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Fiscal Policy

VIEWS: 3 PAGES: 37

									What is Fiscal Policy?
 Fiscal Policy is the decision of the
  government about:
     How to earn revenue and gather resources
      from various sources
     For what to spend those earnings and
      resources
     How much to spend and
     When to spend

                                                 2
There are two sides of fiscal policy
                  Inflow of money
                  into the govt.’s
                  pocket: earning


                     Outflow of
                     money from the
                     govt.’s pocket:
                     spending



                                       3
      Earnings:
Revenue and Resources




                        4
Why does the government need revenue?
   To maintain its daily activities, i.e. to run the
      government
     To ensure protection for the helpless
     To provide necessary services to people that
      otherwise nobody would provide (Market
      failure)
     To ensure development of the country
     To build buffer against risk!


                                                        5
Where does the revenue come from?
     Tax revenue
          Direct: income tax, wealth tax etc.
          Indirect: VAT, tariff, excise duty etc.
     Non-Tax revenue
          Fees & charges: registration, sales of
           forms, stamps etc.
          Fines: mobile court fines, police fines
           etc.
     Printing of money


                                                     6
Where does the government keep its revenue?

    The government’s account is
     maintained by the Treasury which is
     located at Bangladesh Bank
    The “account” in which all these
     revenues are deposited is called the
     “Consolidated Fund”
    Consolidated Fund was created under
     Article 84 of our constitution



                                            7
Resources from other sources
  Grants
  Loans from
       Domestic sources
           Treasury bills/bonds
           savings schemes
           borrowing from the banks
       Foreign sources
           Bilateral
           Multilateral



                                       8
Revenue trend in Bangladesh
     Revenue as percent of GDP is increasing
     Around 80 percent of public revenue in
     Bangladesh is derived from tax sources.




                                                9
 Revenue trend in Bangladesh
 (crore taka)


                 FY    FY    FY    FY    FY    FY    FY    FY    FY    FY    FY
                98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09

Total Revenue   19767 20074 24342 24893 31120 35400 39200 44868 49472 60539 69382
Tax Revenue     16167 16079 19778 21332 24950 28300 31950 36175 39247 48012 56789
Non-Tax
                3600    3995   4564   3561   6170   7100   7250   8693 10225 12527 12593
Revenue

As percentage of GDP

Total Revenue    9.00   8.47   9.60   10.21 10.35 10.63 10.58 10.79 10.59 11.17 11.31
Tax Revenue      7.36   6.78   7.80   7.81   8.30   8.50   8.62   8.70   8.40   8.86   9.25
Non-Tax
                 1.64   1.69   1.80   2.40   2.05   2.13   1.96   2.09   2.19   2.31   2.05
Revenue
                                                                                         10
Spending




           11
How does spending help? Theoretical framework

 How much spending will affect depends on two
 factors-
   The multiplier effect and
   The crowding-out effect
 The multiplier effect denotes that a certain amount of
  spending will have bigger impact than the size of the
  spending.
 The crowding-out effect arises out of a mechanism
  that offsets the increase in AD.

                                                           12
The multiplier effect
 The MPC helps the money spent rolling from hand to hand in an
  infinite chain of successive rounds of spending.
 Suppose, the MPC in Bangladesh is 0.75 and govt. increases spending
  by Tk. 20 billion for social safety net.
 The rounds of spending are as below:
   Govt. spending = Tk. 20 billion
   First change in consumption (C) = (MPC X Tk. 20 billion)
   Second change in C = (MPC X MPC X Tk. 20 billion)
   Third change in C= (MPC X MPC X MPC X Tk. 20 billion)
   ……………
   Total change in C = (1 + MPC + MPC2 + MPC3 + …….) X Tk. 20 billion
   = Tk. 20 billion /(1 – MPC) = Tk. 80 billion.


