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Broken window, weeping growth and Budget 2014-15

Mahfuz Kabir
BANGLADESH Bureau of Statistics (BBS), the 'sole authority' of calculating and reporting national income accounts, recently came up with provisional GDP growth of 6.12% amid much pessimistic projections by external players including the World Bank. The explanation that BBS provided for service sector growth was that services GDP grew partly because of higher cost of transportation and other services. This reminds us of the story of a group of agitated people having a violent procession, and suddenly some of them threw rocks on your window. "No worries, insurance company will fix the broken grass." Numerous cars were broken, properties burnt, lives lost and people spent more than they could never imagine in the next few months. "It was a not bad at all because ultimately people got more money for retention and normalcy. The economy has benefited at the end."
This story of costly growth is nothing but the celebrated 'broken window fallacy' proposed by Frederic Bastiat in 1850, which demonstrates why destruction and the extra money spent for recovery is indeed is not a net benefit to the society. BBS calculates services GDP in monetary terms. However, this apparently 'bonus' growth, coming from intangible pains and tears of millions of citizens, could be adjusted for higher costs for the same or even lower amount of service. BBS reported the growth of real GDP of 6.12% which is supposed to be accounted through filtering abnormally higher cost of
same services. We should not work out real GDP of services through backward calculation of their current market price adjusting for generic inflation, which would provide a completely wrong signal to everyone. Rather, it could be normalised through adjustment with the previous year's price to provide more accurate figure.
Having crossed the 'hurdle' of 6%, it can be termed as 'sleeping growth' as the World Bank commented that it can be achieved if we only follow Newton's first law of motion, i.e., maintain the status quo. However, for achieving higher growth as per the projection of the Sixth Five-Year Plan we need significant boost through budget, both in fiscal operation and public investment programmes. While there were imperatives to come out of the tearful episodes and build on the intrinsic strength of the economy for moving ahead, the proposed budget 2014-15 could hardly unleash optimism particularly after elections. Instead, it is a bit 'single contraction', i.e., an impressive fiscal growth in terms of planned expenditure but conservative monetary regime.
Building on this growth, the proposed budget 2014-15 aims to attain a dream growth of 7.3%, which requires not only awakening the economy but also moving ahead steadily with enormous strength. The proposed budget of Tk.2.5 trillion would work as a starter to pull the economy up through providing some incentives to the private sector and redistribution. However, the next step will require considerable new public investment on energy supply and infrastructure which is quite impossible despite a gigantic ADP of Tk.803.15 billion. This is absolutely because of
lack of transition from the traditional annual low return ADP to a high return multi-year public investment programme. Out of this, allocation of 23.3% in transport and communication and 14.3% in power and energy would address some of the problems temporarily but lack of durable mega infrastructure and energy projects in the next fiscal year, as ADP document reveals, is unlikely to facilitate high-growth ambition.
The finance minister was partially true in terming income tax as the 'future' of domestic resource mobilisaion. To slightly alter the downward stickiness of high Gini coefficient, he tried to make change in the redistributive measure through introducing super-tax on annual personal income above Tk. 4.42 million. What we surprisingly notice, decisions on taxes come merely based on perception and popular demand, not based on rigorous analysis of incidence and net social benefit. This, in turn, results in persistent high inequality and ailment of the economy. The proposed income tax structure is still regressive in its rate, and to a large extent on incidence as most of the upper-middle income groups would provide tax which is lower than progressive tax as seen in the illustration.
Effective fiscal flow from central to local level is a prerequisite to reduce regional disparity and achieving vibration in the local economy, which is also helpful to provide concerted effort to achieve higher growth. Local government units (LGUs) were supposed to get most of the budget of Local Government Division in the proposed budget according to MTBF 2013-14 to 2017-18 projections to
undertake development activities. It, however, did not take place in the proposed budget, which is likely to squeeze LGUs activities through both sluggish local development and lower local resource generation.
The number one challenge of the proposed budget would be to attract investment for attaining the 'dream growth,' which will be an uneasy task for the government with an impressive budget. We already witnessed a very short symptom from the last-minute performance of the stock market despite benefits announced in the budget speech. This clearly indicates the role of confidence of the investors in the upcoming fiscal year when political uncertaintywill remain a critical determinant.
The first and foremost task of the budget should therefore be to provide a signal to everyone to take advantage of the first fiscal year after elections, which is historically growth-stimulating. Destruction is never profitable for the society. It only ends up with weeping payoff for everyone.
The writer is Economist and Senior Research Fellow at Bangladesh Institute of International and Strategic Studies.
E-mail: mahfuzkabir@yahoo.com.