Deficit Financing:Road To More Taxes

A tax cut in present day Says in future we have high tax to pay. For the sake of debt stabilization Paying debt interest is the solution.

Government has recently decided to float the exchange rate of Taka against the US dollar. Bangladeshis living abroad now can get the market offered value of their hard-earned remittances. The fall of Taka is an incentive to them. The move is highly appreciating as it will ease of the pressure to some extent on central bank's foreign currency stock. Idea is that such move discourages unnecessary import holding back the import spending. On the other hand, depreciation makes the Bangladeshi export items more competitive at a time when recession like scenario is more credible than before, signalling individual spending cut of Occidental consumers.

But is it enough to improve the current account deficit? Ahead of election, govt has in no mood to follow austerity measures. In the previous post I tried to underscore how growing budget deficit is posing a danger to our economy. Amid this growing budget deficit ,govt mulls reducing corporate tax by 2%.This means to finance deficit we have to borrow more.

Just take a look at the composition of our tax revenue and expenditure.In 2020 government expenditure stood at Tk 4201 billion while it earned a tax revenue of TK 2659.1 billion,leading to a budget deficit of TK 1542.5 billion.Both govt expenditure and tax revenue increased in the subsequent years. But tax receipts never outweighed the spending. In 2021, budget deficit grew to Tk 1874.5 billion. And in 2022 it is projected to be TK 2146.8 billion,6.2% of GDP.Tax revenue only became 10% of GDP in 2021 and projected to be 11% in 2022¹.

Total Revenue & Total Expenditure(In Billion Taka)

	2020	2021	2022
Total Revenue	2659.1	3515.3	3890.0
Total Expenditure	4201.6	5389.8	6036.8
Budget Deficit	1542.5	1874.5	2146.8

Source:Bangladesh Bank

Failure to generate enough tax revenue means we have to borrow more from both internal and external sources to meet the budget deficit.

In 2020,domestic financing accounts for 3.4% of GDP while foreign financing accounts for 1.4% of GDP.In 2022,domestic financing projected to be 3.3% of GDP while foreign financing projected to be 2.9% of GDP¹. As bank borrowing and borrowing through sale of national savings certificates are rising, govt in future has to either print more money or to cut spending in other sectors or has to raise tax levels to pay the interests. Moreover inflationary pressure has already pushed the depositors and investors on national savings certificate on loser's side.

Like domestic borrowing, our external debt is also rising. In 2015-16,our debt was $41.17 billion. In 2020-21,it became $81.57 billion². Our external debt almost doubled in 5 years. As our budget deficit grows,our external debt grows.Now say we want to keep the external debt at this current level. Economist Olivier Blanchard argues that to make it happen, we have to generate enough tax revenue so that tax minus spending equals(primary surplus) the real interest payments to existing debt ³. For the subsequent years, this measure has to be followed in order to stabilize the debt. Otherwise it will add to the past debt, increasing our debt burden.

External Debt(In Billion US Dollar)

	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21
External Debt	41.17	45.81	56.01	62.63	68.59	81.57

Source:Bangladesh Bank

But what is the govt doing?It is considering a tax cut. It means our debt will rise and the govt has to tax more to get rid of those debts. Olivier Blanchard stresses that a tax cut in the present means higher taxes in the future. In that light, our output growth will be lower when we need to grow more to repay our debts and create more jobs³.

More than two-third of our total debt is public debt. Govt took it to finance many infrastructure and development projects. So large part of the debt went to finance politically motivated projects. Some of which were marred by corruption, faced cost overrun and have little or no economic returns.

At a moment when government requires to raise tax,cut spending,govt is mulling populist policies. And the future generation will pay for prices of its populist policies. Stabilizing debt calls for austerity. Free floating of Taka is only a half done job. Raising taxes along with spending cut will complete the task.

Notes And References:

1. Bangladesh Bank Annual Report 2021
2. Bangladesh Bank
3. “Macroeconomics”,Olivier Blanchard,2nd edition, Prentice Hall International, Inc