Term Paper On Fiscal policy in the context of Bangladesh

Abstract
Fiscal policy of Bangladesh basically comprises activities to ensure
macroeconomic stability of the country. Fiscal policy of Bangladesh is
expansionary that causes large budget deficit. As a result,
government of Bangladesh follows reflationary fiscal stance- borrows
money to overcome the budget deficit. In the fiscal year 2009-2010,
Bangladesh government estimated the budget deficit of Tk. 343.58
billion of which Tk. 137.14 will come from domestic sources and Tk.
173.25 will come from foreign sources. The main reasons of budget
deficit are tax avoidance of public and corruption in government
sector. However, present government is trying to
increase both the government and public investment. As a result,
government should improve the environment of investment by
ensuring available supply of energy, gas, transportation and
implementing law and order system. Another negative side of
Bangladesh economy is high inflation rate. So, government should
take all the necessary steps to reduce the inflation. Otherwise, people
have to suffer a lot. So, the overall circumstance of Bangladesh
economy is not so good.

Introduction
1.1  Fiscal Policy: Fiscal Policy generally refers to the use of taxation and government expenditure to regulate the aggregate level of
economic activity in a country. Fiscal policy is taken by the government of a country.

1.2    Classification of fiscal policy: Fiscal policy has got two forms and by the    help of those forms the
government regulates the fiscal activity in an economy.
.

1.2.1 Expansionary fiscal policy: A form of fiscal policy in which an increase in government purchases, a decrease
in taxes, and an increase in transfer payments are used to correct the problems of a business cycle contraction. The goal of expansionary fiscal policy
is to close a recessionary gap, stimulate the economy, and decrease the unemployment rate. Expansionary fiscal policy is designed to stimulate the
economy during or anticipation of a business-cycle contraction. This is accomplished by increasing aggregate expenditures and aggregate demand
through an increase in government spending or a decrease in taxes. Expansionary fiscal policy leads to a larger government budget deficit or a smaller
budget surplus. Expansionary fiscal policy is usually associated with a budget deficit.

1.2.2 Contradictory fiscal policy: A form of fiscal policy in which a decrease in government purchases, an increase
in taxes, and a decrease in transfer payments are used to correct the inflationary problems of a business-cycle expansion. The goal of contradictory
fiscal policy is to close an inflationary gap, restrain the economy, and decrease the inflation rate. Contradictory fiscal policy is designed to restrain the
economy during or anticipation of an inflation-inducing business-cycle expansion. This is accomplished by decreasing aggregate expenditures and
aggregate demand through a decrease in government spending or an increase in taxes. Contradictory fiscal policy leads to a smaller government
budget deficit or a larger budget surplus.

Fiscal policy in Bangladesh

Fiscal policy in Bangladesh basically comprises activities, which the country carries out to obtain and use resources to provide services while ensuring
optimum efficiency of the economic units. The policy influences the behavior of economic forces through public finance. Major objectives of the fiscal
policy of Bangladesh are to ensure macroeconomic stability of the country, promote economic growth, and develop a mechanism for equitable
distribution of income. The main tools to achieve these objectives are variation in public revenue, variation in public expenditure, and management of
public debt. These are reflected in the budgetary operations of the government, prepared and implemented on year-on-year basis.
 History of Bangladesh fiscal policy
In the initial years of independence, the government of Bangladesh had to spend a large amount of its resources in reconstruction and rehabilitation
work. It had negative public savings and limited private investment. Despite large inflows of  FOREIGN AID, the increasingly large financing gap became
the main concern of the government. The situation was further aggravated by frequent internal and external shocks. Under the circumstances,
government fiscal policies during 1970s and 1980s were largely oriented at rehabilitating the war-torn economy as well as stabilizing it from various
shocks. This had gradually leaded to weak fiscal structure and poor fiscal management. The tax structure was such that any increase in taxes due to
built-in consequences of economic growth was virtually not possible. This was because of the fact that despite a moderate growth of the
economy, INCOME DISTRIBUTION was skewed, and had been pushing more and more people below the  POVERTY line each year. As such, the proportion
of POPULATION with taxable surplus went down overtime. More than 80% of the total tax revenue came from indirect taxes, amongst which taxes on
imports contributed about 60%. Since most imports were in the government sector and basic need-oriented, it was hardly possible to increase import
duty. Despite higher production costs, prices of most public goods could not be rationalized due to socio - economic reasons. As such, these were kept
lower, which resulted in inadequate cost recovery.

