Debt-driven Budget: Relief Today or Risk Tomorrow?

Bangladesh stands at a critical economic crossroads. In a shifting political landscape, the government is preparing to unveil an ambitious national budget for the fiscal year 2026–27, with a projected size exceeding Tk 9 trillion.

At first glance, such a large budget signals confidence, development aspirations, and a commitment to social welfare. However, beneath this optimism lies a pressing concern: how sustainable is a budget that relies heavily on borrowing amid weak revenue performance?

A significant portion of the proposed expenditure is aimed at welfare-orientated programmes. Initiatives such as family support cards, farmer assistance schemes, interest waivers on agricultural loans, infrastructure development, and environmental protection reflect the government’s intention to address social and economic vulnerabilities. These are, without doubt, commendable priorities. Yet, economics demands a simple but critical question – where will the money come from?

The government has set an ambitious target to increase revenue collection by nearly Tk 1 trillion. Given Bangladesh’s longstanding structural weaknesses in tax administration, achieving this goal appears highly uncertain. The tax base remains narrow, tax evasion is widespread, and administrative inefficiencies continue to undermine collection efforts. In such a context, expecting a sudden and substantial rise in revenue may be overly optimistic. Moreover, an increased reliance on value-added tax (VAT) could intensify inflationary pressures, disproportionately affecting lower- and middle-income households.

VAT is often described as a regressive tax, meaning it tends to place a heavier burden on lower-income people than on the wealthy. This happens not because the tax rate is different, but because of how people at different income levels spend their money. VAT is applied uniformly on goods and services, regardless of who is buying them. Whether a low-income worker or a wealthy individual buys the same product, they pay the same amount of tax. At face value, this seems fair, but in reality, it isn’t.

Equally concerning is the growing budget deficit, which is expected to approach 5 per cent of GDP. While moderate deficits can support economic growth, persistent and expanding deficits pose serious risks to fiscal stability. The plan to finance a deficit of nearly Tk 2.75 trillion through borrowing effectively shifts today’s financial burden onto future generations. Borrowing is not inherently harmful, but its sustainability depends on how efficiently the funds are used and whether they generate sufficient economic returns.

One of the most immediate risks arises from increased government borrowing from the domestic banking sector. When the government absorbs a large share of available credit, it leaves less room for private sector borrowing, a phenomenon known as “crowding out". This can dampen private investment, slow down business expansion, and ultimately weaken job creation. Over time, reduced investment can undermine the country’s growth trajectory.

External borrowing, often viewed as a more favourable option due to lower interest rates, is not without its challenges. Foreign loans expose the economy to exchange rate risks and often come with conditions that may limit policy flexibility. In a context where foreign exchange reserves are under pressure, repayment obligations can become increasingly difficult, especially if export earnings or remittance inflows fail to meet expectations.

Another growing concern is the rising cost of debt servicing. A substantial portion of the current budget is already allocated to interest payments, and this figure is expected to increase further in the coming years. This creates a vicious cycle: new loans are taken to repay old ones, gradually expanding the overall debt burden. As a result, resources that could have been invested in development are instead diverted to servicing debt.

Additionally, planned increases in public sector salaries and the expansion of large-scale development projects will add further pressure on government spending. While such measures can stimulate demand in the short term, they risk fuelling inflation if not matched by corresponding increases in productivity. Without improvements in efficiency and output, higher spending may simply translate into higher prices rather than real economic gains.

Given these challenges, the need for a balanced and realistic budget has never been greater. Expanding expenditure to meet political and social commitments is important, but ensuring sustainable financing is even more crucial. Comprehensive tax reform should be at the centre of this effort. Broadening the tax base, strengthening enforcement, improving administrative efficiency, and reducing tax evasion are essential steps toward increasing revenue in a meaningful and sustainable way.

At the same time, prioritisation of expenditures is key. Resources should be directed toward sectors that enhance long-term productivity and resilience – such as education, healthcare, technology, and infrastructure. Reducing or eliminating low-impact and non-essential projects can help create fiscal space for more effective investments.

Ultimately, a large budget does not guarantee success. The effectiveness of a budget depends on its implementation, transparency and long-term impact. A debt-driven approach, if not carefully managed, may provide short-term relief but could lead to significant economic challenges in the future.

The government’s greatest challenge, therefore, lies in striking the right balance between ambition and realism. Whether this budget becomes a catalyst for sustainable growth or a source of future economic strain will depend on the choices made today.