(BONAFIDE) Page | 1 1. Fiscal policy Fiscal policy of Bangladesh basically comprises activities to ensure macroeconomic stability of the country. Fiscal policy of Bangladesh is expansionary that causes large budget deficit. As a result, government of Bangladesh follows reflationary fiscal stance- borrows money to overcome the budget deficit. In the fiscal year 2009-2010, Bangladesh government estimated the budget deficit of Tk. 343.58 billion of which Tk. 137.14 will come from domestic sources and Tk. 173.25 will come from foreign sources. The main reasons of budget deficit are tax avoidance of public and corruption in government sector. However, present government is trying to increase both the government and public investment. As a result, government should improve the environment of investment by ensuring available supply of energy, gas, transportation and implementing law and order system. Another negative side of Bangladesh economy is high inflation rate. So, government should take all the necessary steps to reduce the inflation. Otherwise, people have to suffer a lot. So, the overall circumstance of Bangladesh economy is not so good. 2. Introduction 2.1 Fiscal Policy: Fiscal Policy generally refers to the use of taxation and government expenditure to regulate the aggregate level of economic activity in a country. Fiscal policy is taken by the government of a country. 2.2 Classification of fiscal policy: Fiscal policy has got three forms and by the help of those forms the government regulates the fiscal activity in an economy. . 2.2.1 Expansionary fiscal policy: A form of fiscal policy in which an increase in government purchases, a decrease in taxes, and an increase in transfer payments are used to correct the problems of a business cycle contraction. The goal of expansionary fiscal policy is to close a recessionary gap, stimulate the economy, and decrease the unemployment rate. Expansionary fiscal policy is designed to stimulate the economy during or anticipation of a business-cycle contraction. This is accomplished by increasing aggregate expenditures and aggregate demand
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(BONAFIDE) Page | 1
1. Fiscal policy
Fiscal policy of Bangladesh basically comprises activities to ensure macroeconomic stability of
the country. Fiscal policy of Bangladesh is expansionary that causes large budget deficit. As a
result, government of Bangladesh follows reflationary fiscal stance- borrows money to overcome
the budget deficit. In the fiscal year 2009-2010, Bangladesh government estimated the budget
deficit of Tk. 343.58 billion of which Tk. 137.14 will come from domestic sources and Tk.
173.25 will come from foreign sources. The main reasons of budget deficit are tax avoidance of
public and corruption in government sector. However, present government is trying to increase
both the government and public investment. As a result, government should improve the
environment of investment by ensuring available supply of energy, gas, transportation and
implementing law and order system. Another negative side of Bangladesh economy is high
inflation rate. So, government should take all the necessary steps to reduce the inflation.
Otherwise, people have to suffer a lot. So, the overall circumstance of Bangladesh economy is
not so good.
2. Introduction
2.1 Fiscal Policy: Fiscal Policy generally refers to the use of taxation and government
expenditure to regulate the aggregate level of economic activity in a country. Fiscal policy is
taken by the government of a country.
2.2 Classification of fiscal policy: Fiscal policy has got three forms and by the help of those
forms the government regulates the fiscal activity in an economy.
.
2.2.1 Expansionary fiscal policy: A form of fiscal policy in which an increase in government
purchases, a decrease in taxes, and an increase in transfer payments are used to correct the
problems of a business cycle contraction. The goal of expansionary fiscal policy is to close a
recessionary gap, stimulate the economy, and decrease the unemployment rate. Expansionary
fiscal policy is designed to stimulate the economy during or anticipation of a business-cycle
contraction. This is accomplished by increasing aggregate expenditures and aggregate demand
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through an increase in government spending or a decrease in taxes. Expansionary fiscal policy
leads to a larger government budget deficit or a smaller budget surplus. Expansionary fiscal
policy is usually associated with a budget deficit.
