Deficit Budgeting Does It Essential For Expanding Bangladesh Economy?

Kamruzzaman :
Finance Minister A H M Mustafa Kamal has placed the national budget of Tk. 568,000 crore for the 2020-21 fiscal year in the Parliament. Here revenue collection target is Tk. 378,000 crore and 190,000 crore is deficit. Covid-19 is the most devastating elements for world economy now, in this situation — ‘Does this deficit is accessible? Is it essential?’ The response is:
The economy of Bangladesh is the 39th largest in the world in nominal terms, along with many other factors deficit budgets plays a vital role for expanding the size. Budget is the financial plan of a government, it’s the financial plan usually for a fiscal year, which shows what its resources are, and how they will be generated and used over the fiscal period. The government Budget is an itemized accounting of the payments received by government (taxes and other fees) and the payments made by government (purchases and transfer payments). This entry records the difference between national government revenues and expenditures, expressed as a percent of GDP. A budget deficit occurs when a government spends more money than it takes in. The opposite of a budget deficit is a budget surplus. If income and expenditure same it’s called balanced budget. Developing countries like Bangladesh, India, Pakistan, Malaysia and many other countries are prepared deficit budget. As a developing country like Bangladesh budget is the government’s key instrument for promoting its socio economic objectives. Deficit financing is the best way for expanding Bangladesh economy. Bangladesh as an independent country began its annual budget in 1972 with an outlay of Tk 786 crore, and now it’s Tk. 5, 23,190 crore in 2019-20.
The technique of deficit financing results in an increase of government expenditure which produces a favourable multiplier effect on national income, saving, investments and employment. Deficit budget refers to creation of new money for filling up the gap between planned expenditure and estimated receipt. Sometime deficit financing is made for mobilization of savings. These savings thus collected encourages increasing capital. Sometime deficit budget causes of inflation but in developing countries like Bangladesh the root cause of inflation is inelasticity of supply of essential goods. If there supply can be increased money supply grows, there is no danger of inflation. In reality, this does not happen and some amount of inflation is inevitable. However, everything depends upon the magnitude of deficit financing undertaken by the government and its phasing over the time horizon of the development plan. If there is continuous deficit in the budget, this must be accompanied by additional taxation so as to reduce the excess purchasing power that is likely to be created through printing of paper money. There is also need for price control cum rationing in such periods. Deficit financing in advanced countries is used to mean an excess of expenditure over revenue-the gap being covered by borrowing from the public by the sale of bonds and by creating new money. In Bangladesh it’s mostly covered by borrowing from internal source, external source, grants and bonds. The budget, deficit and investment ratio are examined properly as a result economic condition is secure and expanding properly.
If we observe we can follow that the economy of Bangladesh is currently going through a period of continuous budget deficit. The present data suggest that the government budget deficit, on average, is nearly 5% of the country’s GDP. This has been true since the early 2000s. To finance this deficit, governments have been borrowing largely from domestic and foreign sources resulting in inflationary pressure on one hand, and crowding out of private investments on the other. During the same period, although the economy has grown steadily at a rate of more than 6%, last two years its (FY 2018-19 & FY 2019-20) more than 8% this growth is indicate deficit financing make no harm. On the other hand inflation rate is within our control last 8 years it’s almost our control but last year its increases a little bit due to increase of onion and some other product price but still it’s under control. On the macro fiscal policy stance, the government has kept the budget deficit at 4.9 percent, only a minimal decline from the usual 5 percent. Maintaining such a target has never been a problem for the government as expenditure targets are not fulfilled. Higher reliance on bank borrowing is observed to meet up with the budget deficit in FY2019. Given the exceedingly high purchases of savings certificate in FY2018, bank borrowing is the obvious choice. However, when the government is trying to improve the liquidity situation of commercial banks through various supports, what will be the impact on future liquidity due to high dependency on bank borrowing is something to be observed.
Economic effects of budget deficit on other macroeconomic variables are important. Budget deficits as a way to raise lifetime consumption by shifting taxes to subsequent generations, but higher consumption implies lower savings and thus interest rate must increase so as to bring back capital markets into balance. In this situation, crowding out problems may arise. An important percentage of the population is considered to be either myopic or liquidity constrained and deficits are seen as having beneficial consequences when appropriately timed. The conventional wisdom is that a large budget deficit is a source of economic instability. Large deficits potentially cause two separate but related problems: (i) Shifting the bill for financing the current generation’s consumption to future generations and (ii) crowding out private investment. However, empirical research does not conclusively support conventional wisdom; results are mixed and controversial across countries, data and methodologies. If we discuss on some Asian countries we found that, for Malaysia, there is no long-run relationship between budget deficit and economic growth in consideration, in Pakistan also found that fiscal profligacy seriously undermine the growth objectives thereby adversely impacting physical and social infrastructure in the country. In the case of India also there is a significant relationship between fiscal deficit and economic growth in the long-run. On the contrary, some authors conclude that budget deficits do not contribute significantly to higher inflation. Theoretically it has been a firm belief that if government finances its deficit from the banking system heavily it might crowd out private corporation from the debt market. Turkish found large budget deficit financed by borrowing domestically slowed down private investment causing real rate of interest to increase. But in the case of Bangladesh experiences, due to excess liquidity prevailing in the banking system some people went to capital market without proper knowledge and understanding of this market, so government investment is safer and deficit financing boost our economy. In the same view budget deficit accelerated economic growth in the case of Bangladesh.
Economic development largely depends on capital formation, the basic source of capital formation is savings but the developing countries characterized by low savings income ratio. Though Bangladesh consistently depends on deficit budget, there is little scope to make conclusion about its economic effect. Bangladesh government relies considerably on deficit budget to finance development expenditure. The conventional wisdom is that good economic conditions and expansionary fiscal policy help incumbents get reelected. Truly observation is private investment is not in satisfactory level, for this reason governments generally try to make expansionary budget by making room for large investment.
Basically deficit financing undertakes for the purpose of building up useful capital during a short period of time, is likely to improve productivity and ultimately increase the elasticity of supply curves. If there is an exact balancing of deficit budget and public investment on productive project it might be excellent because it’s give a steady rate of return year by year, there is likely to be a mild dose of inflation which is conducive to the whole process of development. Different studies suggest reduction of subsidies and investing this money in health, education, infrastructure sectors such as power and roads etc., so that it will enhance the productivity of both human capital and physical capital, which will go a long way in increasing the per capita income of the people. That is to say, the multiplier effects of deficit financing will be larger if total output exceeds the volume of money supply. The most important thing about deficit financing is that, it generates economic surplus during the process of development
In this Covid -19 situation, an economic recession is the fate for world economy as well as Bangladesh economy. But in this situation for developing country like Bangladesh, deficit financing becomes absolutely essential, because Bangladesh aims at achieving higher economic growth. A higher economic growth requires finances but private sector is shy of making huge expenditure. Therefore, the responsibility of drawing financial resources to finance economic development depends on the government.
Taxes are one of such instruments of raising resources. Being poor tax collection system, country fails to mobilize large resources through taxes. A very little saved by people because of lower income. In these low saving countries, deficit finance becomes an important source of capital accumulation. By this way deficit financing improve all sorts of infrastructure, improve our investment and export basket and expand our economy. If economy tolerates the wave of corona virus then this deficit financing will gear up our economy.
( Kamruzzaman is a Researcher, Development Economics).