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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),

supplementary duty (SD), EXCISE DUTY, income tax, foreign travel tax, electricity duty, wealth

tax , turnover tax (TT), air ticket tax, advertisement tax, gift tax and miscellaneous insignificant

taxes. Public revenue also comes from non-tax receipts such as surplus of sector corporations,

financial institutions, railways, postal department, telegraph and telephone, judicial stamp, etc,

and these non-tax revenues represent around 19% of total revenues.

5.1 Tax structure of our country:

5.1.1 Direct Tax: Direct tax includes income tax, gift tax, land development tax, non-judicial

stamp, registration, immovable property tax, etc. Since direct taxes represent only about 19% of

total taxes. Of the direct taxes, around 69% come from income tax, 19% from non-judicial

stamp, 5.7% from land revenue, 5.6% from registration and balance from gift tax and other direct

taxes.

5.1.2 Indirect Tax: Indirect tax includes customs duty, excise duty, motor vehicle tax, VAT,

SD, foreign travel tax, TT, electricity duty, advertisement tax, etc. Tax-structure is heavily

dependent on indirect taxes. . Indirect taxes (representing 81% of total taxes), on the other hand,

are mainly import-dependent. Around 67% of indirect taxes are collected at import stage by

customs authorities as customs duty (38.0% of indirect tax or 30.7% of total tax), VAT (24.3%

of indirect tax or 19.6% of total tax), and SD (4.7% of indirect tax or 3.8% of total tax). Balance

of indirect taxes (representing around 26.64% of total taxes) include taxes collected on domestic

production, consumption or transactions such as VAT (11.4%), SD (11.6%), excise duty (1.5%),

foreign travel tax (0.7%), electricity duty (0.6%), motor vehicle tax (0.7%), TT (0.03%), air

ticket tax (0.01%) and advertisement tax (0.001%).

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5.2 Bangladesh Government Expenditure : Bangladesh government expenditure includes both

the purchase of final goods and services, or gross domestic product, and transfer payments.

Bangladesh government expenditures are used by the government sector to undertake key

functions, such as national defense and education etc. These expenditures are financed with a

combination of taxes and borrowing.

5.2.1 List of some major expenditure of our country: According to the total allocation of

expenditure of national budget of Bangladesh under the fiscal policy are listed below.

ü Subsidies 6 percent.

ü Education and IT 12 percent.

ü Interest payment 14 percent.

ü Social security and welfare 7 percent.

ü Defense 5 percent.

ü Health 6 percent.

ü Agriculture 5 percent.

ü Public administration 14 percent.

ü Local government and rural development 5 percent.

ü Transportation and communication 6 percent.

ü Public and security 7 percent.

ü Housing 1 percent.

ü Industrial and Economic state 1 percent.

ü Energy and power 4 percent.

ü Culture and religious affairs 1 percent.

ü Pension 3 percent.

6. Issues related to budget deficit

Budget deficit means a shortfall of tax revenue from government spending. If the tax revenue is

T and government spending is G, then we can define budget deficit as T-G<0 a="" and=""

another="" are="" as="" Bangladesh="" behind="" billion.="" billion="" borrowing=""

budget="" bureaucrats="" by="" caretaker="" cause="" chief="" come="" corruption.=""

corruption="" country="" deficit.="" deficit="" different="" domestic="" don="" during=""

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employees.="" estimated="" eventually="" example="" expected="" finance="" for=""

foreign="" from="" fy09-10="" gave="" give="" go="" goes="" government="" has="" high=""

important="" improvement="" in="" include="" inflation="" is="" jail="" late="" leader=""

leads="" lots="" meet="" minister="" ministers="" ministry="" money="" more="" most=""

of="" on="" opposition="" or="" our="" out="" p="" party="" people="" powerful="" present=""

prime="" punishment.="" rate.="" reason="" reasons="" remains="" rest="" same="" saw=""

sector="" some="" sources.="" sources="" spend="" stand="" still.="" t="" tax.="" tax=""

that="" the="" then="" there="" therefore="" they="" time="" tk137.14="" tk173.25=""

tk343.58="" to="" want="" we="" when="" which="" will="" with="" world="">

7. Slow Pace of the Economy during Election Years

Source: iBAS, Bangladesh Economic Review 2012 and different issues of Budget in Brief.

