ASSIGNMENT

TOPIC: BUDGET COURSE : MANAGERIAL ECONOMICS

Prepared for:
M. Nasiruddin Honorary Professor Department of Finance University of Dhaka

Prepared by,

Ismat Jerin Chetona ID-24065 Sec : B University of Dhaka

Submission Date: 26th August, 2013

A BUDGET is a description of a financial plan. It is an estimation of the revenue and expenses over a specified future period. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a microeconomic concept that shows the tradeoff made when one good is being exchanged for another. A SURPLUS BUDGET means profits are anticipated, while a BALANCED BUDGET means that revenues are expected to equal expenses. A DEFICIT BUDGET means expenses will exceed revenues. Budgets are usually compiled and re-evaluated on a periodic basis. Adjustments can be made to budgets based on the goals of the budgeting organization. In some cases, budget makers are happy to operate at a deficit, while in other cases, operating at a deficit is seen as financially irresponsible. A budget may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units, organizations, activities, or events in measurable terms. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise. It also helps coordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. ry terms. Other purpose of budget include: To control resources To communicate plans to various responsibility center managers.

To motivate managers to strive to achieve budget goals. To evaluate the performance of managers To provide visibility into the company's performance For accountability

In summary, budgeting is a tool that: provide a forecast of revenues and expenditures, that is, construct a model of how a business might perform financially if certain strategies, events and plans are carried out. enable the actual financial operation of the business to be measured against the forecast. establish the cost constraint for a project, program, or operation.

In this assignment, I would like to discuss about Government budget and more precisely about the national budget of our country of the current financial year 2013-2014.
The budget of a government is a summary or plan of the intended revenues and expenditures of that government. There are three types of government budget: the operating or current budget, the capital or investment budget, and the cash or cash flow budget. As a policy document, a government's budget is designed as a plan for implementing its policy. Traditionally, budgets served as a more rigid tool to implement policy in a retrospective setting. A government budget is a document that is often passed by the legislature, and approved by the chief executive-or president. For example, only certain types of revenue may be imposed and collected. Property tax is frequently the basis for municipal and county revenues, while sales tax and/or income tax are the basis for state revenues, and income tax and corporate tax are the basis for national revenues. The two basic elements of any budget are the revenues and expenses. In the case of the government, revenues are derived primarily from taxes. Government expenses include spending on current goods and services, which economists call government consumption; government investment expenditures such as infrastructure investment or research expenditure; and transfer payments like unemployment or retirement benefits. Budgets have an economic, political, and technical basis. Unlike a pure economic budget, they are not entirely designed to allocate scarce resources for the best economic use. They also have a

political basis wherein different interests push and pull in an attempt to obtain benefits and avoid burdens. The technical element is the forecast of the likely levels of revenues and expenses. Government Budget In Bangladesh is reported by the Bangladesh Bank. Bangladesh Government Budget averaged -3.34 Percent of GDP from 1994 until 2012, reaching an all time high of -1.60 Percent of GDP in December of 2009 and a record low of -5.30 Percent of GDP in December of 2008. 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). The National Budget for the fiscal year 2013-2014 of Bangladesh has been announced by the Honorable Finance Minister on June 6, 2013, against the backdrop of mixed performance in the preceding year in terms of macroeconomic and fiscal management. The size of the budget for the fiscal year 2013-14 is Tk 33,165 core. It is 17.52 percent higher than the current fiscal's revised budget of Tk 189,326 crore. The real economic growth target has been fixed at 7.2 percent for the new financial year. The final one of current tenure of the incumbent government has been placed in the Parliament with a profuse expenditure target at Tk2224.91b, which is 18.7% of the Gross Domestic Product (GDP). In the budget for the year 2013-14, the allocation for non- development and other expenditures has been estimated at Tk. 1,56,621 crore. Expenditure for ADP has been estimated at Tk. 65,870 crore. Finance Minister in his post-budget press conference said that the budget may be ambitious but is implementable. However, according to experts and critics the budget portrays overly optimistic revenue target riding high on spending and bloated development allocations. The GDP growth rate for FY2013-14 in the budget has been projected at an ambitious 7.2% while the inflationary pressure is pledged to be curbed within 7%.

