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A decade of government spending

  • Published at 03:46 pm June 8th, 2013
A decade of government spending

Every Bangladeshi wants to know if her country is becoming wealthier, if her government spends within the country’s means, and if her money is spent wisely. The 2013 budget for Bangladesh has been released on Thursday and it holds some answers to these questions. However, the budget is part accounting and part politics, and is subsequently abstract and inaccessible to most people. The magnitude and quantity of numbers reported are confusing and are not relatable. This is an opportunity to take a step back and visualise the big picture.

Bangladesh’s budget has changed significantly in the last decade. It is much easier to understand this year’s budget when it is compared to the last decade’s budgets and economic indicators.

Bangladesh’s GNI, the Gross National Income, roughly a measure of how much economic wealth is created by a country, can put the budget’s size in perspective. Correspondingly the absolute increase is not equal to the impact per citizen since Bangladesh’s population is growing. Normalising the GNI and budget per capita can alleviate this. Illustrating the last decade of GNI and budget expense per capita highlights the long-term economic and spending trends.

The resulting chart shows that the GNI per person grew impressively from 25 thousand to over 73 thousand BDT. At the same time the government expenditure per person increased from nearly 5 thousand to more than 21 thousand BDT. The chart may give the impression that the economic development is outpacing government spending but is that truly so? A precise measure for relative growth is to further normalise the numbers to the 2004 figures.

They start at 100% in 2004 and change each year accordingly to visualise how they increased in the last ten years.

Comparing the 2013 per capita numbers with 2004 reveals a stark difference between the GNI and budget expenditure growth. The current (predicted) GNI is 289% of 2004’s GNI, which is a testament to Bangladesh’s robust economic growth. The budget expenditure outpaced GNI and the 2013 budget is 438% of 2004’s. This is adjusted per person and thus is dampened due to the population growth. The absolute growth for both GNI and budget has been even greater in this period.

This raises the subject of government spending efficiency, as well as debt and budget deficit. A different perspective to the latter besides the usual deficit and debt numbers are indicators like foreign interest payments and net budget expenses.

Foreign interest payments are an important measure since the financial markets can drive indebted countries to (near) bankruptcy as the southern European countries have demonstrated in recent years. Yet a government has little influence on the market development.

In absolute terms the cost of servicing Bangladesh’s foreign debt has risen. Still the increase has been dwarfed by the expanding budget. Servicing foreign debt as a budget cost therefore dropped from 2.16 % to 0.78 % of budget expenses. This is remarkable considering the debt crisis the world economy has faced in the same decade. This improvement is to be taken with caution though since it does not take into account the domestic debt and depends on continued positive economic developments.

An important question is how the budget expenses developed the last ten years. The question if Bangladesh is spending wisely and investing into its future is at the heart of political discourse and could be discussed filling libraries. On a large scale we can make a basic analysis.

Budget expenditure can be divided into two buckets, development and non- development spending. The former grows and develops the economy including health and education while the latter doesn’t and is comprised of administration, defence, police, debt service, and judiciary for example. The non-development spending is required to maintain a country, however, it is desirable to keep it minimal and focus resources on developments like infrastructure or education.

In this regard the last decade shows an undesirable trend. The budget expenditure was 62.1% non-developmental in 2004 and has increased to 69.7% for the 2013 budget with a peak of 74.3% in 2008. This means that next year seven out of ten Taka are spent to maintain the country and only three are spent on its future despite the astonishing growth in budget and GNI in the last ten years.

Finally, for many surprisingly, the budget expenditure focused on in public discussions is not the net expenditure of the government. For example, this year’s effective budget is 222,491 crore Taka while the net budget (expenditure) is in fact 335,575 crore Taka. The reason is that refinancing debt is passed through from an accounting point of view. The government has to pay some of its loans every year and takes new loans to finance it. This essentially does not show on the final budget expenditure figures. The logic behind it is that, for example, paying off a one billion Taka loan with a new one billion Taka loan increases the budget receipts and expenditure each by one billion Taka. It has no influence on the effective budget. This is only somewhat accurate though. The relative size of the net budget expenditure (including loan refinancing) to the effective budget expenditure does indicate how much risk the government is exposed to. The larger the loan refinancing to be accomplished every year the more exposure the budget has to interest changes, and foreign and domestic financial crisis.

In the last decade the effective budget size shrunk from 80.9% of the net budget expenditure in 2004 to 70.7% by this year. This is a concerning development. On the backdrop of the overall budget growth in the same period this gives some indication of the total debt growth in that period and how it outpaced government spending.

In summary, Bangladesh has been thriving over the last decade. Its budgets grew extraordinarily and importantly so did its economy. Core challenges current and future governments are facing are debt risks and high non-development expenditure. Bangladesh has shown economic potential and conservative policies can keep debt manageable and reduce exposure to the volatility of financial markets. A central issue will be to reduce the country’s ‘fixed costs’ of non-development spending to invest into the country’s future so it can continue on its trajectory of economic growth.

Note: The data used for these analyses are from the Bangladesh Ministry of Finance, Finance Division, and World Bank DataBank. The last two years of population and GNI figures are forward predictions and are to be considered estimates only.  

The Graphs referred to in the article can be viewed on the slideshow at the top of the page.

Dr Christian Prokopp holds a PhD in Information Retrieval and works as a Data Scientist at Rangespan in London, UK. You can follow Dr Prokopp at: www.semantikoz.com/blog or twitter @prokopp

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