3.1 Taxation Policy of Bangladesh Government: Taxation one of the major sources of public

revenue to meet a country's revenue and development expenditures with a view to accomplishing some economic and social objectives, such as
redistribution of income, price stabilization and discouraging harmful consumption. It supplements other sources of public finance such as issuance of
currency notes and coins, charging for public goods and services and borrowings. Bangladesh inherited a system of taxation from its past British and
Pakistani rulers. According to Article 152(1) of the Constitution of Bangladesh, taxation includes the imposition of any tax, rate, duty or impost, whether
general, local or special, and tax shall be construed accordingly. To develop manpower for efficient tax administration, the government runs two
training academies - BCS (Tax) Academy at DHAKA for direct tax training and Customs, Excise and Value Added Tax Training Academy at Chittagong
for indirect tax training. The NATIONAL BOARD OF REVENUE (NBR) is the apex tax authority of Bangladesh and it collects around 93% of total taxes or
76% of total public revenues. The NBR portion of total taxes includes CUSTOMS DUTY , VALUE ADDED TAX  (VAT), supplementary duty (SD), EXCISE DUTY ,
income tax, foreign travel tax, electricity duty, wealth tax , turnover tax (TT), air ticket tax, advertisement tax, gift tax and miscellaneous insignificant
taxes. Public revenue also comes from non-tax receipts such as surplus of sector corporations, financial institutions, railways, postal department,
telegraph and telephone, judicial stamp, etc, and these non-tax revenues represent around 19% of total revenues.

3.1.1    Tax structure  of our country:

3.1.1.1 Direct Tax: Direct tax includes income tax, gift tax, land      development tax, non-judicial stamp, registration, immovable
property tax, etc. Since direct taxes represent only about 19% of total taxes. Of the direct taxes, around 69% come from income tax, 19% from non-
judicial stamp, 5.7% from land revenue, 5.6% from registration and balance from gift tax and other direct taxes.

3.1.1.2 Indirect Tax: Indirect tax includes customs duty, excise duty, motor vehicle tax, VAT, SD, foreign travel tax, TT, electricity
duty, advertisement tax, etc. Tax-structure is heavily dependent on indirect taxes. . Indirect taxes (representing 81% of total taxes), on the other hand,
are mainly import-dependent. Around 67% of indirect taxes are collected at import stage by customs authorities as customs duty (38.0% of indirect tax
or 30.7% of total tax), VAT (24.3% of indirect tax or 19.6% of total tax), and SD (4.7% of indirect tax or 3.8% of total tax). Balance of indirect taxes
(representing around 26.64% of total taxes) include taxes collected on domestic production, consumption or transactions such as VAT (11.4%), SD
(11.6%), excise duty (1.5%), foreign travel tax (0.7%), electricity duty (0.6%), motor vehicle tax (0.7%),   TT (0.03%), air ticket tax (0.01%) and
advertisement tax (0.001%).

3.2 Bangladesh Government Expenditure: Bangladesh government expenditure includes both the

purchase of final goods and services, or gross domestic product, and transfer payments. Bangladesh government expenditures are used by the
government sector to undertake key functions, such as national defense and education etc. These expenditures are financed with a combination of
taxes and borrowing.

3.2.1    List of some major expenditure of our country: According to the total allocation of

expenditure of national budget of Bangladesh under the fiscal policy are listed below.