Revenue goal: In the Budget for the FY 13-14 the government has set a revenue target (excerpt grants) of Tk1674b (14.1% of GDP) in which NBR tax revenue is Tk. 1,36,090 crore. Revenue from Non-NBR sources has been estimated at Tk. 5,129 crore.. The budget has planned to procure Tk1412.2b (11.9% of GDP) from the taxpaying sources. The government hopes to achieve this by increasing the weight of National Board of Revenue (NBR) tax for yet another year to 21.23% (21.53% in budget FY13). The rest Tk262.4b (2.2% of GDP) is aimed to be collected from the non-tax revenues. Income tax and Value-Added Tax (VAT) jointly are

expected to provide for the lion share of Tk982.53b. The target is Tk224.9b higher than the previous years target. The projected Tax to GDP ratio for FY14 is 11.88% that is currently 11.22%. The collection targets for non-NBR and Non-Tax revenue sections also signified increase of Tk51.3b and Tk262.4b by 12.4% and 14.9% For achieving the revenue-earning target, the finance minister expressed his determination to carry out reforms in revenue department and said the government has taken initiatives to affect planned reforms in this sector as a vital part of its strategy of overall economic policy. The projected Tax to GDP ratio for FY14 is 11.88% that is currently 11.22%. The collection targets for non-NBR and Non-Tax revenue sections also signified increase of Tk51.3b and Tk262.4b by 12.4% and 14.9%. The government has increased the taxable income slabs and made some major alteration to tax and rebate system that might affect the revenue collection to some extent. At this backdrop, the revenue collection target appears to be too ambitious to realize. The government, nevertheless, believes the new tax slabs and reform measures including expansion of tax offices will eliminate irregularities and include 0.3m new taxpayers this year under the tax net and thus drive up the tax revenue.

All about spending: The Finance minister said the that on the expenditure side, he said the size of Annual Development Program for the next fiscal year will be 658.70-billion-taka (8.44 billion dollars) with power and communications sectors getting the biggest chunk of money. Interest expense, the cost of incautious government borrowing from the banking channel, dominates the total budgetary allocation with 12.5% share in the total expenditure. In addition, the budget has set aside nearly 6.9% of its outlays for capital investment, primarily to bailout the troubled state owned banks. Higher attention to the unproductive sectors is trenching rational requirements of the priority sectors like agriculture, health, and defense. This is hazardous for economic and social growth. Moreover, despite widespread controversy the government made generous allocation for constructing Padma Bridge, which nonetheless is subject to substantial degrees of uncertainties. For a developing economy like Bangladesh, large budget outlay could

have been affirming if the revenue-expenditure balance and the quality of expenditure are ensured. Considering slump in net borrowing from savings certificates the government has set next years target at Tk49.71b. Realizing Tk143.98b foreign aid might also not be that challenging if the current pace of utilization is maintained. The enigma actually lies with the net borrowing target from the banking system. The budget set a target to borrow Tk259.93b from the banking system, which is close to the total paid-up capital of the scheduled banks. In addition, the financial system (other than banks) might have to contribute in the Tk30b non-bank borrowing requirement. The economy is already bearing the air-stream of the previous years excessive bank borrowing; next years target will make the condition more perplexing. Furthermore, the financial system is recently going through a hard time. Reliance on costlier financing will also increase the interest expense. In FY14 an amount of Tk277.43b which is 17.9% of the revenue expenditure or 12.5% of the budget outlay will be used to pay off interest. Allocating largest fund for interest payment would confine outlay for productive and emergency purposes. Moreover, the side effects associated with the financing options are irreversible. Annual Development Program (ADP) Budget: A gigantic Annual Development Program (ADP) budget of Tk658.7b (5.5% of GDP) has been proposed for FY2013-14, which is 19.76% higher than the original ADP of FY2012-13 of Tk550b. Of the total ADP allocation, Tk413.07b (62.07%) would be financed from local sources while the rest Tk245.63b (37.30%) had been planned to be financed from project aids, loans & grants. The transport sector got the highest allocation (23.34%) as Tk68.52b has been allocated solely for Padma Bridge under this sector, resulted in lesser ADP allocation for other development projects. Only 50 new projects are going to be included under this proposed ADP along with 996 carried forward and 130 projects of the autonomous bodies.

