A comparative perspective

An exit from the classical doctrine of laissez-faire to active government intervention was engineered by the celebrated British economist John Maynard Keynes who authored The General Theory of Employment, Interest and Money. The book was published in February 1936, and blessed macroeconomics with a central place in economic theory termed the "Keynesian Revolution."

The intervention by the public sector in a mixed economic framework and the New Deal policy by Franklin D. Roosevelt [1933-39] cured the ailing USA economy from the curse of the Great Depression of the 1930s. The New Deal embraced the concept of a government--regulated economy aimed at achieving a balance between conflicting economic interests contrary to the traditional American political philosophy of laissez-faire.

Surprisingly, the conservative political philosophy and the ideology of the limited role of the state by his predecessor, the 31st President of the USA, Herbert Hoover, thwarted the recovery. President Hoover vetoed several bills that would have directly relieved struggling Americans. Unfortunately, in his 1930 State of the Union address, the statement “raids upon the public treasury cannot restore prosperity,” was a slur on the millions of Americans who lost their jobs, savings, and dreams during the Great Depression. Thus the Great Depression was the hotbed through which we observe the increasing government involvement in worldwide economic activities.

The expenditure as a per centage of GDP determines the size of the public sector. The government expenditure during the first three decades of the twentieth century was only a tiny proportion of the Gross Domestic Product [GDP]. Subsequently, expenditure rose steadily over the next eighty years, and currently, the expenditure as a per centage of GDP is at its peak. Among the five developed countries, the United States, the United Kingdom, Germany, France, and Japan, the expenditure constituting over 50 per cent in France is the highest, with the lowest in the United States at about 33 per cent. The expenditure as a per centage of GDP rose sharply for all the countries between 2008 and 2009 as the government increased spending to reflate their economies in the aftermath of the Great Recession of 2007.

Among the various categories of expenditures, the most marked rises come from social spending such as education, health, and pension. Expenses on education and pensions have risen sharply as a share of the GDP, in many countries constituting over 5 per cent of GDP. The health sector in many industrialized countries averages about 6 per cent of GDP.

Currently, the increasing trend in the pension budget exposes many countries to a crisis in which the current rate of expenditure on state pensions is unsustainable. However, data on expenditure understate the full impact of the public sector. The defense expenditure is one candidate; the expenditure is often erratic and often goes beyond the norm.

Again, regulations such as safety standards, foreign exchange regulations, and minimum wage laws affect economic activity but do not directly generate any measurable government expenditure or income. The spending is financed through the revenue, which relates to different tax instruments and alternative government levels, i.e., federal versus state level.

The revenue streams in developed and developing countries span between 27 to 45 per cent of GDP. The current Tax- GDP ratio are 45, 30, 32, and 27 per cent in France, the United Kingdom, Canada, and the United States, respectively. The country with the impressive growth in tax revenue was Turkey, with revenue rising from 11 per cent of GDP in 1965 to 33 per cent in 2000 but declining since then. Between 2020 and 2021, the OECD average increased from 33.6 per cent to 34.1 per cent.

However, with 23 per cent, Turkey was in the 34th position among the 38 OECD countries. Among the different categories of instruments, the value-added tax is a principal component in tax collection in OECD countries; income and profit tax constitutes the most significant proportion of revenue in the United States, the United Kingdom, and Canada. Social security taxes are the largest in Japan, France, and the United States.

The dismally low Tax to GDP ratio is the weakest link in the fiscal spectrum of Bangladesh, and the IMF’s conditions tagged with the USD 4.7 billion loans warrant that the country should raise the domestic revenue by an additional 0.5 per cent of GDP per annum for both the FY 2023-24 and FY 2024-25 respectively and 0.7 per cent in FY 2025-26. An estimate by the Policy Research Institute, a think tank, projects that an additional revenue mobilization of Tk 560 billion, Tk 1,382 billion, and Tk 2,340 billion in three consecutive years could fulfill the target and could enhance the Tax-GDP ratio from the current 7.8 per cent to 8.3 per cent in FY 2023-24 and 8.8 per cent in FY 2024-25 and 9.5 per cent in FY 2025-26, the terminal year of the loan agreement. This target is below the 12.3 per cent projected in the Eighth Five-Year Plan. “ The IMF loan conditions on domestic revenue mobilization should be considered part of a homegrown agenda, and the tax-GDP ratio needs to be much higher than suggested.” This is obvious in the budget's less than the average allocation of health, education, and social spending compared to many developing countries.

One of the apparent reasons for the poor Tax- GDP ratio is the inadequate tax base; currently, 8.5 million people are in the tax net, which could be augmented to 15 million, less than 1 per cent of the total population of 169 million as per the latest population census. This figure may be compared with the tax base in India. Out of 1363 million people in India, 6 per cent of the population [82 million] file tax returns; the number of taxpayers includes persons who pay income tax and corporate tax and who have either filed a return or whose tax has been dedicated at the source. This is an indication of substantial leakage of income either through illegal or legal activities in the tax stream. The time-honored practice of whitening black money through tax incentives manifests weak governance at the cost of sensible, honest taxpayers. The government should have a clear objective of reducing the size and impact of the informal economy.

The government may consider more investment in electronic governance and ease the process of filing tax returns. The government can initiate research projects to assess the extent of the shadow economy, the structure of advanced tax deducted at the source as a per centage of total tax revenue, and reconfigure the revenue administration to streamline the revenue collection. It is desirable to separate the tax policy department from revenue administration to ensure a business-friendly environment, curbing evasion and enhancing the credibility of taxpayers.

The writer teaches at BRAC University and BIDS as an adjunct Faculty in the Master's Programme in Economics. He can be contacted at [email protected].