Subsidy, spending cuts should power pay scale bump

Commission recommended in its proposal

The National Pay Commission recommended reducing subsidies, phasing out export cash incentives and cutting government expenditure to ease the cost of implementing the new pay scale for government employees.

It also recommended merging or reducing departments under ministries, cutting allocations for poorly performing development projects and reforming the tax system to boost revenue.

Headed by former finance secretary Zakir Ahmed Khan, the commission submitted the report to the then interim government in January this year. Although the commission’s proposed salary structure became public at the time, the full report was not published.

The current BNP government has started implementing the new pay scale in phases over the current and next fiscal years.

According to finance ministry estimates following cabinet approval of the pay scale with minor adjustments in August, the new salaries and allowances for nearly 23 lakh employees of defence and government services, and nine lakh pensioners will cost additional Tk 1,05,580 crore.

The commission estimated the additional cost at Tk 1,06,307 crore, including Tk 39,340 crore for the salaries, Tk 29,263 crore for allowances, Tk 19,733 crore for 9,15,999 pensioners and Tk 17,971 crore for employees whose salaries and allowances are paid through budget allocations.

Under the previous pay scale, the government spent Tk 1,31,000 crore a year for its employees and pensioners.

A finance ministry official told The Daily Star that the government had already taken steps to implement the commission’s revenue recommendations, some of which had been reflected in the current budget.

Measures to reduce expenditure had also started, though not all the recommendations might be implemented, the official said.

The World Bank and the International Monetary Fund have been pressing for these reforms for years, but the government has yet to implement them effectively, he said. The lenders also press for subsidy cuts during loan negotiations.

The report said subsidies for energy, exports, remittances, and agriculture were intended to benefit targeted groups but needed regular reviews to assess their effectiveness. Subsidies that distort economic efficiency should be withdrawn, freeing up resources for other uses.

It recommended three measures, in line with IMF and World Bank recommendations: market-based pricing for liquid fuel, gradual adjustments to electricity tariffs and social safety net programmes for the poor.

Together, these would ease subsidy pressure and help mobilise resources.

With the exchange rate relatively stable, export cash incentives were no longer indispensable, the report said. Such incentives could be phased out over 12-14 months, generating substantial savings.

Government spending on subsidies and incentives rose to more than three times its FY2019-20 level, from Tk 41,926 crore to Tk 1,41,238 crore in FY2024-25, according to finance ministry budget documents. The revised allocation for the following fiscal year was Tk 1,18,956 crore, though final expenditure was expected to be higher. The allocation for the current fiscal year is Tk 1,26,125 crore.

CUTTING EXPENDITURE

The report recommended rationalising the number of departments under ministries, building on a proposal by the Public Administration Reform Commission. Merging or reducing departments could streamline administration and lower recurrent expenditure.

It also proposed cutting allocations for Annual Development Programme projects that were progressing slowly or had unsatisfactory expected returns, and redirecting the funds to priority needs. Returns from projects delivering results more quickly could also help finance priority sectors, including salaries and allowances.

The report identified scope to reduce recurrent operating costs on domestic and foreign training, travel, fuel, lubricants, repairs and maintenance. Savings could help meet the cost of the new pay structure.

BOOSTING REVENUE

The commission noted that Bangladesh’s tax-to-GDP ratio was the lowest among developing countries, including those in South Asia. Revenue collection was insufficient to meet rising development needs and compensate for declining foreign aid, while growing debt-servicing costs further constrained the government’s fiscal space.

To address the shortfall, the report proposed splitting the National Board of Revenue (NBR) into separate Revenue Policy and Revenue Management divisions. It also recommended a Tax Expenditure Policy and Management Framework to review and reduce tax exemptions.

Broadening the tax base was another priority. Although the number of affluent individuals, business owners and entrepreneurs had grown over the past few decades, many remained outside the tax net, the report said. Bringing them into the system would require more revenue officials and greater use of modern information technology.

The report also recommended strengthening research in the revenue department by recruiting qualified staff, establishing a dedicated research cell and requiring it to submit periodic reports identifying potential revenue sources.

Non-tax revenue accounted for an average of just 13.2 percent of total revenue over the past five years, the report said, noting that the share was higher in several South and Southeast Asian countries. The government could increase collections by raising existing non-tax rates and identifying new sources, provided service quality was maintained.

It also recommended updating and rationalising rates for land development tax, duties on alcohol and narcotics, road taxes, stamp duties and vehicle taxes to reflect current conditions.