2.2.2 Contradictory fiscal policy: A form of fiscal policy in which a decrease in government
purchases, an increase in taxes, and a decrease in transfer payments are used to correct the
inflationary problems of a business-cycle expansion. The goal of contradictory fiscal policy is to
close an inflationary gap, restrain the economy, and decrease the inflation rate. Contradictory
fiscal policy is designed to restrain the economy during or anticipation of an inflation-inducing
business-cycle expansion. This is accomplished by decreasing aggregate expenditures and
aggregate demand through a decrease in government spending or an increase in taxes.
Contradictory fiscal policy leads to a smaller government budget deficit or a larger budget
surplus.
2.2.3 Self-Financing Fiscal Policy: Assume an economy in which output is well below its
potential, cyclical unemployment is elevated, supply constraints on short-run demand are absent,
conventional monetary policy is constrained by the zero lower bound, and the central bank is
either unable or unwilling to, but in any case does not, provide additional stimulus through
quantitative easing or other means. A simple calculation then conveys the main message of this
paper: under these circumstances, a combination of real government borrowing rates in the
historical range, modestly positive fiscal multiplier effects, and small hysteresis effects are
together sufficient to render fiscal expansion self-financing.
3. Fiscal policy in Bangladesh
Fiscal policy in Bangladesh basically comprises activities, which the country carries out to obtain
and use resources to provide services while ensuring optimum efficiency of the economic units.
The policy influences the behavior of economic forces through public finance. Major objectives
of the fiscal policy of Bangladesh are to ensure macroeconomic stability of the country, promote
economic growth, and develop a mechanism for equitable distribution of income. The main tools
to achieve these objectives are variation in public revenue, variation in public expenditure, and
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management of public debt. These are reflected in the budgetary operations of the government,
prepared and implemented on year-on-year basis.
4. History of Bangladesh fiscal policy
In the initial years of independence, the government of Bangladesh had to spend a large amount
of its resources in reconstruction and rehabilitation work. It had negative public savings and
limited private investment. Despite large inflows of FOREIGN AID, the increasingly large
financing gap became the main concern of the government. The situation was further aggravated
by frequent internal and external shocks. Under the circumstances, government fiscal policies
during 1970s and 1980s were largely oriented at rehabilitating the war-torn economy as well as
stabilizing it from various shocks. This had gradually leaded to weak fiscal structure and poor
fiscal management. The tax structure was such that any increases in taxes due to built-in
consequences of economic growth were virtually not possible. This was because of the fact that
despite a moderate growth of the economy, INCOME DISTRIBUTION was skewed, and had been
pushing more and more people below the POVERTY line each year. As such, the proportion
of POPULATION with taxable surplus went down overtime. More than 80% of the total tax
revenue came from indirect taxes, amongst which taxes on imports contributed about 60%. Since
most imports were in the government sector and basic need-oriented, it was hardly possible to
increase import duty. Despite higher production costs, prices of most public goods could not be
rationalized due to socio - economic reasons. As such, these were kept lower, which resulted in
inadequate cost recovery.
5. Taxation Policy of Bangladesh Government:
Taxation one of the major sources of public revenue to meet a country's revenue and
development expenditures with a view to accomplishing some economic and social objectives,
such as redistribution of income, price stabilization and discouraging harmful consumption. It
supplements other sources of public finance such as issuance of currency notes and coins,
charging for public goods and services and borrowings. Bangladesh inherited a system of
taxation from its past British and Pakistani rulers. According to Article 152(1) of the
Constitution of Bangladesh, taxation includes the imposition of any tax, rate, duty or impost,
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whether general, local or special, and tax shall be construed accordingly. To develop manpower
for efficient tax administration, the government runs two training academies - BCS (Tax)
Academy at DHAKA for direct tax training and Customs, Excise and Value Added Tax Training
Academy at Chittagong for indirect tax training. The NATIONAL BOARD OF REVENUE (NBR) is the
apex tax authority of Bangladesh and it collects around 93% of total taxes or 76% of total public
revenues. The NBR portion of total taxes includes CUSTOMS DUTY, VALUE ADDED TAX (VAT),