Fuel Price Hike: The Only Way To Avoid Budget Deficit?

This morning while I was on board to work and checking The Daily Star Online edition’s business page from my cell phone a news caught my eye. The government plans to increase fuel prices (BDT 1/Liter) this fiscal year to cut the pressure of subsidy on the national budget. Honorable Finance Minister confirms it but he did not mention when it will take place.

The report revealed the issue was discussed at a high-level meeting chaired by Prime Minister Sheikh Hasina at her office. An official who attended the meeting said the government -- before hiking the prices -- will study the impact of the fuel price increase on the cost of living. He added a detailed report on how much pressure subsidy puts on the national budget was placed at the meeting. The finance division recommended price adjustments to reduce subsidy on petroleum products and electricity.

Officials of Finance ministry think if more subsidy than projected is provided, it will create indiscipline in the budget. The budget deficit may rise to 6.5 percent from the projected 5 percent of GDP in the current fiscal year if the amount of subsidy exceeds the projection.

After reading the report I passed they day with a gloomy mind as a member of limited earner’s league. Like others who struggle hard for living during this almost double digit inflation, I became more scared of thinking how tougher will be the days to come. From the said report it seems govt is planning to hike the price of fuel to lessen the budget deficit. After some google and recalling my little study on Macro Economics I wanted to see how justified the Govt. decision will be and how many alternatives can it consider to avoid this price hike.

The amount by which a government, company, or individual's spending exceeds its income over a particular period of time, is called budget deficit. It is also called deficit or deficit spending, opposite of budget surplus. The emergence of a rising budget deficit has been due to a weaker economy and the effects of increases in government spending on priority areas such as health, education, transport and defense.

There is a consensus that a persistently large budget deficit can turn out to be a major problem for the government and the economy. A budget deficit has to be financed and day-today, the issue of new government debt to domestic or overseas investors can do this. But it may be that if the budget deficit rises to a high level, the government may have to offer higher interest rates to attract buyers of government debt. In the long run, higher government borrowing today may mean that taxes will have to rise in the future and this would put a squeeze on spending by private sector businesses and millions of households.

Now let us see how many alternatives are there to finance deficit budget.

Increase Taxes or Reduce Government Spending

In structural deficits, the deficit occurs because either taxes are too low or government spending is too high. In order to balance this deficit, one or both of these factors must be changed. Taxes may be increased for everyone/every entity across the board or lawmakers may decide to assign that tax burden to specific groups of people (higher-income individuals, businesses, etc). Lawmakers may also decide to cut government spending to break the budget into balance. Like with taxes, they could decide to cut the budgets every government agency/entity by the same percentage or they may decide to give a greater budget cut to specific agencies. Many, if not all, of these decisions made by lawmakers are based on political ideology, popularity with their electorate or popularity with their donors.

Changes in Tax Code

Similar to increasing taxes, changes can be made to the tax code that increases tax revenue. Closing tax loopholes and allowing fewer deductions are different from the act of increasing taxes but essentially could the same effect.

Reduce Debt Service Liability

Every year, the federal government must pay debt service payments on their overall public debt. These payments include principal and interest payments. Occasionally, the government has the opportunity to refinance some of their public debt to afford them lower debt service payments. Doing this would allow the government to cut expenditures without cutting government spending.

Now if we recall the government’s decision about escalating fuel price and consider alternatives of deficit budget financing we will see government can take some other initiatives other than increasing fuel price to avoid deficit finance. Those alternatives can be-

Increase tax to specific groups of people: As goverment said the main reason for budget deficit is the subsidy for fuel. All of we know our rich and super rich people are enjoying the cream of fuel subsidy. They use one or more car per person for the family. Waste our subsidized fuel by going long drives and just driving around. So this priviliged group should get more tax burden.

As all of us aware that it is becoming a bad habit of our young generation to pass time talking over phone unnecessarily. They do not bother about the bill as their well to do families do not feel any pressure to bear. Government should increase more VAT on call tarrifs of mobile telephone.

Now luxury restaurants, fast food shops, bars are mash rooming in divisional cities. General people are not regular to these shops and restaurants. They charge illogically high price but they are doing good business. Mose of the regulars are from black money holder and solvent families and they dont care about the price. Government can impose increased tax on these shops and restaurants.

Boutiques and fashion chains are also doing hefty profit but they collect products at comparatively lower price. Their buyers are also from black money holder and solvent families and they dont care about the price. So government can impose escaleted tax on them. Another two alternatives also can be considered.

I personally not against price hike of fuel. I strongly believe we should come out of subsidy culture. But reality is, the impact of price hike is huge on our economy and overall cost of living. I think this is not the right time to increase fuel price. Our overall econmoy is passing a crisis period now with almost double digit inflation rate. So if government increase fuel price again the situation will turn severe. It will not aslo be a politically popular decision.