Fiscal

Year

GDP Growth

(%)

Revenue Expenditure

(Billion Taka)

Development Expenditure

(Billion Taka)

Deficit

(Billion

Taka)

1 2 3 4 5

1989-90 5.9 67.4 57.17 56.79

1990-91 3.3 73.10 52.69 47.57

1994-95 4.9 103.00 103.03 63.93

1995-96 4.6 118.14 100.16 63.18

2000-01 5.3 206.62 161.51 126.40

2001-02 4.4 226.92 140.90 91.12

2007-08 6.2 579.22 184.55 158.38

2008-09 5.7 676.03 196.68 180.91

2011-12 6.23 1021.30 380.00 252.45

2012-13 6.03 1369.60 523.70 496.60

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8. Parameter Values for the Base Case

9. List of Successfully Implemented Policies/Programmes/Activities

Included in Last Four Budgets (Financial Sector)

1. Money Laundering Prevention Act, 2012 enacted

2. Anti-Terrorism (Amendment) Act, 2012 enacted

3. Insurance Act, 2009 enacted

4. The Securities and Exchange Commission (Public Issue) Rules, 2006 amended

5. The Securities and Exchange Commission (Mutual Fund) Rules, 2001 amended

6. The Securities and Exchange Commission (Merchant Banker and Portfolio Manager) Rules

7. The Exchanges (Demutualization) Act, 2012 passed in the parliament

8. The Securities and Exchange Commission Act, 1990 amended

9. The Securities and Exchange Ordinance, 1969 amended

10. The Securities and Exchange Commission (Private Placement of Debt Securities) Rules

11. Insurance Development and Regulatory Authority Act, 2009 enacted

12. Insurance Development and Regulatory Authority (IDRA) established and process started to

formulate Insurance Corporation Act, 2013

13. Bangladesh Development Bank Ltd. established by merging Bangladesh Shilpa Bank and

Bangladesh Shilpa Rin Shangstha

14. The face value of all shares and mutual funds listed with the stock exchanges reset to Tk 10

Parameter Interpretation Assumed value

μ Present-period government spending multiplier 0–2.5

r Real government borrowing rate and social rate of time

discount, per year 0.025–?

g Trend growth rate of potential GDP, per year 0.025

Marginal tax-and-transfer rate 0.333

Disincentive effect: reduction in potential output from

raising additional tax revenue 0.25–0.5

Hysteresis effect: proportional reduction in potential

output from a temporary downturn 0–0.2

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15. The mandatory provision for sponsor–directors of listed limited companies to hold

individually minimum 2.0 per cent and collectively 30 per cent share made

16. The Corporate Governance Guidelines modernized

17. A network connecting all departments of the head office with branches of Bangladesh Bank

18. The total accounting and human resource management systems of Bangladesh Bank brought

under Enterprise Resource Planning (ERP) software

10. Inflation in Bangladesh:

In economics, inflation is a rise in the general level of prices of goods and services in an

economy over a period of time. When the price level rises, each unit of currency buys fewer

goods and services; consequently, annual inflation is also erosion in the purchasing power of

money – a loss of real value in the internal medium of exchange and unit of account in the

economy. A chief measure of price inflation is the inflation rate, the annualized percentage

change in a general price index (normally the Consumer Price Index) over time. Although the

present situation of inflation in Bangladesh is not very good, it is better than the previous year.

The present scenario of inflation in Bangladesh is given below:

Year Inflation rate (consumer prices) Rank Percent Change Date of Information

2003 3.10 % 117

2002 est.

2004 5.60 % 67 80.65 % 2003 est.

2005 6.00 % 160 7.14 % 2004 est.

2006 7.00 % 160 16.67 % 2005 est.

2007 7.20 % 163 2.86 % 2006 est.

2008 9.10 % 184 26.39 % 2007 est.

2009 8.90 % 137 -2.20 % 2008 est.

2010 5.10 % 142 -42.70 % 2009 est.

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11. Stance of Bangladesh fiscal policy

The fiscal stance is a term that is used to describe whether fiscal policy is being used to actively

expand demand and output in the economy (a reflationary or expansionary fiscal stance) or

conversely to take demand out of the circular flow (a deflationary fiscal stance).

A neutral fiscal stance might be shown if the government runs with a balanced budget where

government spending is equal to tax revenues. Adjusting for where the economy is in the

economic cycle, a neutral fiscal stance means that policy has no impact on the level of economic

activity.

A reflationary fiscal stance happens when the government is running a large deficit budget (i.e.

G>T). Loosening the fiscal stance means the government borrows money to inject funds into the

economy so as to increase the level of aggregate demand and economic activity.

A deflationary fiscal stance happens when the government runs a budget surplus (i.e. G

From budget scenario it is seen that government of Bangladesh is running a large budget deficit

(i.e. G>T). As a result, the government borrows money to inject funds into the economy so as to

increase the level of aggregate demand and economic activity. So it can be said that the stance of

Bangladesh fiscal policy is reflationary.