                                                                        13
The Crowding-out effect
                                             3. As a result r
                                             increases
                                         r
 P                  4. And AD
                    falls back                                  2. This increases
                                                                money demand
                                        r2

                                        r1
                                                                      MD2
                                 AD2
                              AD3                                   MD1
                        AD1
                                                                            M
  1. An increase in G               Y
  increases AD
                                                                                14
How does spending help?
If the government wants to increase GDP…

    Government increases spending that
    increases demand for goods and
    services


        As a result, producers produce more
        goods



            GDP increases



                                              15
How does spending help?
If the government wants to check inflation…

     The government reduces spending



        Demand for goods and services
        fall


            Price of goods fall in the short run
            and as a result reduces inflation


                                                   16
For what to spend?
Through spending the government tries to affect:
 Macroeconomic stabilization
 Equity: horizontal and vertical
 Efficiency in resource allocation:
       Provision of public goods
       Check market failure




                                                   17
Macroeconomic Stabilization

    To stabilize price
    To raise growth rate
    To raise employment level
    To reduce deficit




                                 18
How government spending helps keep
macroeconomic stabilization?


                                    Food price
                                    stabilizes
                       Food
                       production
                       increases
         Subsidy for
         food
         production



                                                 19
How government spending helps keep
macroeconomic stabilization?




                                     20
Equity
 Inequality prevails in all societies.
 Government tries to reduce the gap
  between the rich and the poor
 For this, the government collects taxes
  from the rich and spends it for the poor




                                             21
Efficiency of resource allocation
  Private entrepreneurs may not be interested
   in investments where return of investment is
   not good for him but good for the country
  In this case, the government may step ahead
   and supply resources for such investments
  Example: building roads and highways,
   Public-Private Partnership (PPP)



                                                  22
Is government spending always good?
 Government spending is necessary to keep the
  economy on track.
 However, if the spending is not in line with the
  economic objective then it may be detrimental
 Example: Suppose a country is facing high inflation.
  Price is increasing very rapidly. But as the national
  election is close the government decides to spend
  more on social safety net programs and development
  activities to win popularity. What will be its impact on
  the economy?

                                                             23
Public Expenditure: Types
 Government spending may be broadly classified
 into two categories-
       Revenue expenditure
       Development expenditure
 Revenue expenditure mainly includes
  government employees salary, benefits and
  establishment costs.
 Development expenditure mainly includes money
  spent on development activities.
 Is revenue expenditure good or bad?
                                                  24
In which way public expenditure of
Bangladesh moving?
 The government spends huge amounts of money on
     building socio-economic and physical
     infrastructure
    human resource development and
    poverty alleviation.
 Besides, the government has to incur expenditure for:
    Administrative
    welfare and
    other service oriented activities.




                                                          25
Recent trend of public expenditure in
Bangladesh
                                                                                                FY 08-09
                FY       FY      FY      FY      FY      FY      FY      FY      FY      FY
                                                                                                  (up to
               98-99    99-00   00-01   01-02   02-03   03-04   04-05   05-06   06-07   07-08
                                                                                                February)

  Public Exp
               29779    34464   37399   40757   42075   47184   53903   59030   66836   93608    99962
    (a+b)


  a) Rev Exp   17454    19243   21498   25707   26804   30367   35132   39557   48920   71108    74362



  b) Dev Exp   12325    15221   15901   15050   15271   16817   18771   19473   17916   22500    25600

Percentage of GDP
  Public Exp
                13.55   14.54   14.75   14.92    14     14.17   14.54   14.2    14.3    17.27     16.29
    (a+b)
  a) Rev Exp    7.94    8.12    8.48    9.41    8.92    9.12    9.48    9.52    10.47   13.12     12.12

  b) Dev Exp    5.61    6.42    6.27    5.51    5.08    5.05    5.06    4.68    3.83    4.15      4.17