The private sector investment rate was upwardly mobile until FY11. Since FY12, initially the uncongenial fiscal and monetary stances and later the intensified political tension and financial sector instability impaired the private sector investment growth. Allocation for Investment: The budget for the FY13-14 offered a number of tax incentives to augment investments. The customs duties on capital machineries import has been reduced to 2% from 3%. That of the

intermediate raw materials was also proposed to be trimmed down to 10% from 12%. The budget has also relaxed the regulatory duty imposed on some important raw materials for the textiles sector. The SME, pharmaceutical and shipbuilding sectors have also got a boost. Tax holiday for 17 industrial and 17 infrastructure facilities was been extended for two more years until June 30, 2015. The budget has also proposed to increase investment tax rebate by 5 percentage points to 15% and raise the investment ceiling to Tk15m from existing Tk10m.

The overall budget deficit is Tk. 55,032 crore and of this amount, Tk. 21,068 crore will be financed from external sources and Tk. 33,964 crore will be mobilized from domestic sources. Of the domestic financing, Tk. 25,993 crore will come from the banking system.

Deep deficit proposition: In all the fiscal budgets proposed by the incumbent government deficit were projected at 5% of the Gross Domestic Product (GDP). However, this time the

government had to accede to the International Monetary Fund (IMF). Hence, breaking the tradition, the government estimated the budget deficit for FY14 at 4.6% of the GDP, though IMF suggested it to be at 4.3% of the GDP. The deficit target for FY14 is thus projected to be Tk550.32b. However there remains a risk of further increase considering the over ambitious revenue collection target. Consuming such costly (both tangible and opportunity costs) fiscal deficit would be worthy only if the fund mobilized for deficit financing are channeled to the productive sectors.

Critics opinion on the Budget Opposition party leader Begum Khaleda Zia termed the present budget as only aimed for looting purposes only. From Opposition, BNP leader Barrister Moudud said that the budget is a big beautiful balloon. Center for Policy Dialogue(CPD) termed the budget as surreal. Policy Research Centre.bd (PRC.bd) in its presentation mentioned Tk 222,491 crore budget as lavish, the projected growth of GDP impossible with governments present track record and the Padma Bridge financing as a challenge, the think tank identified a number of prospective issues that need special attention and review for the overall success of the budget.0 Revenue and internal debt: Foremost, the National Board of Revenues (NBR) expected revenue earning of Tk 136,100 crore during the next fiscal year is unrealistic: the amount being around 21 per cent higher than the bygone fiscal, and at a period of discernible economic contraction. As well, due to recurring deficits and increased public borrowing, spending on interest payment will go up further in the next fiscal. Interest payment alone amounted to around Tk 23,300 crore in the last fiscal, which is expected to surpass Tk 30,000 crore in the upcoming fiscal. As of March 2013, total internal outstanding credit of the government from banks and savings instruments stood at Tk 162,791 crore. The higher borrowing in 2013-2014 will warrant more money for interest payment. External debt: Besides, as the total external debt now stands at about US$24 billion, approximately $1.4 billion worth of fund has to be spared to meet external debt payment obligations, about $226 million higher than what was needed in the previous year.