  Subsidies 6 percent.
  Education and IT 12 percent.
  Interest payment 14 percent.
  Social security and welfare 7 percent.
  Defense 5 percent.
  Health 6 percent.
  Agriculture 5 percent.
  Public administration 14 percent.
  Local government and rural development 5 percent.
  Transportation and communication 6 percent.
  Public and security 7 percent.
  Housing 1 percent.
  Industrial and Economic state 1 percent.
  Energy and power 4 percent.
  Culture and religious affairs 1 percent.
  Pension 3 percent.

       

Issues related to budget deficit

Budget deficit means a shortfall of tax   revenue from government spending. If the tax revenue is T and government spending is G, then we can define
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4.1 Inflation in Bangladesh:  In economics, inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, annual inflation is also
erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief
measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over
time. Although the present situation of inflation in Bangladesh is not very good, it is better then the previous year. The present scenario of inflation in
Bangladesh is given below:

             

Inflation rate (consumer

Year Rank Percent Change Date of Information
prices)
2003 3.10 % 117 2002 est.
2004 5.60 % 67 80.65 % 2003 est.
2005 6.00 % 160 7.14 % 2004 est.
2006 7.00 % 160 16.67 % 2005 est.
2007 7.20 % 163 2.86 % 2006 est.
2008 9.10 % 184 26.39 % 2007 est.
2009 8.90 % 137 -2.20 % 2008 est.
2010 5.10 % 142 -42.70 % 2009 est.
           

Stance of Bangladesh fiscal policy

The fiscal stance is a term that is used to describe whether fiscal policy is being  used to actively expand demand and output in the economy (a
reflationary or expansionary fiscal stance) or conversely to take demand out of the circular flow (a deflationary fiscal stance).
A neutral fiscal stance might be shown if the government runs with a balanced budget where government spending is equal to tax revenues. Adjusting
for where the economy is in the economic cycle, a neutral fiscal stance means that policy has no impact on the level of economic activity.
A reflationary fiscal stance happens when the government is running a large deficit budget (i.e. G>T). Loosening the fiscal stance means the
government borrows money to inject funds into the economy so as to increase the level of aggregate demand and economic activity.
A deflationary fiscal stance happens when the government runs a budget surplus (i.e. G
From budget scenario it is seen that government of Bangladesh is running a large budget deficit (i.e. G>T). As a result, the government borrows money
to inject funds into the economy so as to increase the level of aggregate demand and economic activity. So it can be said that the stance of
Bangladesh fiscal policy is reflationary.

The national income multiplier effect

The multiplier effect or spending multiplier is the idea that an initial amount of spending (usually by the government) leads to
increased consumption spending and so results in an increase in national income greater than the initial amount of spending. In other words, an initial
change in aggregate demand causes a change in aggregate output for the economy that is a multiple of the initial change.
The change in government expenditure of Bangladesh 2010 is influenced by a national income multiplier. If multiplier is 5 then income will be 5 times of
government expenditure. If income rises, then interest rate or opportunity cost of holding money will fall. As a result, investment on business and
residence will increase. Because of increase in investment aggregate demand will increase and be 5 times of government expenditure. Because of
unavailable information, national income multiplier is assumed 5.

Conclusion
Bangladesh fiscal policy is expansionary which causes large budget deficit. For that, government takes reflationary stance of fiscal policy. The reasons
behind this budget deficit are tax avoidance of citizens, corruption in government sector, high inflation rate and global recession.   As a result,
government should take all the necessary steps to remove these negative aspects. Otherwise, Bangladesh economy will fall into great danger.

Bibliography
http://www.imf.org/external/np/ms/2009/102909.htm
http://www.bdresearch.org/budget0910/index.php
http://www.scribd.com/doc/21084110/Bngladesh-Budget-2010-Briefings
http://bangladeshbudgetwatch.wordpress.com/2009/08/31/gdp-growth-
target-may-be-raised
http://www.mof.gov.bd/en/
http://banglapedia.search.com.bd/ed
http://www.indexmundi.com › Bangladesh › Economy
http://www.bangladesh.gov.bd