                                                                                                     26
Recent trend of public expenditure
              % of GDP




                                 27
  Economic structure of revenue expenditure
  % share of major economic categories
Particulars                            FY 03-04   FY 04-05   FY 05-06   FY 06-07   FY 07-08   FY 08-09 (up to February)
Pay and allowances                      27.87      26.29      27.64      29.39      26.88              26.68
 Pay of officers                         2.69       2.58       2.87       2.62       2.38               2.32
 Pay of staff                           11.33      10.91      13.52      12.57      11.48              10.41
 Allowances                             13.85      12.80      11.25      14.20      13.02              13.94
Goods and services                      17.19      17.39      16.93      14.35      14.84               9.69
 Supply and services                    11.66      10.64      10.46       9.84       9.71               7.92
 Repair and maintenance                  5.53       6.75       6.47       4.51       5.13               1.77
Payment of interest                     20.58      19.51      20.61      20.89      21.46              27.63
 Domestic                               17.05      15.91      17.06      17.92      18.83              24.89
 Foreign                                 3.53       3.60       3.55       2.97       2.63               2.74
Subsidies and current transfers         28.83      31.32      30.24      32.59      33.17              34.26
 Subsidies                               4.75       6.47       4.72       7.24       8.35               8.99
 Grants-in-aid                          17.25      18.45      19.40      18.59      18.59              18.51
 Subscription to the international       0.08       0.08       0.08       0.08       0.08               0.03
organizations
 Write-off of loan advances             0.00       0.00       0.00       0.00       0.01               0.001
 Pension and gratuity                   6.75       6.32       6.04       6.68       6.14                6.72
Block                                   1.55       1.90       1.70       1.39       2.83               0.54
 Unexpected                             0.70       0.51       0.14       0.57       1.59                0.03
 Other                                  0.85       1.39       1.56       0.82       1.24                0.51
Procurement of assets & public works    5.58       5.20       4.95       3.82       3.73                1.2

 Procurement of assets                  4.36       4.03       3.93       3.15       3.18                0.66
 Purchase of land                       0.03       0.14       0.07       0.12       0.08                0.25
 Construction and works                 1.19       1.03       0.95       0.55       0.47                0.25
Gross total                            101.60     101.61     102.07     102.43     102.91              100.00
Deduction recovery                      1.60       1.61       2.07       2.43       2.91               0.001

Total- Non-development revenue         100.00     100.00     100.00     100.00     100.00              100.00
expenditure
                                                                                                                    28
Is the government fulfilling its welfare
commitment?
      Public Expenditure By Social Sectors:

           The Social Sectors are getting
           increasing prominence day by day




                                               29
 Annual Development Program expenditure for
 social sectors (crore taka)
Sector                   FY    FY    FY    FY    FY    FY    FY    FY    FY    FY    FY
                        98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09


Education & Religion    1776   2014   2274   2171   2591   2342   2110   2865   2930   3030   3519
Sports and Culture       52     85     113    79     91    117    110    167     96     97    132
Health & Family         1256   1469   1616   1443   1542   1948   1468   2151   2403   2442   2585
Welfare
Labor & Manpower         9      14    18      18     27     42     72     88    70     105    113
Social Welfare, Women   169    180    189    173    220    183    186    196    160    140    334
& Youth Dev
Sub-total (1+2+3+4+5)   3262   3762   4210   3884   4471   4632   3946   5467   5659   5814   6683

As % of Total ADP Exp   23.30 22.80 23.13 24.28 26.15 24.38 19.25 25.43 26.20 25.84 26.11
(6/8*100)
Total ADP Allocation    14000 16500 18200 16000 17100 19000 20500 21500 21600 22500 25600


                                                                                                     30
 Revenue expenditure for social sector
 (crore taka)
Sector                     FY 98-99    FY      FY      FY      FY      FY      FY      FY      FY      FY      FY
                                      99-00   00-01   01-02   02-03   03-04   04-05   05-06   06-07   07-08   08-09
Education & Religion        2988      3279    3700    3842    4086    4628    5245    6508    8085    8717    9664
Health & Family Planning     887       972    1099    1286    1334    1497    1803    2065    2682    2898    3441