According to one estimate, $964 million will be needed in the next fiscal to make payment towards the principal amount owed on external credit while another about $210 million will be needed for interest payment alone. External trade: In 2013-2014, revenue from external trading is likely to fall due to reduced import activities observed in the previous fiscal and an anticipated fall in exports too. During the first nine months of the previous fiscal (July March), import amounted to $24.2 billion against $24.4 billion of the corresponding period of the previous year. While remittance from Non-Resident Bangladeshis (NRB) is likely to remain robust in the upcoming fiscal too, due mainly to the obligations of expatriate workers to their family members back home, export of Readymade Garments (RMG) which accounts for over 80 percent of the total export earning and earns for the economy about $20 billion annuallyis expected to fall dramatically. RMG shock: The RMG sector is under a tectonic transformation due to the bad publicity it had received lately from the collapse of the Rana Plaza complex in Savar and the consequent deaths of over 1100 people. Buyers are also scared by the fact that 60 per cent of Bangladesh garment factories are considered similarly vulnerable and at risk of collapsing. This is shown in the results of a survey analyzed by a team of engineers from the Bangladesh University of Engineering and Technology (BUET), who have so far visited and examined just a sixth of the Dhaka regions 3,000 RMG factories. The survey shows most of the factories suffer from the same pitfalls as are being discovered in the Rana Plaza complex. Compliance and competition: No wonder a new set of compliances are now being demanded of the manufacturers from Bangladesh by external buyers while the competition is intensifying further. High street retailers like Primark, H&M and Zara- whod used the Rana Plaza factories for their products have already preconditioned their future trading with Bangladesh on fulfilling new health and safety standards to prevent the recurrence of similar tragedies. Added to this sullied image and stricter preconditions is the demand by nearly 4 million workers of increased wage, which, though realistic and unavoidable, will further undercut the nations competitive edge. Growth-unfriendly: Finally, the budget is not growth-friendly. The four main planks of the GDP are: Volume of domestic consumption; private investment, productivity and job creation; public investment, productivity and job creation, and; volume of export and import. While excessive public borrowing will choke off private borrowing and investment, exacerbate the unemployment crisis, and, cause both export and import to nosedive, reduced consumer demand will truncate the revenue from the VAT which now constitutes the main chunk of the governments earning.

Above all, the huge allocation for the Padma bridge construction project, about Taka 50 billion, will divert indispensible allocations from other vulnerable sectors without offering commensurable dividends to growth, employability and revenue earning. In the final analysis, the lofty budget may be election friendly for a regime hell bent on clinging onto power; it is economically unsustainable and politically disastrous. In summary, the national budget FY 2012-2013, placed in the election year, portrays overly optimistic revenue target which is high on spending and bloated development allocations. It feels that it is a last gasp effort from the government to please and sway voters with the opportunity to blame for any non-implementation to the newly elected government. The national budget FY2013-14 has been rolled out on the back drop of a year that experienced mixed fortunes. On one hand robust remittance inflows, modest export growth and declining imports boosted foreign exchange reserves, aided appreciation of the Taka and improved balance of payments; partially restoring macroeconomic stability and providing import security and stabilization. While on the other hand adverse domestic factors in the form of restrained private investments, dithering infrastructural development and low employment generation amid unrelenting political turmoil resulted in slow economic growth for a second consecutive year while the public endured erosion of purchasing power as domestic savings slipped to lowest level in a decade. Exposure to malpractices and scams afflicting the financial sector aggravated default loans resulting in high interest rate and subdued private sector credit growth. Just like the previous budgets, the new one also put much emphasis in the size than the quality in less creative accommodation with emerging challenges. The budget is too ambitious yet less visionary and appeared to be a combination of flashy figures to lure voters and compromising policies to accord with International Monetary Fund. It thus clearly lacks in coordination between facts and figures. Implementation of the budget, which seems over optimistic at instances, would have to straggle and therefore undergo adjustments for sure.