Macro and Fiscal Issues in the Budget

This year’s national budget has not been a run-of-the-mill one. It incorporates some novel visions and aims to build a democratic, humane, and inclusive economy. There is also a new emphasis on the potential of the creative economy. Economists have by and large echoed similar views at a recent seminar organised by the Bangladesh Economic Association.
The deliberations at the seminar were quite insightful, especially regarding the macroeconomic and fiscal ramifications of the budget, sectoral issues related to the labour market and education, challenges in the healthcare sector, gender issues, social security and inclusive development, and the re-engineering of industrialisation strategy through the use of public procurement as an engine of transformation.
One of the core components of this year’s budget has been the 3-R strategy, which is aimed at recovery and stabilisation in the short term, restoration in the medium term, and reconstruction in the medium-to-long term. The veteran economist Dr Abdur Razzaque pointed out that recovery would require higher spending, credit, revival of private investment, employment and stable household purchasing power, while stabilisation would require restraint by maintaining lower inflation, protecting reserves, containing borrowing, and restoring financial sector discipline. The success of the 3-R framework would depend on proper sequencing, sufficient fiscal space, and stronger institutions.
Although the 6.5% GDP growth target is not excessive compared to previous standards, it assumes a rebound in private investments, productive credit, foreign trade, and business confidence. However, a tight monetary situation, high borrowing costs, and banking sector vulnerabilities are likely to delay investment recovery. Dr Razzaque points out that targeting a real GDP growth rate of 8.5% and an investment-GDP ratio of 40% by 2030-31 is quite unrealistic and not essential for achieving a US$1 trillion (nominal) economy by 2035. A premature push for very high growth could exacerbate inflation and borrowing costs and create exchange rate pressures. Instead, steady real growth, manageable inflation, and limited exchange-rate pressure would go a long way in achieving objectives.
Another unrealistic aspect of this year’s budget has been the revenue mobilisation target. The NBR’s tax revenue target for FY27 has been set at Tk604,000 crore, whereas the FY-2026 collection by NBR is projected to be Tk410,000 crore. Therefore, raising the FY27 target for NBR by 47% is too optimistic. Besides, interest payments would absorb between 25% and 35% of the revenue collected by NBR, and a credible implementation pathway for increasing revenue generation is not yet visible. Moreover, if the probable shortfalls in revenue collection and foreign financing are taken into account, then only about 80-85% of the planned budget would be implemented.
Dr Razzaque also points out that seeking more foreign financing in the backdrop of global aid shrinkage and weak domestic absorption capacity is not very wise. The projected external financing for the 2026-27 fiscal year has been raised by 64%, when net official development assistance (ODA) fell by 23% in 2025. Besides, external loan disbursement of US$4.24 billion during FY26 exceeded the debt-service payments of US$3.80 billion only slightly, and feeble project plans, procurement delays, and weak implementation capacity continue to hinder foreign aid disbursements.
Another economist, Dr Abu Eusuf, claimed in the seminar that the budget should combine recovery, stabilisation, and reform by gearing public spending towards restoring citizens’ confidence, increasing productivity, and protecting vulnerable groups. The key question was not merely the size of the deficit but whether it was productive, financeable and sound. Revenue shortfall risk is not only an annual issue; it is linked to monthly cash flow needs. This is because revenue collection may not follow the pace or sequence assumed in the budget, and expenditure obligations like those for salaries, interests, subsidies, pensions, and safety nets occur regularly. A dearth or delay in revenue collection and foreign financing would increase the need for bank borrowing.
The government’s medium-term revenue generation strategy rests on three pillars, viz., broadening the tax base, improving compliance, and enhancing efficiency and transparency in revenue administration. The administrative measures include expansion of the taxpayer base, digitalisation of tax-return filing, strengthening monitoring, modernising VAT administration, improving compliance, and introducing risk-based audits. Taxpayer services are being expanded and procedures are being simplified for encouraging voluntary compliance; besides, tax exemptions are being reviewed. Instead of raising rates, proposed reforms aim to broaden the base and sharpen incentives. These are all geared towards raising the tax-GDP ratio and revenue-GDP ratio to 9.6% and 11%, respectively, by 2030-31. But these are quite ambitious, and the set targets would be upended if rampant corruption in tax administration is not curbed resolutely.
Currently, the NBR collects around 87% of total revenue, while non-tax revenue collected by it contributes about 9% of the total. Income tax and VAT contribute about one-third each to taxes collected by NBR, while indirect taxes (VAT, supplementary and customs duties) account for 65%. On the other hand, the size of non-NBR revenue remains very small. Consequently, achievement of budgetary targets depends largely on the widening of the VAT and income tax base through reforms. Besides, efforts should also be made to expand the scope of non-tax revenue and bringing the country’s huge informal economy under some kind of tax net. 
Dr Abu Eusuf has emphasised tax productivity instead of merely higher targets, the means of which would be better taxation. For example, under-reported income, wealth, services, digital transactions, etc. should be brought under the tax net; tax exemptions should be linked to jobs, exports, investments, and productivity gains; and all exemptions should have cost-benefit justification as well as a sunset provision. The short-term measures for expanding fiscal space should include: enforcing tax-linked access to public services, separation of policy and administrative functions of NBR, strengthening compliance for TIN-holders through automated system, and installing integrated automation. The medium-term measures may include expansion of the registered taxpayer base, a universal tax identification number for adults, strengthening NBR capacity, and promoting fiscal decentralisation.
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The writer is a retired Additional Secretary and former Editor of Bangladesh Quarterly. He can be reached at [email protected]