Budget a ‘litmus test’ for new govt as fiscal space tightens

The upcoming FY27 budget will be a “litmus test” for the newly elected government, experts warned yesterday, as it faces mounting pressure to balance reforms, debt obligations and political promises within the tightest fiscal space in recent memory.

There is little room to manoeuvre for policymakers as they face weak revenue mobilisation, an underperforming ADP, rising debt costs and unaddressed corruption, they said at a pre-budget dialogue organised by Citizen’s Platform for SDGs at the Lakeshore Hotel in Dhaka.

Towfiqul Islam Khan, additional director (research) of the Centre for Policy Dialogue (CPD), said while presenting the keynote paper that the budget would be shaped by a series of difficult trade-offs.

“The first budget of the newly elected government faces dual pressures of balancing economic stability and reforms while meeting political demands to deliver quickly and prove legitimacy, all within the tightest fiscal space in recent memory,” he said.

Public financial management faces challenges on multiple fronts, he said, including streamlining tax expenditures, protecting investment, advancing reforms, managing subsidies for the marginalised, and addressing the ADP (annual development programme) backlog.

Khan noted that the National Board of Revenue’s tax-to-GDP ratio fell to the lowest in years at 6.6 percent in FY25. The country “forgoes roughly as much as it collects” through exemptions and tax expenditures.

The government’s planned Tk 6.95 lakh crore revenue target for the upcoming fiscal year would require at least a 42 percent jump in collection compared to the current fiscal year, according to Khan. The FY26 shortfall alone is expected to reach Tk 1 lakh crore.

“A Plan B will be required if revenue mobilisation does not keep pace,” he said, raising the question of where the government would cut if the gap proved too wide.

Mustafizur Rahman, CPD distinguished fellow, said a major component of the “litmus test” is whether the government can ensure redistribution of resources through the budget.

According to him, the core issue was not revenue volume but reducing the gap between what taxpayers pay and what the government actually receives.

“That gap is corruption,” he said. “If we can bring this to zero, many of our other tasks will become much easier.”

The CPD fellow also warned of a deepening debt risk. Bangladesh’s borrowing is becoming increasingly non-concessional, yet the entire development programme still depends on loans.

“Interest and principal repayments are increasing gradually. This is creating a huge risk,” he said.

Debapriya Bhattacharya, noted economist and a distinguished fellow at CPD, criticised the government for not producing “a documented assessment of the economy” it inherited.

He said, “This government is focusing more on the outward aspects of political commitments such as Family Card, Farmers Card, canal excavation, and so on.

“But the core issue of the economy is maintaining macroeconomic stability, the biggest expression of which is controlling inflation, reducing interest rates and at the same time keeping the exchange rate stable.”

These issues, which are directly linked to people’s livelihoods, are not receiving sufficient attention, he said.

Debapriya said they suggested the government adopt a policy of “tough love” by preparing a budget that is consistent with reality.

Instead, he warned, the government is repeating the pattern of its predecessors and is risking passing a conventional budget similar to that of the interim government.

“You are increasing the ADP by another 20 percent even though 40 to 50 percent of the previous ADP could not be implemented. At the same time, you did not clean up the mess within those 1,500 projects,” he said. “You are simply reproducing the old situation in a new form.”

AK Enamul Haque, director general of Bangladesh Institute of Development Studies, said a portion of every budget usually remains unimplemented, and therefore, the efficiency level must be improved. He also stressed reducing land dependency in development projects.

“One reason many government projects are delayed is the huge amount of land demanded for project implementation. In a land-scarce country like ours, the land dependency of projects must be reduced,” he said.

Sharmind Neelormi, a professor of economics at Jahangirnagar University, suggested introducing a programme to ease tax-related fears among the nearly 82 percent of TIN holders who currently do not pay taxes.

She proposed engaging students from public and private universities in awareness programmes in exchange for an honorarium so that they could help TIN holders.

She also suggested allowing people with incomes below a certain threshold to submit “zero returns” for three years in order to build the habit of filing tax returns.

Mahmuda Habiba, a lawmaker from the Bangladesh Nationalist Party for a reserved women’s seat in the 13th National Parliament, said this year’s budget is “more of a crisis-management and stabilisation budget.”

Zahid Hossain, minister for women and children affairs and social welfare, said the government is focusing on making the country humanitarian and inclusive.

“But it may not happen overnight,” he said, urging all to work together.