Amidst predictions of continued economic challenges, the government is poised to unveil on Thursday an ambitious Tk 7.97 trillion budget with one-third of the outlay constituting a gap between income and expenditure targets.

This substantial outlay will be accompanied by a strong emphasis on fiscal discipline and controlled spending. The move signals a strategic shift towards prudence as the nation navigates the turbulent waters of the global economic landscape.

With the national budget strained and the gap between income and expenditure widening, the government is committed to maintaining its austerity measures.

Experts concerned term this as a sensible approach as the country grapples with persistent inflation and dwindling foreign currency reserves.

The proposed budget represents a modest 4.6% increase compared to the original budget for the current fiscal year.

This restrained growth, a stark contrast to the typical 12-13% annual increase, reflects the government's commitment to fiscal austerity in the face of economic headwinds.

In line with the government's austerity measures, the development budget for the upcoming fiscal year is expected to remain virtually unchanged.

The Annual Development Programme (ADP) will see a marginal increase of only 0.76%, or Tk 2,000 crore, reaching Tk 2.65 trillion. This signals a continued focus on fiscal restraint as the government navigates economic challenges.

The upcoming budget might lower the tax collection target for the National Board of Revenue (NBR), which is responsible for 87% of government revenue, by Tk 20,000 crore to Tk 4.1 trillion.

Despite this reduction, the overall revenue target for FY24 is projected to increase to Tk 5.40 trillion, representing a 4.5% growth compared to the current fiscal year's higher target of 16%. The NBR has historically struggled to meet government-set collection goals.

The government also has lowered its GDP growth target for next year to 6.5 percent from the initial projection of 7.5 percent, now aiming for 6.75 percent.

A finance ministry official who preferred to be anonymous put the main goals of the budget simply: It will prioritize tackling inflation, bolstering social safety net initiatives, and streamlining subsidy expenditures across various sectors, with agriculture and food remaining as exceptions.

Reasons behind a restrained budget

Bangladesh is facing a persistent cost-of-living crisis, with inflation stubbornly exceeding 9.5 percent in the first eight months of the 2023-24 fiscal year.

This follows a 12-year high of 9.02 percent in the previous financial year, making it increasingly difficult for many in this low-income nation to make ends meet.

The FY25 budget is being scaled back due to a combination of factors. Stagnant revenue receipts and the International Monetary Fund's (IMF) prescribed fiscal and monetary tightening measures under its $4.7 billion loan program have necessitated this reduction.

Distinguished fellow of Center for Policy Dialogue (CPD) Dr Debapriya Bhattachariya recently told a public forum that the upcoming budget will prioritize implementing slightly contractionary policies, tailored to the global and domestic economic landscapes.

Additionally, it will focus on maintaining a manageable budget deficit to ensure macroeconomic stability and curb inflation, he added.

Dr Debapriya however warned that the planned combination of contractionary monetary policy and an elevated budget deficit will be a challenging balancing act.

"We have to understand that a budget with a higher deficit necessitates borrowing, either from domestic banks or foreign lenders. Domestic borrowing can lead to a crowding-out effect, potentially stifling private sector investment,” he pointed out.

So the complex trade-offs inherent in managing fiscal and monetary policy in the current economic climate could hurt the macroeconomic stability, he added.

State Minister of Finance Waseqa Ayesha Khan told a news agency that plans are already in motion to maintain macroeconomic stability by keeping the budget deficit at a bearable level and controlling inflation.

High inflation can generally be prevented in two ways – by reducing consumer demand and increasing the supply of goods in the market, said the state minister.

“Traditional monetary policy primarily focuses on curbing inflation by reducing consumer demand, while fiscal policy aims to stimulate economic growth through incentives and subsidies for producers,” she said.

Waseqa informed that the new fiscal policy measures implemented by the government have already started addressing the current economic challenges including enforcing austerity in government spending, rigorous market monitoring, and emergency imports of essential goods.

She also mentioned that the upcoming budget will prioritize infrastructure and rural development, invest in human resources through education, healthcare, and skills training, and continue support for agriculture, and strengthens social safety nets,

Which sectors will get priorities?

Experts cautioned that a significant portion, nearly 40%, of the upcoming budget will be allocated to subsidies, interest payments, and government employee salaries and allowances.

This considerable expenditure will inevitably constrain the government's capacity to invest in critical areas such as social safety nets, healthcare, and education, they feared.

CPD executive director Dr Fahmida Khatun told Bangla Outlook that a hefty subsidy burden, equivalent to nearly 1.9 percent of GDP, weighs heavily on the economy.

“The existing distribution of subsidies across sectors is viewed as inefficient and a drain on the nation's valuable resources, yet the government has not prioritized addressing this issue,” she said.

Dr Fahmida also pointed out that the government investment in physical infrastructure remains a priority, accounting for 45.8% of the current ADP.

“However,this emphasis comes at the expense of social infrastructure like education and healthcare, which remains severely underfunded,” she said.

Despite the glaring vulnerabilities exposed by the Covid-19 pandemic in the education and healthcare sectors, these fundamental rights are being sidelined in the national budget.

Allocations may be increasing in monetary terms, but their proportion of the Gross Domestic Product (GDP) remains paltry. This neglect is likely to persist in the FY24  budget.

The World Bank ranks Bangladesh among the bottom 10 countries globally in terms of education spending relative to GDP. Meanwhile, the World Health Organization (WHO) estimates that Bangladeshis require $88 annually for basic health services, yet only $58 is spent, largely out-of-pocket.

A finance ministry source told Bangla Outlook that the education sector would get Tk 1 trillion and the health sector Tk 420 billion in the next budget. Experts term these allocations “significantly insufficient.”

Finance ministry officials acknowledged their intent to bolster funding for safety net programs, healthcare, and education but admitted that resource limitations have hindered their ability to do so.

One of the main reasons behind modest spending on essential sectors is that the government spending on interest payments, both foreign and domestic, has been increasing every year, said Dr Fahmida.

Interest payment rates have risen in recent years, and the finance ministry projects that it may go up even more. In the current fiscal year, the government allocated Tk 943 billion for interest payments, which crossed Tk one trillion in the revised budget for the first time.

The finance ministry is going to increase the allocation for interest payments by 23 percent in the upcoming budget. “This would essentially tie their hands to spend more on health and education,” Dr Fahmida added.