Instituting Greater Realism in Tax Revenue Targets

November 28, 2023

By  Sadiq Ahmed

Bangladesh seems to have adopted a tradition to set  unrealistic tax revenue targets in the National Budget and then underperform, knowing well that the tax targets are not achievable. This is baffling and unfortunate.  Baffling because the rationale for doing so is not clear.   Unfortunate because it undermines the credibility of the budget. It is also surprising that the National Parliament has not  investigated this matter and directed government officials to do away with this practice or otherwise be held accountable for under-performance. 

Some deviation from the target is always possible owing to a variety of factors, including adverse external developments, unforeseen domestic disruptions, and unanticipated implementation capacity constraints. But the deviations in tax revenue are large, recurring, and predictable.  I hope the chairman of the NBR, the Finance Secretary, and the Finance Minister will look into this matter seriously, debate the value of this practice, and help set up a more transparent and realistic budget process.  This will better serve the country and improve confidence in the budget-making process.

The magnitude of this unrealism in budget making is illustrated in Chart 1. Several results emerge from the chart.  First, the actual tax/GDP ratio has remained virtually flat at around 7–8% over the past 7 years. This is very distressful in an environment where public spending needs have expanded progressively. Second, the gap between the budget target and the actual tax collection is large. The percentage gap between budget and actual revenue collection has ranged from a peak of 35% in FY2020 to 13% in FY2022.  In absolute terms, the tax revenue gap was BDT 1.3 trillion in FY2020, which fell to BDT 484 billion in FY2022 and then climbed again to BDT 548 billion in FY2023.   Third, the gap has been consistently above 10% over the past 10 years, suggesting that setting unrealistic tax targets has become a standard practice in budget making. 

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Sadiq Ahmed

Sadiq Ahmed is the Vice Chairman of the Policy Research Institute of Bangladesh. He was previously at the World Bank, serving as country director for Pakistan and Afghanistan and chief economist for the South Asia region. He also led key missions to Egypt, South Asia, and Southeast Asia. He completed his PhD in Economics from Boston University. He has worked on topics of poverty reduction, governance, private sector, trade and macroeconomic. He has authored more than 30 books, policy research papers and articles on various development issues.