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, whether general,

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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
(SD), EXCISE

DUTY,

CUSTOMS DUTY, VALUE ADDED TAX

(VAT), supplementary 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.
Subsidies 6 percent.
Education and IT 12 percent.
Interest payment 14 percent.
Social security and welfare 7 percent.
Defense 5 percent.
Health 6 percent.
Agriculture 5 percent.
Public administration 14 percent.
Local government and rural development 5 percent.
Transportation and communication 6 percent.
Public and security 7 percent.
Housing 1 percent.
Industrial and Economic state 1 percent.
Energy and power 4 percent.
Culture and religious affairs 1 percent.
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

Fiscal
Year

Deficit
GDP Growth Revenue Expenditure Development Expenditure
(Billion
(%)
(Billion Taka)
(Billion Taka)
Taka)

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

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

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Paramete
r

r
g

Interpretation

Assumed value

Present-period
government
spending
02.5
multiplier
Real government borrowing rate and social
rate of time
0.025?
discount, per year
Trend growth rate of potential GDP, per
0.025
year
Marginal tax-and-transfer rate

0.333

Disincentive effect: reduction in potential

output from
0.250.5
raising additional tax revenue
Hysteresis effect: proportional reduction in
potential
00.2
output from a temporary downturn

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

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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
15. The mandatory provision for sponsordirectors 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

2003

3.10 %

117

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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Percent Change

Date of Information
2002 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 economys 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
economys 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 taxesa 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 cuthow much is spent or saved,
and the response of economic activitydepend 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 governments 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 extra public debt resulting
from the tax cut. In the extreme case, households will not feel that their disposable income has

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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 economys 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.
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

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spending. In this extreme case, the increase in the governments 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.

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

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

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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 policys 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.

15. Summary of our analysis

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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 economys
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.

16. Conclusion
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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

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