12. Fiscal Policy Affect the Macro Economy

Fiscal policy affects aggregate demand, the distribution of wealth, and the economy’s capacity to

produce goods and services. In the short run, changes in spending or taxing can alter both the

magnitude and the pattern of demand for goods and services. With time, this aggregate demand

affects the allocation of resources and the productive capacity of an economy through its

influence on the returns to factors of production, the development of human capital, the

allocation of capital spending, and investment in technological innovations. Tax rates, through

their effects on the net returns to labor, saving, and investment, also influences both the

magnitude and the allocation of productive capacity. Macroeconomics has long featured two

general views of the economy and the ability of fiscal policy to stabilize or even affect economic

activity. The equilibrium view sees the economy quickly returning to full capacity whenever

disturbances displace it from full employment. Accordingly, changes in fiscal policy, or even in

monetary policy for that matter, have little potential for stabilizing the economy. Instead,

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inevitable delays in recognizing economic disturbances, in enacting a fiscal response, and in the

economy’s reacting to the change in policy can aggravate, rather than diminish, business-cycle

fluctuations. An alternative view sees critical market failures causing the economy to adjust with

more difficulty to these disturbances. If, for example, consumers were to reduce their current

spending in order to consume more in the future, producers, who would not know the

consumers’ future plans for want of the appropriate futures markets for goods and services,

would see only an indefinite drop in demand, and this might encourage them, in turn, to reduce

their hiring and capital spending. In this world, changes in fiscal and monetary policy have

greater potential for stabilizing aggregate demand and economic activity. How the economy

reacts to fiscal policy depends on whether it is at full employment or operating below its full

capacity.

12.1 Effects of a Tax Cut on Consumer Spending

To illustrate the importance of the difference in these two views for fiscal policy stabilization,

consider the effects of a cut in personal taxes—a classic countercyclical fiscal-policy action.

Lower taxes, everything else being constant, increase households’ disposable income, allowing

consumers to increase their spending. The consequences of the cut—how much is spent or saved,

and the response of economic activity—depend on the way households make their decisions and

on prevailing macroeconomic conditions.

For example, whether the tax cut is perceived to be temporary or permanent will influence how

much consumers save. A temporary cut when the economy is at full employment will alter

households’ lifetime disposable income relatively little, and so might have little effect on

consumption. If the cut is, instead, perceived to be permanent, then households will perceive a

larger increase in their lifetime disposable income and so will likely increase their desired

consumption by much more than they would if they thought the cut were temporary.

So far, we have been considering the effect of a tax cut on households’ consumption

expenditures with everything else held constant. However, lower taxes will increase the

government’s fiscal deficit. Suppose that the economy tends to remain near full employment and

that households do not expect their disposable income to rise any higher than it would have risen

without the change in fiscal policy. Even if the tax cut is long-lasting, many will conclude that

future taxes will need to be higher than they otherwise would have been in order to retire the

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extra public debt resulting from the tax cut. In the extreme case, households will not feel that

their disposable income has risen, because they have completely internalized the increase in the

public debt arising from the tax cut, treating it as though it were equivalent to personal debt.

Yet even in the full-employment view, consumption might increase as a result of the tax cut if

capital markets are imperfect. Consumers who are liquidity constrained, living from paycheck to

paycheck, will likely increase their spending even if they internalize the public debt. So the

effect of the tax cut will depend on its incidence over different types of Tax payers. Consumption

will also increase if the government can borrow at a lower rate of interest than the consumer.

However, consumption can increase more significantly when the economy is not at full

employment and if the tax cut is seen as an instance of a continuing fiscal policy that stabilizes

economic activity, or if the tax cut otherwise raises households’ expected income by increasing

the economy’s future productive capacity. Although the tax cut entails an increase in public debt,

higher current and future income diminishes the burden of servicing or repaying this debt. In this

case, the tax cut is essentially an investment in a public good that redounds to the benefit of

households.

12.2 Effects on Interest Rates, Capital Formation, and International

12.2.1 Capital Flows

Over time, an increase in the budget deficit resulting from a tax cut will increase the public debt.

That increase raises important issues concerning the long-run effects of the tax cut on interest

rates, capital investment, and future economic welfare. The rich range of possible consequences

makes this a very controversial and interesting topic.

