Thursday, 7 July, 2022
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Merits and Demerits of a Balanced and Deficit Budget

Dr. SM Jahangir Alam

Merits and Demerits of a Balanced and Deficit Budget
Dr. SM Jahangir Alam

A budget is a calculation of a country's potential income and expenditure. The government has to run the country, pay the salaries of those who work for the government, and take various initiatives including building roads for the development of the citizens. So the budget is the name of the plan where and how much will be spent in a particular financial year. Even a person has to calculate income and expenditure. But there is a fundamental difference between the state budget and the individual one. The person first decides what the income will be, then determines the expenditure sectors. On the other hand, the state does the exact opposite. The state determines the expenditure sectors first, then decides where the money will come from. That is, the government understands the cost of income, and the individual understands the income. If the expenditure does not match the income, the state can borrow money from home and abroad. Individuals can, but the limit is small because, if you borrow, you have to pay. The state also has to pay but it is not usually bankrupt for this. Borrowing can drag on year after year. The state creates this opportunity for itself. However, as a result, the liability continues to grow. Vis-à-vis the question of whether income and expenditure are equal, the budget of the state is of two kinds. If the total revenue and total expenditure of the government is equal then it is a balanced budget. In other words, the probable income is equal to the total expenditure plan of the government where income and expenditure are not equal. Unequal budgets can be of two types such as surplus budget and deficit budget. If the income is more than the expenditure, it is a surplus budget. Deficit budget is just the opposite, the higher the expenditure, the lower is the income. The question is which of the budgets is better. Developed countries usually have balanced budgets. However, it is not possible for every country to have a balanced budget every year. Developed or rich countries have balanced budgets in line with the trade cycle. That is to say, the budget of a particular financial year is prepared by coordinating with the ups and downs of the economy. A balanced budget is possible if the economic situation is good, a deficit budget if it is bad. Many developed countries legislate to create a balanced budget. It is not a good idea to create a consistently balanced budget, but to adjust the budget in line with the economic situation because a balanced budget reduces interest rates, increases savings and investment. In addition, trade reduces the deficit. In the long run, the economy moves forward. Generally, a balanced budget is made when the economy is in good condition, while deficit budgets are made to stimulate the economy when it is bad.

There was a time when the deficit budget was considered harmful and also the weakness of the government. The situation has changed now, but economists think that it is better to have some deficit in a poor country like Bangladesh. This increases the use of unused resources and puts pressure on them to fill the gaps. It stimulates the economy. It is not good to have wide deficit. Deficits of up to 5 percent of gross domestic product (GDP) are generally accepted. The budget deficit is met in two ways. This is basically a foreign loan. The government borrows on easy terms from various donor agencies and countries. It is more tolerable for the economy to be able to cover deficits with more debt from this source. Because, the interest rate is low and there is a lot of time to pay. However, the conditions are more. The government borrows from within the country in two ways such as from the banking system and non-bank system. Non-bank system is the sale of savings certificates. Thus the government borrows from the common people.

There are two dangers to borrowing more from internal sources. If the government borrows more from the banking system, there will be less money for the private sector. As a result, investment is reduced. And if you take a loan from a non-bank system, you have to pay higher interest rate. The government has to allocate more money to pay interest. This increases the budget for the next financial year. If the government borrows too much, inflation may rise.

There are two types of budget based on income and expenditure. And there is the development budget. Revenue expenditure is the cost of running the government. Revenue expenditure is also called non-development budget. Non-development expenditure is in three areas such as national defense, law and order and administration costs. Though is not a welfare state, Bangladesh is still trying to give the budget a humane look. For this, various social programs are implemented. The government also subsidizes the agriculture and energy sectors. Out of this there is the interest payment. However, the biggest cost sector is salary-allowance.

How many sources of income does the state have? These can be divided into three parts such as direct taxes, indirect taxes and non-taxable income. Direct taxes include personal income tax, business tax (corporate tax), donation tax, inheritance tax, vehicle tax, drug tax, land revenue, etc. And indirect taxes are import tax, excise duty, VAT or value added tax, supplementary duty etc. There is more income besides taxes. Such as profit of various government institutions, interest, income from general administration, income from post-wire-telephone, income from transportation, income from fines and penalties, income from rent, lease, toll and levy etc. The government implements the development plans with the rest of the income by meeting the expenses of running the country. The development budget is the money allocated for this. With this money various types of projects are implemented. The government carries out various developmental works including construction of roads, construction of bridges, rural development, and construction of power plants, schools, colleges and hospitals. Development budget is made up of revenue surplus and loans taken from inside and outside the country. There is a project sector called Annual Development Program (ADP). This is the sector in which development budget expenditure is usually shown. However, no matter how much the expenditure is shown, the national budget is not benefiting the common men if the budget is limited to the account of government revenue and expenditure. The budget is not for public welfare.

 

The writer is a Bir Muktijoddha, Former Tax Commissioner and Director - Bangladesh Satellite Company Limited