The Sources of funds, budget deficit & its impact on important sectors that influences the economy

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Prepared By:Jasfia khanam Fama Id:133200105

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Prepared to: Nasreen SultanaSenior lecturerEastern University, FBA

ObjectivesBroad objective

• To identify the sources of funds, the budget deficit & its impact on important sectors that influences the economy.

Specific objectives:Under this principle objective following specific objectives have

been covered:

To identify the sources of fund in the budget. To evaluate the reasons and bad effects of budget deficit. To identify the effects on different sectors influencing the

economy significantly. To find ways for managing the budget deficit for the purpose of

macroeconomic goal achievement.

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Financial sectors of Budget

• As Bangladesh has been facing sustained deficit budget the sources of resource collection is not enough to finance the budget at all.

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• Tax is the main source of government revenue collection.

• But the amount of tax is not enough to finance the deficit budget.

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Thus, there are 3 main sources of financial sectors of budget as-

1. Loans & Advances and Non-Development Expenditure2. Domestic borrowings and3. Foreign assistance.

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Description 2016-17 2015-16 2015-14

A. ReceiptsFinancial Institution 79 138 211

Non-Financial Institutions 892 2,002 1,021

Government Employees 37 88 129

Subtotal-Receipts 1,008 1,742 1,361

B. PaymentsNon-financial institutions 9,260 9,800 10,178

Government Employees 176 183 177

Program management 0 0 0

Subtotal- payments 9,436 9.983 10,408

Loan & advances net(B-A) 8,428 7,755 9,047

C. Non-ADP employment generation program 4,147 3,339 2,346

Loans & Advances and Other Non-Development Expenditure:(Taka in crore)

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Description 2016-17 2015-16 2014-15A. Domestic Debt ReceiptsBorrowing from Banking System

Long-term Debt 44,504 36,321 17,026Short-term Debt 98,269 1,02,285 84,150 Sub Total - Borrowing from Banking System 1,42,773 1,38,579 1,02,176

Non-Bank BorrowingNational Savings Schemes 43,240 36,500 42,597Others 12,800 12,394 5,52,249 Sub Total - Non-Bank Borrowing 56,040 48,894 5,94,846

Total - Domestic Debt Receipts 1,98,813 1,87,473 6,97,022

Domestic Borrowing (Taka in crore)

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Description 2016-17 2015-16 2014-15Foreign Assistance Grants:Food aid 316 200 30Project Aid 5,200 5,600 2,291Others 0 0 0

Subtotal Grand 5,516 5,800 2,324LoansProject Aid 34,800 28,900 0Non-ADP Project Aid 4,147 3,329 101Miscellaneous Foreign Loan 0 0 11,889

Subtotal loan 38,947 32,239 11,990Total Foreign Assistance 44,463 38,039 14,314Use of Foreign AssistanceFor ADP:Project Aid 40,000 34,500 2,291Miscellaneous Foreign Loan 0 0 11,889

Sub Total - For ADP: 40,000 34500 14180OthersFood Aid 316 200 31Non ADP 4,147 3,539 2,346

Subtotal for other 4,463 3,539 2,377Total-use of foreign assistance 44,463 38,039 16,557

Foreign Assistance (Taka in crore)

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Overview of Deficit Budget (2016-17)

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Comparison of deficit budget between 3 years:

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Sector FY#16-17 FY#15-16 FY#14-15

NBR Tax Revenue 2,031.52 1763.7 1239.77

Non-NBR Tax Revenue 72.50 58.74 48.21

Non Tax Revenue 323.50 261.99 171.67

Total Revenue 2,427.52 2084.43 1459.65Non Dev. Expenditure 1,889.66 1645.71 1189.92

Development Expenditure 1,170.27 1025.59 636.76

In which , Annual Dev. Program 107.00 970.00 603.76

Other Expenditure 346.12 279.70 217.08

Total Expenditure 3,406.05 2951.00 2043.76

Budget Deficit 978.53 866.57 584.11

Evaluation of bad effects of budget deficit

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1. Crowding out effect, a dilemma of public investment:

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2. Increase in Inflation due to budget deficit:

• Inflation rate may be increased by extra circulation of money.

• Budget deficit causes to increase the circulation of money.

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Reasons of inflation due to deficit budget in our economy:

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Effects of inflation due to deficit budget that affect our economy

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3. Interest rate Increase due to budget deficit or wrong monetary policy

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• Two another bad effect of budget deficit is:

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The Effects of Deficit Budget on different sectors

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The Effects of Deficit Budget on different sectors:

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The most important sectors are describe below

1. Education : This year government has allocated 26% of total Budget for

allocation.

2. Health care :

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Year Health budget(in %of total allocation)

2009-10 6.2%

2010-11 5.9%

2011-12 5.1%

2012-13 5.8%

2013-14 4.6%

2014-15 4.5%

2015-16 5.6%

2016-17 8.45%

Standard Allocation :

There should be 15% of total budget allocation to the Standard of World Health organization .

In Bangladesh there is only 4.45 % of total Budget allocation of Healthcare .

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3. Agriculture :

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Year Contribution on agriculture sector to the GDP (%)

2009-10 20.29%

2010-11 18.01%

2011-12 17.38%

2012-13 16.78%

2013-14 16.33%

2014-15 18.65%

2015-16 21.35%

2016-17 22.68%

4. Power

5. Over dependency on gas based power plants

6. Subsidy dilemma

7. The gap between installed capacity & maximum generation

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9. Subsidy

• Bad effects of subsidy reduction :

1.Inflation2.Education subsidy3.Agriculture subsidy4.Management of budget deficit5.Acceleration of Economic growth6. Macroeconomics goal achievement

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Deficit Budget Financing

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Deficit Budget Financing

When the budget deficit is financed by borrowing from the public and banks, it is called deficit financing.

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Reasons for deficit financing in BD

• Rise in government expenditures• No rule based fiscal policy• Low savings• Rapid population growth

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Sources of Financing Deficit budgetBank borrowing: (i) issuing new currency notes &(ii) drawing upon the past cash balances.

Non-bank borrowing: (i) selling of Government Treasury Bills, (ii) Short Term Federal Bonds, (iii) Saving Certificates etc.

External financing: total foreign debt.

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Sources of Financing Deficit budget

Sector FY#16-17 FY#15-16 FY#14-15

Financing 978.53 866.57 584.11

External Source 363.05 389.38 72.80

Domestic Source 515.48 301.35 511.31

In which, Banking Source 389.38 385.23 5.14

GDP 19,610.17 17,167.00 15,158.02

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Deficit financing-as a useful weapon: o Mobilizing additional resourceso Helping utilization of resourceso Helping to build-up overheadso Helping to ensure higher level of employment

Adverse Effects :o Government borrowing funds increases interest rateso Printing of notes creates inflationary impact which-

(i)Discourages foreign investment , (ii) Reduces exports ,(iii) Increases imports, (iv) Increases inequality in the distribution of income & (v) Lowers saving rate in the economy.

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Conclusion

• Government should reduce the budget deficit without reducing the public expenditure.

• The interest rate burden should be removed so that private sector investment will expand.

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