Fiscal policies that increase the deficit will result in future taxes being higher than they otherwise

would have been, but, depending on the policies’ effects on incentives for investing in human or

physical capital, they might also raise future living standards. Policies that absorb slack resources

or foster investment might reduce government saving, as reflected in the greater budget deficit,

while they increase total saving, as reflected in the greater rate of capital formation. This

additional saving might be supplied by the increase in national income, or it might come from

foreign sources. Policies that fail to raise income and investment not only reduce government

saving, but also reduce total saving.

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When the economy is at full employment and a tax cut today is expected to be offset by a tax

increase in the future, as discussed above, lower taxes do not necessarily increase consumption

spending. In this extreme case, the increase in the government’s deficit will be matched by an

increase in private saving. As a result, national saving, interest rates, and investment spending

will be much the same as if there had been no change in fiscal policy. If, instead, consumers

spend much of their additional disposable income while the economy is already at full

employment, personal saving will not rise sufficiently to offset the drop in public saving, interest

rates will rise, and investment spending will decline, unless business saving (resulting from the

additional consumption spending) or capital inflows from abroad increase sufficiently to make

up the difference. If the economy is not at full employment, national income might expand as a

result of the cut, providing additional income-tax receipts and saving, and thereby preventing a

drop in national saving. In either case, a tax cut that increases the return on capital can increase

business saving and attract, for a time, an inflow of foreign saving sufficient to maintain total

saving and investment. If, however, fiscal policy depresses investment, then both the capital

stock and economic output will be lower in the future than they otherwise would have been. The

lower capital stock will tend to be accompanied by real interest rates that are higher than they

otherwise would have been.

If capital inflows from abroad increase sufficiently to offset any drop in national saving resulting

from a change in fiscal policy, then investment need not fall. In this case, the current account

deficit, which is equal to the quantity of capital inflows from abroad, will increase at least

enough to offset the increase in the budget deficit less the induced increase in private saving. The

future levels of the capital stock and real output will not fall, but future domestic consumption

will be reduced because an increased share of the return to capital will accrue to foreign

nationals— unless the fiscal policy fosters a greater utilization of the stock of capital, greater

capital formation, or greater net returns on capital to compensate for the outflow. The concurrent

large budget and current account deficits that occurred in the early 1980s and again in the last

few years have led many to believe that increases in the current account deficit would generally

accompany large increases in the budget deficit, and gave rise to the term “twin deficits.”

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12.3 Tension between Short-Term Stabilization and Long-Term Goals

In the discussion so far, it is apparent that there is a potential conflict between the use of fiscal

policy to stimulate aggregate demand when the economy is operating below potential in the short

run and the use of policy to promote longer-run goals for national saving and capital formation to

improve future living standards. When there are underutilized economic resources, fiscal

stimulus can increase investment. But when the economy is operating near potential, an increase

in the public debt might eventually depress private investment, unless the fiscal stimulus is

reversed as the economy approaches full employment or the policy fosters capital formation and

increases the supply of labor.

This tension between short-run stabilization and longer-run growth is prominent in the rest of

this volume. The volume begins with a reconsideration of the role of fiscal policy in

macroeconomic stabilization before turning to an analysis of longer-term concerns.

13. The national income multiplier effect

The multiplier effect or spending multiplier is the idea that an initial amount of spending (usually

by the government) leads to increased consumption spending and so results in an increase

in national income greater than the initial amount of spending. In other words, an initial change

in aggregate demand causes a change in aggregate output for the economy that is a multiple of

the initial change.

The change in government expenditure of Bangladesh 2010 is influenced by a national income

multiplier. If multiplier is 5 then income will be 5 times of government expenditure. If income

rises, then interest rate or opportunity cost of holding money will fall. As a result, investment on

business and residence will increase. Because of increase in investment aggregate demand will

increase and be 5 times of government expenditure. Because of unavailable information, national

income multiplier is assumed 5.

14. Fiscal Policy Improves Macro Stabilization

14.1 Countercyclical Fiscal Policy in Theory

Through the 1980s and 1990s, the predominant answer in the profession was a resounding “no.”

Alan Blinder takes issue with that conclusion in “The Case against the Case against

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Discretionary Fiscal Policy.” Blinder reminds the reader that views on the use of discretionary

fiscal policy as a tool for macroeconomic stabilization have undergone a sea change since the

early 1960s, when the prevailing wisdom was that discretionary stabilization policy was effective

and desirable for taming the business cycle, and that fiscal policy was the most important tool

with which to conduct stabilization policy. Then, beginning in the late 1960s, theoretical and

empirical work raised serious doubts about fiscal policy’s ability to accomplish countercyclical

stabilization; while large deficits in the 1980s made it unlikely any would be attempted.

