistic.
With the global pandemic yet to show any sign of ending and the science and logistics of a vaccine still uncertain, it is useful to do a simple scenario analysis -- what would be the fiscal impacts if the recovery reflected the WB’s April guesses instead of the official budget projections?
The table below sets out the scenario that was analyzed a couple of weeks ago.
Some back of the envelope calculations suggest that if the scenario were to materialize, the government might be facing a revenue shortfall to the tune of nearly Tk500 billion a year (Tk488bn in 2020-21 and Tk495bn in 2021-22, to be precise).
How could the government make up for such a revenue shortfall? In a classic commentary on the political economy coming out of Kolkata (okay, okay, I jest, but only just), the Chief Minister Soumitra Chatterjee tasks Mithun Chakraborty to find Rs40 billion in a week.
The hero achieves this with aplomb, gusto, and the hit dialogue -- “marbo ekhane, lash porbe shoshane” (will hit you here, and the body will fall at the crematorium). Since there is no Fatakeshto in Bangladesh, more conventional methods are warranted.
Conceptually, the government could, of course, raise new taxes to collect Tk500 billion. But raising taxes in the middle of a harsh pandemic is neither sound economics nor realistic politics.
Discarding this possibility, there are two other options before the government: Cut expenditure, or finance a bigger budget deficit. Leaving the deficit finance, and debt dynamics, for a future post, let’s go through expenditure carefully, paying particular attention to the economics of each avenue, and their political realism.
Total government expenditure of Tk5,678 billion (17.9% of GDP) is budgeted for the 2020-21 financial year.
Over half of this is what is called current expenditure -- that is, the expenses needed to run the machinery of the government (wages and salaries, procurement, interest payments on past loans) as well as subsidies and transfer payments to households.
The rest is capital expenditure -- that is, the investment that should raise the productive capacity of the economy -- the bulk of which comes in the form of Annual Development Program. The chart below (source: 2020-21 Budget) breaks down total expenditure by categories.
Let’s start with the expenditure that the government is least able to curb -- interest payments on past borrowing, which is expected to be about Tk666 billion in 2020-21. Fortunately, less than a 10th of this interest expenditure is in foreign currency.
But the government still has to honour its past obligations, not the least because it will likely need to borrow even more in the coming years.
Things get a bit trickier with the other expenditure categories. Let’s take salaries for public servants, which account for nearly an eighth of budgeted expenditure. Is there inefficiency in the public service? Quite likely.
But will public service pay cut, or job cuts, improve efficiency? That’s not so clear cut at all. In fact, knee jerk and poorly conceived cuts to public service pay or jobs could well have unintended consequences in terms of morale, corruption, and institutional instability.
A thorough reform of the bureaucracy is much needed, particularly after years of rampant politicization. But wholesale cuts in the middle of a recession is not the way to achieve that.
The economics of subsidies and transfers are even murkier, while the politics of cutting these in during a downturn is even more vexing. The rhetoric is that subsidies and transfer payments are necessary to ensure that economic growth is pro-poor and inclusive.
But it’s not at all clear how much of these payments -- making up a quarter of total expenditure -- actually reach the poor. In fact, the literature actually suggests that in most developing countries, subsidies and transfer payments actually accrue to the urban classes who aren’t the poorest in the society. And therein lies the political economy infeasibility of cutting these payments in 2020-21.
Fortunately, that still leaves over half of total expenditures in the form of government procurement, annual development program, and other capital expenditures. To the extent that a lot of government purchases or projects are over-budgeted, there is likely to be a lot of proverbial fat to be trimmed if needed.
For example, Tk500 billion translates to about a quarter of the annual development budget in 2020-21. As it happens, it’s not at all unusual for about a quarter of budgeted development expenditure to remain unimplemented.
Of course, all this assumes that there is no additional expenditure. If the economic rebound proved to be as anemic as the scenario being considered, it is quite likely that the government would be under pressure to spend.
There is a clear, conceptual distinction between various types of expenditure that could be needed. Households might need to be supported through either cash payments or public relief operations that provide food and other necessities. Businesses might ask for bridging loans or other forms of assistance, merits of which would have to be carefully considered.
And finally, if the crisis leaves long-lasting scars -- for example, in the form of a prolonged slowdown in global trade -- Bangladesh’s low-cost manufacturing dependent growth model might become unsustainable, and the government might need to consider policies to “build back better.”
Cutting annual development expenditure might cover a Tk500 billion revenue shortfall in 2020-21. But that’s not a sustainable strategy if the recovery proves elusive beyond this year.
Jyoti Rahman is an applied macroeconomist. This article first appeared on www.jrahman.wordpress.com.