Some thoughts on the financing of the budget deficit


The budget deficit is one of the most important macroeconomic problems facing economists. It has been debated since the 1970s in academic and political arenas. Due to the experience of structural problems, the budget deficit poses more extreme problems in developing countries than in developed countries.

However, in developing countries, budget deficits are likely to occur due to structural and economic factors such as high rates of inflation, a deficit in the balance of payments, an extreme level of expenditure relative to a insufficient national income, as well as other political factors the reasons. Conversely, developed countries are not severely affected by the negative impacts of the budget deficit on macroeconomic balances, unlike developing countries, because they have a positive external trade balance, high foreign exchange reserves and capital stock, and low inflation. Therefore, the government can use the sources of deficit financing primarily through debt to fill the budget deficit and spray the negative effects on the economy.

In general, the financing of the budget deficit is covered by borrowing from other sectors of the economy or the international financial market, public borrowing from domestic sources, central bank minting, and this can also be done. do so by issuing public securities. A higher level of domestic lending results in considerable economic expenditure which leads to slower economic growth. Growing domestic debt drives up debt service costs. Servicing the domestic debt absorbs a large share of government revenue. The government therefore has fewer resources to devote to improvement projects. Moreover, in the financial markets, as domestic debt increases, the cost of interest also increases due to holding a large number of loans in short-term instruments. If the budget deficit is financed by borrowing from the domestic banking system, there will be an increase in domestic interest rates and crowding out of private investment. In addition, the monetization of the deficit leads to an expansion of the money supply and therefore the rate of inflation. In addition, the exchange rate may appreciate due to the adoption of a deficit budget. The appreciation of the real exchange rate due to the inflow of foreign exchange makes the country’s exports less competitive. This will further deteriorate the trade balance. Again, less competitive exports can lead to a shift in resources from the production of tradable goods to the production of non-tradable goods.

However, an excessive budget deficit can lead to a debt crisis because it leads to growth in the country’s external debt stock. Thus, the budget deficit has a cascading impact on the financial, economic and political stability of the country.

Since independence, Bangladesh has experienced a slight increase in the growth rate of gross domestic product (GDP), from an average of less than 4.0% per year between 1972-1990 to 6.47% in 2015- 21. Although Bangladesh has attracted immeasurable attention from around the world due to the growth of its economy, it has experienced continued budget deficits and growing debt levels over the years due to declining sources of income. The tax-to-GDP ratio is one of the lowest in Bangladesh compared to other South Asian countries. Over the past 10 years, Bangladesh’s average tax-to-GDP ratio was 10.3 percent, compared to 19.6 percent in India and 19.6 percent in Nepal. In developed countries, the average tax-to-GDP ratio is 35.8 percent. Although the economy is developing, there is a blockage in growth due to the increase in government spending relative to revenues.

According to the Bangladesh Economic Review (2021), the total budget deficit (excluding grants) for fiscal year 2020-21 was estimated at Tk 1.9 trillion, or about 6.0 percent of GDP. Domestic government borrowing in Bangladesh increased from Tk 16.5 billion in 1981 to Tk 1,099.83 billion in 2021, while government borrowing from external sources increased from Tk 42.5 billion in 1981 to 760.04 billion Tk in 2021. In comparison with domestic debt, the amount of public borrowing from external sources decreased between 2006 and 2021.

Within national sources, government borrowing from non-bank sources during the period 2017-2019 had increased, mainly due to the expansion of the net sale of National Savings Directorate (NSD) certificates, while borrowing from bank sources was down. After 2019, government borrowing from bank sources increases relative to non-bank sources in Bangladesh. It is generally argued that a decrease in borrowing from the banking system stimulates private sector investment because it reduces the crowding out effect resulting from government borrowing from banking industries. On the other hand, raising funds from the sale of NSD certificates will incentivize savers by delivering positive real returns as well as ensuring the social safety net of marginal families, although this has more costly implications for the economy. government. In any case, when wasted, external borrowing expenditures can add to macroeconomic administration problems in the form of severe or unreasonable levels of external debt service commitments.

It is true that, for the economic development of our country, the budget deficit is significant, but it remains to be seen to what extent the maintenance of the amount of 6 percent of GDP, which is equivalent to almost 32 percent of the total budget , is reasonable. He will have to keep in mind that the budget deficit increases the national debt, that more national debts force the public treasury to pay more interest and that more interest charges play a role in the extension of the budget deficit. According to the World Bank (2010), the deficit budgeting route stipulates that fiscal responsibility law deficits should not exceed 3% of GDP. According to some researchers, these conditions are met if the size of the total budget deficit is around 3 percent of GDP.

The government of Bangladesh is expected to reduce the size of budget deficits, primarily by increasing domestic revenue mobilization through broadening the tax base while reducing external financing and the borrowing deficit. The tax base can be broadened by reducing the size of the informal sector, combating corruption and tax evasion, reducing unproductive tax exemptions and improving the overall efficiency of the tax organization. A decrease in the overall current expenditure bill relative to GDP can also help alleviate the problem of budget deficit which leads to the accumulation of debts in Bangladesh.

As deficit financing by the banking sector crowds out private investment, the government must therefore strengthen policies that reduce the amount of deficit financing by the banking sector in order to improve economic growth. Perhaps the public authority should focus on other internal sources like the non-bank public, individual investors in the securities and bond market, further privatization, dealing with the glut of money , etc. Therefore, it is recommended that the deficit financing be enlarged in a sustainable manner and that the government ensure an efficient public expenditure process, fiscal discipline and maintenance of macroeconomic stability so that the economy of Bangladesh can develop. It is suggested that the government’s budget deficit should be focused on the use of capital spending rather than recurrent spending to secure investment in infrastructure that can improve economic development through upgrading domestic investment. and exteriors. External debt should also be closely monitored to ensure that external borrowing does not exceed the normal limit, which could lead to debt distress. In addition, the government should increase moderate levels of domestic and foreign borrowing and use it productively and efficiently to accelerate economic growth in Bangladesh.

Dr. Md Nazmus Sadekin is Chairman of the Department of Economics and Dean of the Faculty of Social Sciences, Mawlana Bhashani University of Science and Technology, Bangladesh.

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Michael J. Birnbaum

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