Blinder begins by reviewing the intellectual and policy developments that led to the diminished

role of fiscal policy, and then turns his attention to a critical analysis of the arguments against the

use of discretionary fiscal policy as a stabilization tool. After discussing the theoretical

assumptions underlying, Blinder evaluates the empirical research on this topic. He concludes that

the weight of the evidence supports the view that both temporary and permanent tax changes do

affect consumption spending. Overall, Blinder finds the practical arguments against the use of

discretionary fiscal policy to be more compelling than the theoretical arguments.

Long lags in the formulation and implementation of appropriate stabilization policies are likely

to be especially severe when the policy instrument is government purchases, leading Blinder to

conclude that changes in taxes and transfers are more effective fiscal instruments for

stabilization. Blinder suggests that institutional changes, such as placing short-run tax policy in

the hands of a board of technical experts modeled after the Federal Reserve Board, might

alleviate some of the practical aspects of using tax policy for stabilization. Another suggestion

Blinder makes is to improve the targeting of changes in taxes and transfers. If tax and transfer

changes were better targeted at those households that are most likely to change their

consumption spending in response to temporary changes in their disposable income, then fiscal

policy would be more effective at influencing aggregate demand. Blinder cites the expansion of

unemployment insurance benefits as an example of a fiscal policy that is well targeted for

increasing consumption. Blinder also suggests that future fiscal stabilization make greater use of

opportunities to exploit intertemporal substitution. Examples of policies that exploit

intertemporal substitution to temporarily stimulate aggregate demand are a temporary cut in

sales-tax rates, which creates an incentive for consumers to purchase durable goods earlier than

they otherwise would in order to avoid paying the tax, and a temporary investment tax credit,

which provides an incentive for firms to accelerate the timing of new investment projects.

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15. Summary of our analysis

Our analysis reaches five conclusions about fiscal policy as stabilization tool in a depressed as

opposed to a normal economy:

15.1 The absence of supply constraints in the short term, together with a binding zero lower

bound on interest rates, means that the Keynesian multiplier is likely to be substantially greater

than the relatively small value it is thought to have in normal times. This multiplier may well be

further magnified by an additional zero-bound effect: the impact of economic expansion on

expected inflation and hence on real interest rates.

15.2 At current and expected future real interest rates on government borrowing, even a very

modest amount of “hysteresis,” through which cyclical output shortfalls affect the economy’s

future potential, has a substantial effect on estimates of the impact of expansionary fiscal policy

on the future debt burden. Although the data are far from conclusive, a number of fragments of

evidence suggest that additional government spending that mitigates protracted output losses

raises potential future output, even if the spending policies are not directly productive in

themselves.

15.3 Policies of austerity may well be counterproductive even by the yardstick of reducing the

burden of financing the national debt in the future. Austerity in a depressed economy can erode

the long-run fiscal balance. Stimulus can improve it.

15.4 Arguments that expansionary fiscal policy at the zero bound is not self-financing and does

not pass a benefit-cost test by raising the present value of future potential output hinge on

establishing one of three conditions: that monetary policy offsets the demand effects of fiscal

policy even at the zero bound sufficiently that the multiplier is near zero, or that future potential

output is invariant to the size and length of the downturn, or that interest rates are at or above the

range seen historically, at least in the United States.

15.5 Only when a government must pay a substantial premium over the social rate of time

discount in order to borrow is the economy unlikely to benefit from expansionary fiscal policy at

the zero bound. The paper is organized as follows. It then lays out an analytical framework for

assessing the likelihood that expansionary fiscal policy will actually be expansionary, and it

identifies the parameters that are most important in evaluating the impact of fiscal policy

changes.

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16. Conclusion

Bangladesh fiscal policy is expansionary which causes large budget deficit. For that, government

takes reflationary stance of fiscal policy. The reasons behind this budget deficit are tax avoidance

of citizens, corruption in government sector, high inflation rate and global recession. As a result,

government should take all the necessary steps to remove these negative aspects. Otherwise,

Bangladesh economy will fall into great danger.

17. Bibliography

http://www.imf.org/external/np/ms/2009/102909.htm

http://www.bdresearch.org/budget0910/index.php

http://www.scribd.com/doc/21084110/Bngladesh-Budget-2010-Briefings

http://bangladeshbudgetwatch.wordpress.com/2009/08/31/gdp-growth-target-may-be-raised

http://www.mof.gov.bd/en/

http://banglapedia.search.com.bd/ed

http://www.indexmundi.com › Bangladesh › Economy

http://www.bangladesh.gov.bd