Youth, Sports & Cultural     55        73      67      71      84     140     140     184     205     185     195
Affairs
Labor & Manpower             28        31     35      36       42     41      45       46      58      70      70
Social Welfare & Women       141       177    203     229     283     455     895     1067    1250    1778    2134
Affairs
Sub-total                   4099      4532    5104    5464    5829    6761    8128    9870    12280 13648 15504
(9+10+11+12+13)
As % of Total Rev Exp      24.45      24.57   24.70   24.08   23.03   23.81   23.45   25.93   27.04   23.56   24.31
(14/19*100)
Total (ADP+Rev) (6+14)     7361       8294    9314    9348    10300 11393 12074 15337 17939 19462 22187
As % of total Pub Exp      23.93      23.74   23.97   24.16   24.29 24.04 21.89 25.75 26.77 24.20 24.83
(16/(8+19)*100)

As % of GDP                 3.35      3.50    3.67    3.42    3.43    3.42    3.26    3.69    3.80    3.59    3.62
(16/20*100)
Total Revenue Allocation   16765      18444 20662 22692 25307 28390 34664 38070 45412 57922 63764

GDP at Market Prices       219697     237086 253546 273201 300580 332973 370707 415728 472477 541919 613640
                                                                                                               31
What is the balance in the government’s pocket?

      If revenue earning is higher than
       expenditure, the government has surplus
      If revenue earning is lower than expenditure,
       the government faces deficit
      In Bangladesh the government maintains a
       deficit budget




                                                       32
How the deficit is met
 Deficit means that spending is more than earning
 Therefore, additional money is needed for filling out the
    gap between spending and earning
   This additional money is called “financing”
   Financing may be either from domestic or foreign sources
   From foreign sources financing may come as bilateral or
    multilateral loans
   Financing from domestic sources comes from borrowing
    from banks, issuance of savings schemes and bonds… and
    if needed from printing money.
   Which one would you prefer for deficit financing- domestic
    or foreign?

                                                              33
Trend of deficit financing in Bangladesh
                                                       Overall budget deficit                          Net foreign financing                        Net domestic financing

                                    3.7
 Deficit and Financing (% of GDP)




                                                                                                                                              2.7              2.8
                                          2.4                                                    2.4                                                                 2.5                2.5
                                                                        2.2                               2.2 2.3                                   2
                                                                                                                                                                                                       2.3
                                                       1.9 1.8                1.7          1.8                                   1.7                                              1.9
                                                                                                                                                                                                 1.6
                                                                                                                           1.3




                                                                                                                                                                                                             -3.4
                                                                 -3.7               -3.9
                                                                                                   -4.2             -4.2               -4.4                                               -4.6
                                                                                                                                                        -5.1
                                                -6.1                                                                                                                       -6.1


                                    FY 07-08           FY 06-07         FY 05-06           FY 04-05       FY 03-04         FY 02-03           FY 01-02         FY 00-01           FY 99-00       FY 98-99



                                                                                                                                                                                                                    34
Implications of budget deficit
 High budget deficit means government is spending more
    than its ability
   And in doing so it is borrowing from various sources
   If the borrowing comes from domestic sources it means
    less money is available for the private sector. This may
    hinder private sector development initiatives.
   If the borrowing comes from foreign sources it means the
    country is exposed to foreign currency risk (for example-
    speculative attack, current account deficit)
   Increased amount of borrowing increases interest rate and,
    therefore, debt liabilities. High interest rate may make debt
    unsustainable. In such cases, the country will be exposed to
    financial crisis. Recent example is Greece.

                                                                35
Question:
 What is the most prominent document
  that elaborates the Fiscal Policy of
  Bangladesh?
 As head of the government how would
  you design your next fiscal policy?




                                         36
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